EKATERINBURG, Russia: Perception vs. reality.
I think about this notion in some fashion whenever I’m on the road somewhere in the world, either for fun or for work. Here in central Russia, I’m on the road for family—helping my wife apply for her Czech residence visa. We spent part of an afternoon meandering through a local mall and the supermarket in the basement.
Which is where I come back to perception vs. reality.
There is a perception of Russia among Americans. It’s a perception based on stereotypes, on the supposed “history” we’re taught in school. They say history is written by the winners. Not true. History is written by locals with a perception to sell.
In the U.S., the perception that has been sold for decades is “American Exceptionalism.” It leads to a belief system in which the U.S. permanently stands atop the winners’ podium and every other country is light years behind us and scrapping for second place, or as Americans tend to see it: the first loser. (To be fair, other countries have perceptions about America, too.)
The problem I’ve always had with any form of exceptionalism is that it blinds one to reality. It doesn’t allow you to see the opportunities because perceptions are so warped by dogmas and ideologies that are not always rooted in truth.
Russia is a rather good case-in-point. Let’s skip the political and military BS. Russia meddles in U.S. politics just as the U.S. has meddled in politics around the world since the 1950s in pushing its own economic agenda. That’s just geopolitics. Pot, kettle. Goose, gander.
But on the level I care about as an investor—the personal, consumer level—perceptions of Russia are largely wrong. (And, to be clear, Russia is just a bogeyman I’m using for this column because I am in Russia. I could just as easily be writing about Colombia or Ghana or Poland, or even Mexico for that matter—they’re all touched by certain perceptions.)
There was a moment back in the 1990s, after the Soviet Union collapsed, that Russia was a basket case—a dirt poor country. And, yes, poverty here still exists.
But Russia is also an increasingly middle-class country. I can’t tell you how many BMWs, Lexus, Mercedes, and Audis I saw while walking around Ekaterinburg. I can’t tell you how many packed, hipster coffee shops I passed. How many sushi bars. How many new, upscale apartment blocks and modern business towers.
I can, however, tell you that the Giperbola supermarket is one of the nicest supermarkets I’ve shopped, and that it would fit right into any upscale, middle-class neighborhood in Los Angeles, Miami, New York, etc. I can you tell it’s packed with average, middle-class Russians picking up everything from prosciutto to excellent Spanish wines, to branded American and European products you’d instantly recognize.
And this, to an investor’s eye, screams “opportunity.” Particularly when you know what I do about emerging markets.
Though often unfairly maligned, emerging markets are the place to go for profits as an investor.
Over the past 20 years, emerging market stocks have generated the absolute best returns of all the global asset classes, sitting at or near the top of the leaderboard eight times. In contrast, the S&P 500 sat at or near the top of the leaderboard only four times.
There is a reason the emerging markets—of which Russia is one of the biggest—tend to outperform.
The American Dream.
Back in 2013 or so, I spent more than a year bebopping around the world, visiting emerging markets on four continents to research a book I wrote called Replay: Your Second Chance to Invest in the American Dream. It’s the story of the rise of the middle class outside the West, and how this emerging middle class—vastly larger than America’s—is now pursuing the same middle-class life that defined America in the second half of the 1900s.
The opportunity to chase those consumer profits in the land that birthed the America Dream has waned at this point. We are, after all, more than 70 years into that experiment now. The far greater opportunity exists in places like Russia…or Ghana, Colombia, Poland, Mexico, et. al.
Scores of emerging economies are now pursuing their local version of the American Dream. But for them, it’s still early days. Maybe the way to profit from their dream is a deeply undervalued stock market, like the one in Moscow. Maybe it’s relatively inexpensive farmland or a beachy apartment in Uruguay.
Whatever the case, I’ve found boatloads of opportunities all over the world in my travels over the last 30 years.
I started looking for these opportunities back in 1994, when I opened my first international brokerage account in New Zealand to buy stocks in a company that makes kitchen appliances. I calculated that its price would explode higher over the years as demand for a Western lifestyle erupted across Asia, one of the company’s primary markets. I was right. I made huge money on that one before it was ultimately gobbled up in a takeover years later.
Over the last quarter century, I’ve found very nice profits in an Egyptian dairy company, a Chinese supermarket chain, a Hong Kong operator of low-end shopping malls, a chain of Thai convenience stores, an Emirati water company, and so many more. Frankly, it wasn’t awfully hard. I just thought to myself: What do American consumers buy and where do they buy it…and what are the doppelgänger companies in Asia, Africa, South America, Eastern Europe, India, and the Middle East?
Those companies are everywhere: The McDonald’s of X, the FedEx of Y…you get the idea.
I tell you all of this because we’re going into an environment that will again see the emerging markets sit atop the leaderboard. It’s the subject of the May issue of the Global Intelligence Letter. There, I will tell you how to play this trend and why the emerging markets are again moving to the top of the leaderboard and how you can take advantage.
