By Lula’s surprising and doubtfully legitimate re-election last week, Brazil became un-investible for rational buyers, as evidenced by the 14% fall in the Bovespa index and the 20% fall in the iShares MSCI Brazil ETF (NYSE:EWZ) Monday. This is an increasing trend; MSCI is attempting to remove Indonesia from its indices, while Russian investments were not only rendered un-investible but effectively confiscated by the Biden administration. Looked at rationally, the universe of places in which a reasonable person might invest is ever-shrinking. It is not a good trend.
Until about 2007, it seemed that the world was one’s oyster, as far as investing went. Everywhere there were good growth stories and provided you had some means of accessing the market, you could be pretty sure that your investment would be well-treated and would share in the ups and downs of that country’s economy. When I first began international investing in the early 1980s, it was very difficult to buy shares beyond a few obvious mostly English-speaking markets, but by the 2000s many of the problems had been removed by multiple listings, better tele-communications, the Internet and international brokerage links available to even the retail investor of modest means.
The first country after 1990 to cross the line to un-investible was Argentina, with its debt crisis of 2001-02 and the arrival of the Kirchner regime in 2003. Argentina had a highly successful albeit inflationary government in the 1990s under Carlos Menem, which led investors all over the world to pile into Argentine shares and the IMF to lend Argentina excessive amounts of money. Argentina’s debt default would not normally have been a problem; investors all over the world were losing money after 2000 as the dot-com bubble vaporized. However, the extreme socialism of the Kirchners and their disdain for property rights made investors’ position impossible.
As this column has frequently written, property rights are the basis of all sound investment. Without solid property rights, investors cannot be certain that their investment will remain in place, earning profits or losses according to the investee company’s own management and the conditions that surround it, and that the investment can be sold if the investor rationally decides he no longer wishes to hold it. In a society without solid property rights, the company may be nationalized without proper compensation, or it may be forced into bankruptcy by price controls on its products or import controls on its inputs. Finally, its share register may be tampered with for political ends.
Politically well-connected and very rich shareholders can overcome these difficulties if they wish: Elliott Management through a series of lawsuits profited greatly from their holdings of distressed Argentine sovereign debt. However, such “deals” are not available to those without Elliott’s money, deep political connections and access to top legal talent. In general, foreign investors, unless they have such connections, are likely to lose out in such situations. Small foreign private investors are especially vulnerable to expropriation, as they have no political pull, having no position within the domestic political system. To such investors, the Kirchners’ Argentina was un-investible; it had effectively been wiped off the global economic map.
Un-investibility does not necessarily arrive through direct economic misdeeds by the host government. Russian investments were quite interesting from the advent of Vladimir Putin in 2000 (before that date, there had been a speculative boom in Russian assets, with highly imperfect property rights, that collapsed in the default debacle of 1998). The early years after 2000 formed a “Putin Renaissance” when as a result of sound and intelligent economic policies, Russian investments provided stellar returns and the economy itself grew rapidly, greatly improving Russian living standards, at least in the major cities.
The picture darkened after 2008. Russia’s invasion of Georgia in 2008 and Crimea in 2014 reduced international appetite for Russian assets, so returns during the 2010s were mediocre and the market began to trade at a substantial discount to others. Despite the appearance of political risk, that made it attractive to value investors, and Russian natural resources such as the well-run gold mine Polyus, the largest in the world, were exceptionally attractive to investors in that sector. For foreign investors with no connection to Russian oligarchs (who might at any time fall out with the regime) property rights seemed reasonably assured.
The problem since 2022 has been the Western embargo, which has violated property rights far more egregiously than anything Putin has done, blocking Russia’s $600 billion of dollar reserves in foreign banks, for example, and attempting to use it to finance Ukraine’s endless war. As for private investors, they have effectively been expropriated, not by Putin, but by Western governments that saw fit to steal their own citizens’ property in pursuit of those governments’ moral crusade against Russia. To have one’s property seized is no more acceptable coming from the Biden administration (for whom one did not vote) than from the Putin regime.
Further back, there are many examples of countries that were investible, then ceased to be so – Russia in 1917, for example. One example of current relevance is Iran, which was not on many investors’ radar screens during the Shah’s regime before 1979, but was unquestionably investible, with a substantial range of public companies quoted on the Tehran Stock Exchange and a high rate of economic growth. There may have been a missed opportunity to reopen the Iranian investment market, when in 1997 the moderate Mohammad Khatami became President of Iran, which he remained until 2005. However, the previous year the U.S. had passed the Iran-Libya Sanctions Act, which was renewed in 2001 (before 9/11) and any opportunity for an Iranian opening and return to investibility was lost to the U.S. neocons.
International organizations may themselves arbitrarily decide that particular countries are un-investible. MSCI, Inc., the global index company, is one example. They have begun threatening to demote Indonesia from its current “emerging market” status to not only the lowlier status of a “frontier market,” but to reduce it further to “standalone” status, similar to Argentina since 2021. This would exclude it from all international investment indices and probably eliminate it from international institutional investors’ portfolios. (MSCI’s failure to restore Argentina to its 2018-21 “emerging market” status since Javier Milei took over in 2023 is an increasingly anomalous disgrace.) However, Indonesia is a democratic and capitalist if corrupt country with a stock market valued around $800 billion in an economy of $1.4 trillion GDP, growing at a steady 5% per annum and 287 million people; it is an essential component of the portfolio of any international investor worth his salt.
In Brazil, Lula is about to enter his fourth term, and it might be thought that any damage would have been done by now. However, the counterexample of Venezuela tells a different story. Venezuela had been highly investible before 1998, although the oil dominance of the economy meant there was nothing much to invest in beyond PdVSA and a few banks. Then Hugo Chavez arrived. For the first few years the damage was moderate and could have been reversed; an attempted coup by the democratic opposition in 2002 was combined with a desperate plea to President George W. Bush for support. Bush ignored the plea and focused on the more distant and alien opponent in Iraq, despite Venezuela being much closer, culturally compatible, Catholic and controlling far more oil than Iraq. The result was tyranny and disaster until President Trump’s courageous and effective intervention in January of this year, though even now the job of restoration to investibility is not yet done.
Trump is unlikely to intervene in Brazil, at least not yet. The last two Presidential runoffs (2022 and 2026) appear to have been stolen by Lula. In spite of that, the media who love him as they did Chavez have essentially given him a pass for this and will certainly not do the journalistic digging that would prove the electoral theft. Had he had the chance, Trump would probably have intervened in Venezuela in 2002. However in today’s Brazil, Lula is likely to arrest the leaders of the opposition, with the assistance of his highly corrupt Supreme Court. Thus there will not be an organized body to request U.S. intervention, even if it were militarily feasible in Brazil, much larger and more populous than Venezuela. In these circumstances, with Lula already showing himself contemptuous of the market system and property rights, Brazil must be declared at least temporarily uninvestible.
The most important investibility question globally is the EU, and to a lesser extent Britain. The EU has already taken to assessing arbitrary fines against U.S. tech companies, to the extent that its income from those fines is greater than the corporate taxes it receives from Europe’s feeble tech sector. It has introduced a new regime whereby all EU citizens who interact with the Internet will have to register to prove their age and can therefore be “found” by the authorities. This is not a theoretical risk; the activist Tommy Robinson has just been subjected in Britain to a prison term of up to 10 years for “harassing journalists” – in a better-run country they would give him a medal!
Those activities certainly reduce the EU’s investibility – arbitrarily large fines and universal censorship make coherent investment analysis impossible. However, the EU’s and Britain’s descent into the pit of darkness is mostly caused by their arbitrarily harsh climate change and other regulations. These have already increased energy costs to such an extent that EU heavy industry is becoming impossible, declaring for bankruptcy or desperately attempting to move its operations to a less harassing environment such as China. Even in the area of democracy, which the Greeks claim to have invented and the British actually did, EU interference in its member country elections and those of nearby countries becomes ever more heavy-handed – as witness the recent victory of a “student movement” without a leader in Serbia against the long-established and capable Aleksandar Vučić, whom the EU bureaucracy disdained. For economic and constitutional reasons, therefore, the EU and even Britain are today only doubtfully investible and may descend shortly into outer darkness.
I’m sure MSCI is not about to throw out the EU in the near future, and probably not Brazil. Leftist wimps! Nevertheless, in the final analysis investibility is in the mind of the intelligent investor, and for such people the universe of investible destinations is alas steadily shrinking.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)