BOSTON, MA – 04/07/2022 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), stated the following about his new report “To Protect Investment Portfolios from Inflation, We Need to Know Its Roots.” "In the report, I discussed the reasons for high inflation that developed in various countries around the world in 2020-2022. To understand how inflation will impact investments in the future, one needs to understand its likely longevity. Without understanding the reasons that caused inflation, investors would not be able to forecast how long it lasts and how intense it is going to get. A number of investment publications – often based on the political views of their authors - focus on one or two reasons for inflation. In the US, for example, conservative publications often focus only on domestic factors that caused inflation, and liberal publications focus primarily on international factors. I believe it is essential to cover inflation’s reasons – both domestic and international. Anything else could be counterproductive as investors have to focus on all reasons for this damaging economic phenomenon that destroys the purchasing power of money and makes everyone poorer. In my opinion, we should not shy away from difficult topics. For example, in the report, I discussed the profound inflationary impact of the ‘soft-on-crime’ policies in the United States. I have not seen any other publications focusing on these policies as a source of inflation.
 
We need to investigate the reasons for inflation with the same intellectual honesty and hard-nosed dedication as was demonstrated by a team of police officers in one of my favorite movies, “The Untouchables.” They were tasked with halting bootlegging operations of the gang led by Al Capone, an infamous Chicago-based gangster during the Prohibition in the 1930s. The team’s first attempt was thwarted by corrupt policemen who alerted Al Capone about a police operation against him. The gang’s activities continued. If we leave some of the reasons for inflation untouched because of political expediency or because we like the people who create them, we will not understand why inflation continues to rage while supposedly all the reasons for its development were eradicated.
 
Importantly, there is a difference between Al Capone and his gangsters and most people responsible for creating the factors that led to inflation development. The gangsters often care about their own interests and maybe those of their loved ones. In the overwhelming majority of cases, they do not care about the interests of society in general. Many people, who created some reasons for inflation, care about society. They proposed changes that, in their minds, would solve important societal problems. But they did not think about, could not forecast, or simply ignored the adverse side effects of their often single-minded pursuit of positive goals. This phenomenon can be described by an old, true saying, “The road to hell is paved with good intentions.”

Please see the list of inflation causes identified by BBIS and divided into groups below my signature."
 
To read the full report in PDF format, please Click Here
 
Please let me know if you have any questions about BBIS or the firm’s investment strategies, would like to be on our publication distribution list, or want to invest some funds with BBIS.
 
Thank you.
 
Best regards,

Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]
​

Sources: Refinitiv, Beyond Borders Investment Strategies (BBIS). Used MSCI country index performance for 48 countries - all but the US. The US performance is represented by MSCI USA and S&P 500 indices. All performance series measure total returns of US Dollar-denominated indices.
 
Disclaimer: Opinions expressed in this report are of BBIS and are for information purposes only. This report does not represent investment advice. BBIS holds investment positions in single-country equity ETFs of some or all countries mentioned in the report. Past performance is no guarantee of future results

BOSTON, MA – 02/07/2022 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), shared his thoughts on the factors that may impact future performance prospects of four indices with the highest returns during January 2022. They included MSCI Brazil, MSCI Chile, MSCI Peru, and MSCI Colombia. The idea behind writing this report was to understand tailwinds, or factors that would help these indices finish on the pedestal or at least in the “Top 10” out of fifty country equity indices in the Beyond Borders Investment Strategies, LLC universe at the end of 2022, and headwinds, factors that are likely to hurt the indices’ performance. It is essential to do it because sometimes indices that won the January stage proceed to win the entire annual competition. For example, after winning the January 2021 stage, the MSCI United Arab Emirates (UAE) index won the 2021 annual competition.
 
To read the full report in PDF format, please Click Here

Please let me know if you have any questions about BBIS or the firm’s investment strategies, would like to be on our publication distribution list, or want to invest some funds with BBIS.
 
Thank you.
 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]

BOSTON, MA – 01/07/2022 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), commented on the performance of the “Top 3” country indices leading in terms of total returns during the last week of December 2021. These indices included the MSCI United Arab Emirates (UAE) Index, MSCI Austria Index, and MSCI Saudi Arabia. The report focuses on four factors that explained the performance of these indices during the last week of the year. They included the oil price increases, strong earnings growth momentum, high index valuations, and COVID-19 case increases. The report’s readers will also learn some general statistics about the 2021 performance of 50 indices in BBIS’ universe. For example, they will know what number of country indices had positive returns and how many indices beat the assumed expectations rate of return of the US defined-benefits retirement plans in 2021.
 
The report focuses on other topics that may be of interest to the report’s readers:

• The reason why earnings forward estimates are important for country selection in equity investing even though the estimates are often coincidental or lagging indicators, not leading indicators, for the stock indices’ returns. The explanation fuses concepts from the investment world and the technology adoption life cycle model.
• Two major factors that heavily impacted the stock index performance in 2021: robust commodity price increases and quantitative easing (QE) programs. Specifically, the report focuses on the QE prospects in the Eurozone in 2022. The report also references Vitaly’s earlier report on the QE tapering in the US and its impact on the global stock market leadership.
• Why MSCI Austria Index has a high correlation with oil prices despite Austria being just the 74th largest oil producer globally.

 
To read the full report in PDF format, please Click Here
 
Congratulations to the winners of the 2021 competition and investors who held ETFs benchmarked to the winning indices!
 
Please let me know if you have any questions about BBIS or the firm’s investment strategies, would like to be on our publication distribution list, or want to invest some funds with BBIS.
 
Thank you.
 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]

BOSTON, MA – 12/26/2021 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), shared his thoughts on the potential developments that may impact three leaders in BBIS’ 50-country-stock-market-index universe during the last week of 2021. The leaders include the MSCI United Arab Emirates (UAE) Index, MSCI Austria Index, and MSCI Saudi Arabia Index.
 
To read the full report in PDF format, please Click Here
 
As always, please let me know if you have any questions about BBIS, the firm’s investment strategies, or would like to invest some of your funds with the firm. Thank you.
 
I look forward to talking to you in early January.
 
Have a Happy New Year!
 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]
​

Sources: Refinitiv, Beyond Borders Investment Strategies (BBIS). Used MSCI country index performance for 48 countries - all but the US. The US performance is represented by MSCI USA and S&P 500 indices. All performance series measure total returns of US Dollar-denominated indices.


Disclaimer: Opinions expressed in this report are of BBIS and are for information purposes only. This report does not represent investment advice. BBIS holds investment positions in single-country equity ETFs of some or all countries mentioned in the report. Past performance is no guarantee of future results.
​

BOSTON, MA – 11/24/21 – A report written by Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), was published by SovereigNet, an interdisciplinary network at Tufts University’s Fletcher School dedicated to the study of sovereign wealth funds (SWF) and their impact on global capital markets. The report “Potential Change of Leadership from US and Growth Stocks to International and Value Stocks in 2021-2023” was published on September 28, 2021.
 
Vitaly Veksler said, “It is always a pleasure when top-notch organizations find your work valuable and share it with their members. SovereigNet is a leader in study of sovereign wealth management (SWF). I have served as the network’s research affiliate for the last eight years. I truly enjoyed discussing the role of the sovereigns as institutional investors with my colleagues from all over the world during monthly phone calls and conferences. I was deeply impressed by their expertise and knowledge of various aspects of the SWF business. It is an honor that SovereigNet shared my report with its audience.”

To read the SovereigNet article "Capital Ideas: Research Affiliate Vitaly Veksler on the Future of International Stock Leadership" about the BBIS report, please Click Here
 
To read the report on BBIS’ website, please Click Here
 
Please let me know if you have any questions about BBIS or the firm’s investment strategies, would like to be on our publication distribution list, or want to invest some funds with BBIS.
 
Thank you. Have a Happy Thanksgiving!
 
Best regards,
Vitaly

Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]

BOSTON, MA – 11/14/2021 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), shared his thoughts on the presidential election in Chile, the main driver of stock market performance in the top-performing country during last week and in November 2021 (see columns two and three in the Performance Tables section at the end of the report). He also focused on several other leaders among the 50 country stock market indices in BBIS’ research universe at the end of the second week of November.

To read the full report, please Click Here
 
Chile’s Stock Market Surges in Line with the Pro-Business Presidential Candidate Rise in Polls: The MSCI Chile index continued its surge in November. During the first two weeks of this month, the index had total returns (price appreciation plus dividends) of 12.3%, far ahead of the MSCI Philippines in the second place with 6.3%, and more than twice the impressive returns of 6.1% posted by the MSCI United Arab Emirates in the third place. In the last presidential polls before the first round of the presidential elections on November 21, 2021, José Antonio Kast, a right-wing candidate friendly to the markets, received the support of 27.3% of people participating in the Pulso Ciudadano poll published on November 6. [1] Mr. Kast’s lead over his main rival, Gabriel Boric, a left-wing candidate supported by 23.7% of the polled people, was 3.6%. [2] The Cadem opinion poll, which surveyed 1,010 people, demonstrated an even more substantial lead – 6% – for Mr. Kast. He received support of 25% of the potential voters to Gabriel Boric’s support of 19%. The Cadem poll also showed that José Antonio Kast would get the support of 44% of the vote in a hypothetical head-to-head against Boric, who received 40% in a second-round vote. [3]
 
Even the last-minute pre-election impeachment by the left-wing Congress members of the sitting center-right President Sebastian over “possible” irregularities in the sale of a mining company all the way back in 2010 have not negatively impacted the stock market on November 9. [4] The deal had previously been examined and dismissed by courts in 2017. The timing of the impeachment makes it likely that the left-wing Congress members tried to link President Pinera to Jose Antonio Kast. Judging by the market’s response, or really lack of it, this political exploit did not work. The MSCI Chile index increased in value in the US Dollar terms on November 10 (0.5% vs. the November 9 level) and November 11 (1.0% vs. the November 9 level). On November 12, the MSCI Chile declined by 0.7% compared to its November 9 level, but this decline may not be connected to the impeachment. In my opinion, the impeachment’s negative impact would have been much more immediate (November 10 or November 11).   
 
A Political Revolutionary Presidential Candidate Scares Markets: In my opinion, the markets reacted so positively to José Antonio Kast’s surge because of their antipathy to his rival, Gabriel Boric. Mr. Boric famously or infamously, depending on one’s political views, threatened to destroy the neoliberal economy that made Chile one of the most successful economies, if not the most successful economy in Latin America. “Currently, Chile’s economy ranks 19th highest in the world in the 2021 Index of Economic Freedom and first in Latin America. [5]
 
“If Chile was the cradle of neoliberalism, it will also be its grave,” said Boric shortly after becoming the presidential candidate of the left Apruebo Dignidad (Approve Dignity) coalition that included the Communist Party and parties representing various forms of socialism. [6] [7] Chile’s neoliberal economy was built along the economic blueprint developed by the ‘Chicago Boys’ under President Augusto Pinochet.  The authors of the neoliberal economic reforms were called the ‘Chicago Boys’ because a number of them studied economics at the University of Chicago.[8] Miguel Kast, a brother of José Antonio Kast, was among ‘Chicago Boys.’ The neoliberal program was based on economic reforms implemented by the ‘Chicago Boys’ with three main objectives: economic liberalization, privatization of state-owned companies, and inflation stabilization. [9] The reforms were highly successful from an economic standpoint. For example, the country’s annual inflation dropped from 150% in 1972 (the last year under the Socialist President Salvador Allende) to just 1.9% in September 2019, the last month before massive protests against inequality started and pushed inflation to 2.7% in October 2019. [10] [11] The impact of ongoing COVID-19, such as the global supply chain management, and a ten-percent Chilean Peso’s depreciation vs. the US Dollar from the end of September 2019 to the end of October 2021, were among the reasons that pushed inflation to 6.2% in October 2021. [12] [13]
 
However, the economic reforms were done under President Augusto Pinochet, whose government brutally repressed its political rivals. [14] His name became a synonym for cruelty in many countries around the world. Also, while Chile successfully reduced poverty – between 1987 and 2017, the poverty level dropped from 52% of the population to 3.6% - the reforms created inequality. [15] Chile is a country with the second-highest level of inequality (just behind Costa Rica) among the thirty-eight members of the Organization for Economic Co-operation and Development (OECD). [16]
 
Despite Chile’s past problems, and which country does not have them, it does not sound logical to destroy the neoliberal system, which brought the country so much success, rather than to improve the system. Gabriel Boric came to prominence as a student protest leader in 2011. [17] As Ivan Klima, a Czech novelist and playwright, said about protesters, “To destroy is easier than to create, and that is why so many people are ready to demonstrate against what they reject. But what would they say if one asked them what they wanted instead?” [18]
 
New Program is Not Dissimilar from the Old Failed One: Unfortunately, Boric’s program is not very dissimilar from the Chilean Socialist President Salvador Allende that led to very high inflation and low wellbeing in the country in the early 1970s. Unlike successful centrist programs that spread benefits to people across the society, Gabriel Boric’s program includes 53 priorities that can be categorized as a wish list of his supporters. It would be paid for by existing and new taxes imposed on the rest of the society – business people, job-creators, enterprises, and the wealthy. Their role is just to finance spending that benefits others. His program, a 227-page document, was drawn up after consultations with around 33,000 people from all over Chile. [19] Of course, who would not ask for everything under the moon as long as it is paid for by somebody else?
 
Gabriel Boric’s program includes 53 priorities, many of which are expensive and difficult to implement. So many priorities in a political program raise a question of whether a person who did not manage to complete his education at the University of Chile’s Law School, one priority that he personally had, with no professional experience outside of protesting and politics, would be able to lead others in completing so many challenging reforms. [20]  For example, he wants to develop a universal health system that does not discriminate according to the ability to pay and equalizes the quality of service across society. [21] Some people would have to pay for medical care, while many would receive precisely the same care for free or close to it. While one can understand if universal healthcare, a giant undertaking in itself, was the one or maybe three or five top priorities that the Boric government would focus on, it is just one of the 53 priorities.
 
Another “tiny” undertaking contained in the program includes “creation of a popular real estate agency to prevent excessive increases in sale and rental prices” (rent control?), “and building 260,000 decent homes.”  Rent control has been proven detrimental to societies as it results in shortage and dilapidation of housing. Without rent control, landlords charge market rates for their apartments or rental houses. However, with rent control, when rental property owners cannot charge market rates for their properties, potential landlords are reluctant to buy existing rental properties and developers to build them. This reluctance always leads to a shortage of rental properties. Also, the landlords do not have incentives to maintain existing properties because they would not get higher rents. If existing tenants are not happy and leave, the landlords would not have problems finding other tenants for their “cheap” properties.  In addition, who would finance building 260,000 ‘decent’ homes?
 
The most controversial of all, Mr. Boric proposed eliminating the AFPs, Chile’s pension system run by private pension funds, and creating a national public pension system instead. [22] The AFPs pension system helped make Chile a pillar of stability in an unstable neighborhood. Chile’s pension system has been studied by financial authorities and economists from all over the world as a “best practice” in administering pension systems. Gabriel Boric’s program allocates four and a half pages out of 229 pages in total in his programs to present his proposal on pensions. [23] That’s it. Mr. Boric dedicated only four and a half pages to ‘reforming,’ or more like destroying, one of the most important elements of the country’s stability. His proposal not to allow Chileans to make mandatory pension contributions to the AFPs would likely lead to the AFPs system’s bankruptcy. The AFPs charge commissions on money flows into the pension system every month. They do not charge commissions on the balance, or stock, of the accumulated pension savings. [24] By not allowing people to contribute to the AFPs, Mr. Boric proposes to destroy the AFPs’ revenue stream.
 
Currently, Chileans must contribute 10% of their incomes to the pension system and receive pension payments proportional to their contributions. [25] In the future, in Mr. Boric’s world, the state-run pension system would make universal pension payments equal to the minimum wage to all Chileans, regardless of whether they worked and made contributions into the pension system or not. [26] This Universal Basic Pension of $250 per month ($3,000 per year) would be created for all people, regardless of their pension contributions to date. [27] According to the platform, “workers who currently do not have any funds in their individual savings accounts will automatically enter the new system, and their pension will be financed entirely with the Solidarity Pension Fund, which will be calculated based on contributions, with recognition of unpaid care work and subsidizing those with periods of unemployment.” [28] Clearly, the state would have to make pensions payments that it does not do now. The state would have to finance these payments through higher taxes on the wealthy and businesses, extra borrowing, or printing new money. The first measure would lower incentives to keep cash and invest it in the country leading to capital flight and lower productivity. The second and third measures may negatively impact the country’s financial stability and would both lead to higher inflation.
 
It is also unclear what would happen to the pension contributions already in the system. After reading four pages devoted to the topic, the AFP Association responded that “we do not know the implications and details of the proposals of the Gabriel Boric Government program with regard to the stock of savings from the pension funds that would remain in the administration of the AFPs and we are waiting for the implications of this approach to be made transparent.” [29]
 
The Attack on the Tried-and-True Economic Policies Is Not Unique to Chile or Emerging Markets: This cavalier treatment to making massive, often totally unpopular changes to the financial service industry is not unique to Chile these days. The draconian provision that the US Treasury Department came up with to finance the “Build Back Better” spending package, also known as the Democrat Budget Reconciliation package, falls into the same category. According to the provision, the banks had to report gross inflows and outflows to and from another bank account with the same owner for all US bank accounts with $600 in annual transactions or total assets. This provision was supposed to help the IRS collect around $460 billion over the next decade was just one-page-and-six-lines long. [30] In my opinion, this provision can lead not only to permanent outflows of much larger funds from the US. It may even threaten the US Dollar’s status as the world’s premier reserve currency. There are multiple problems with this provision. Think even about one – cybersecurity. There are no completely secure databases. With its information on almost all bank accounts in the United States, the IRS database would become a Holy Grail for cybercriminals and spies of all types. I do not think domestic and especially foreign investors would want to keep their money in the US banks or investment firms if the provision is adopted. I wrote about the provision’s negative potential impact on the US Dollar on Slides 28-41 in a report titled “Potential Change of Leadership from US and Growth Stocks to International and Value Stocks in 2021-2023.” [31] Below is a link to the report:
 
http://bbistrategies.com/our-publications--events/report-potential-change-of-leadership-from-us-and-growth-stocks-to-international-and-value-stocks-in-2021-2023
 
Common Problems of Transformational Economic and Political Programs: The problem with “transformational” programs with multiple priorities, often unproven and unachievable, is that they involve a lot of spending and often result in higher debt levels and runaway inflation for countries that adopt them. Below are two common scenarios that happen time and again. A Presidential Candidate promises the ‘Haven on Earth’ program to his supporters. A large part of the program, if not all of it, is almost always financed by other people’s money. This money may not materialize because of the capital flight from the country. The newly-elected President finds themselves at a crossroads. There are two paths. One is a short but damaging one for the President. They say that despite the campaign promises, they can concentrate on just several priorities. The President may lose popularity because some disappointed supporters may leave due to the broken promises. However, the President can implement one or two priorities. Another path for the President is to continue pursuing all priorities. Most always, there is not enough money for these priorities. If they control currency, the President and his supporters start their printing presses and create enough new money out of thin air to cover some of their priorities. If not, they borrow money from others. Some Presidents do both.
 
The toxic combination of printing money and high debt starts inflation. The local currency depreciates, imports become more expensive, and inflation accelerates. And if the country imports a lot, inflation rages and destroys citizens’ savings. People become disenchanted, and their level of wellbeing drops significantly. The President is not reelected and has to leave their post. To stop inflation, the new President has to start austerity measures to conquer inflation. They may raise interest rates. The economy slows, people whose savings were already decimated by inflation cannot find jobs. Thus, despite the President’s good intentions, the pursuit of multiple priorities that the country cannot afford leaves everyone worse off.
 
The program written by Mr. Boric and his supporters does not propose anything to make the lives of job creators - business owners and enterprises of various sizes - better. Instead, he proposed increasing taxes not only on the country’s super-rich (0.01% of the population) but also on small and medium-sized enterprises. [32] He also wants to impose new mining royalties. [33] It is a pure socialist redistribution program aimed not at increasing the size of the economy that would benefit all people willing to work. Instead, the program would redistribute a smaller economic pie – the economy usually shrinks, and capital leaves the country when authorities increase taxes – with a more significant piece going to his supporters. It is not surprising that the markets support José Antonio Kast.
 
Change of the Leader on the Year-to-Date Basis: Strong performance of the MSCI United Arab Emirates (UAE) index during the second week of November allowed it to maintain leadership on a year-to-date basis. Its total 2021 performance was 47.5% as of November 12, 2021 (see the Performance Tables section at the end of the report). The MSCI UAE index leads the MSCI Saudi Arabia with total returns of 46.4% by 1.1%. The MSCI Austria index is in third place with total returns of 40.5%. The MCSI Argentina is in fourth place with 37.7%. The oil price is the primary driver of the long-term performance of the MSCI UAE and Saudi Arabia indices. It is also important for the MSCI Austria, where the weight of the Energy sector is 24.29% of the total index’s weight as of the end of October. [34]
 
While MSCI Austria and MSCI Argentina’s returns are impressive on a year-to-date basis, both indices lost ground versus the other leaders. Last week, MSCI Argentina (in second place) and MSCI Austria (in fourth place) were less than 1% behind the leader, MSCI UAE.  Here is a link to the last week’s report, “The Four-Country Race”:
 
http://bbistrategies.com/our-publications--events/the-four-country-race
 
During the second week of November (November 8 – November 12), the performance of both MSCI Austria and MSCI Argentina was negative. While the Austrian market declined by 1.8%, the MSCI Argentina Index dropped by 4.0%.
 
Rising COVID cases may explain the MSCI Austria index’s negative performance. As of November 12, there were 11,798 new cases compared to 910 new cases on October 5, just a month and a week ago. [35] It is difficult to identify the most important factor driving the performance of a market when the performance is not very different from zero in either direction.
 
As I said in the last report, the performance of the MSCI Argentina index is mainly driven by the performance of Globant stock. It represents more than 88% of the index’s weight as of the end of October. [36] The stock traded at a stratospheric Price-to-Trailing-12-Months-Earnings (P/E) ratio of 156.22 on November 12. [37] This P/E ratio is exceptionally high in absolute terms and close to the top of the trading range for Globant SA’s stock (GLOB). At these levels of valuations, both GLOB’s valuations and stock prices can be very volatile. I believe that even though the software development company’s revenue growth is impressive (26.4% per year) and its client base is diversified and includes many leaders in their fields, the stock’s valuation is too high. [38]
 
Please let me know if you have any questions about BBIS, the firm’s investment strategies, or would like to invest some of your funds with the firm. Thank you.
 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]

Sources: Refinitiv, Beyond Borders Investment Strategies (BBIS). Used MSCI country index performance for 48 countries - all but the US. The US performance is represented by MSCI USA and S&P 500 indices. All performance series measure total returns of US Dollar-denominated indices.


Disclaimer: Opinions expressed in this report are of BBIS and are for information purposes only. This report does not represent investment advice. BBIS holds investment positions in single-country equity ETFs of some or all countries mentioned in the report. Past performance is no guarantee of future results.
​

BOSTON, MA – 11/08/2021 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), shared his thoughts on the performance of several from the 50 country stock market indices in BBIS’ research universe as of the end of the first week of November. To read the report in PDF format, please Click Here
 
Chile’s Pro-Business Presidential Candidate Surges in Polls: The MSCI Chile became the best performing index during the first week of November. I believe that the surge of José Antonio Kast, a right-wing business-friendly presidential candidate, drove the index’s performance during the week. The first round of the presidential elections is scheduled for November 21, 2021. The Pulso Ciudadano study, released on October 31 by Activa Research consulting firm, showed that José Antonio Kast gained 26.5% of the vote, pulling slightly ahead of the center-left former student leader Gabriel Boric, at 25%. [1] By the end of the week, José Antonio Kast’s polling advantage further increased. The Pulso Ciudadano poll, released on November 6, demonstrated that Kast had the support of 27.3% of the polls’ participants versus 23.7% for Boric. [2] José Antonio Kast’s polling numbers show a significant improvement in his appeal to voters. In August and September of this year, he was supported by less than 10% of various polls’ participants. [3]
 
The October Stage Winner Continues to Perform Well: The MSCI Egypt index continues to perform well since the country’s state of emergency was lifted on October 25, 2021, after four years it was in place. The index posted total returns of 4.1% during the first week of November. I wrote about lifting a state of emergency in Egypt in the report titled “The End of A State of Emergency Propels Egypt’s Index to Victory in October.” [4] Below is a link to the report:
 
http://bbistrategies.com/our-publications--events/the-end-of-a-state-of-emergency-propels-egypts-index-to-victory-in-october
 
Change of the Leader on the Year-to-Date Basis: Strong performance of the MSCI United Arab Emirates (UAE) index during the first week of November was sufficient for the index to wrestle the leadership from the MSCI Saudi Arabia. The MSCI Argentina and the MSCI Austria indices also had a strong week. The oil price is the primary driver of the long-term performance of the MSCI UAE and Saudi Arabia indices. It is also important for the MSCI Austria, where the weight of the Energy sector is 24.29% of the total index’s weight as of the end of October.[5] The performance of the MSCI Argentina index is mainly driven by the performance of Globant stock. It represents more than 88% of the index’s weight as of the end of October. [6]
 
As of November 5, the MSCI UAE index in the first place leads the MSCI Austria index in the fourth place by just 0.9% on the year-to-date basis.
 
Please let me know if you have any questions about BBIS, its investment strategies or would like to invest some of your funds with the firm. Thank you.
 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]


​
Footnotes
[1] Natalia A. Ramos Miranda, Reuters, “Chile Right-Wing Kast Gains Edge in Polls as Presidential Vote Nears,” November 1, 2021.
[2] Natalia A. Ramos Miranda, Reuters, “Chile right-Wing Kast Gains Edge in Polls as Presidential Vote Nears,” November 6, 2021.
[3] Wikipedia, “Opinion Polling for the 2021 Chilean Presidential Election,” After Official Registration Tables. Downloaded on November 7, 2021.
[4] Vitaly Veksler, Beyond Borders Investment Strategies, “The End of a State of Emergency Propels Egypt’s Index to Victory in October,” November 3, 2021.
[5] MSCI Austria Index, Factsheet, October 29, 2021.
[6] MSCI Argentina Index, Factsheet, October 29, 2021.

BOSTON, MA – 11/03/2021 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), shared his thoughts on the performance results of winners among 50 countries stock market indices as of the end of October 2021. To read the report in PDF format, please Click Here
 
Peru’s Lost Opportunity: As I wrote in a recent report, the MSCI Peru, with its impressive month-to-date returns of 17.6% as of October 22, led the closest competitors in the 50-country-stock-index field - MSCI Indonesia and MSCI Egypt - by 6.9% and 8.4%, respectively. [1] Please find the Performance Tables, including the month-to-date total returns (price appreciation plus dividends), by following the link to the report mentioned above. It is titled “Unknown Unknowns or A Delayed Confirmation Vote for Peru’s Cabinet of Ministers”:
 
http://bbistrategies.com/our-publications--events/unknown-unknowns-or-a-delayed-confirmation-vote-for-perus-cabinet-of-ministers
 
I believe the MSCI Peru Index’s rally was sparked by an appointment of Mirtha Vasquez, a moderate Leftist, as Peru’s new Prime Minister on October 6. [2]  Ms. Vasquez replaced Guido Bellido, a belligerent Marxist-Leninist who used gas industry nationalization threats during his short (two months and nine days) but tumultuous tenure as Peru’s Prime Minister. Peru’s Congress was to vote to confirm (or not) Mirtha Vasquez’s cabinet of ministers on October 26, 2021. However, the vote was postponed to November 4, 2021, due to the death of Congressman Fernando Herrera Mamani. As a result of the delay and uncertainty associated with the confirmation, the MSCI Peru Index ended the month on a negative note by declining by 3.6% during the last week of the month (October 25-29, 2021).
 
On the positive side, the MSCI Peru Index’s performance in October, with total returns of 13.4%, allowed the index to get off the last, 50th place, in our rankings. The index was rooted to the bottom of the table after the country elected Marxist-Leninist President Pedro Castillo in July 2021. During his presidential campaign, Mr. Castillo also pledged to nationalize Peru’s mining and hydrocarbon sectors. [3] However, promises made on the political campaign trails, especially the most extreme ones, often, luckily, become less feasible when a person assumes the reins of power. An elected official must deal with the reality of governing (i.e., negotiating with influential people and groups with opposite views) rather than just sloganeering with the supporters.
 
The October Stage Winner: At the same time, the MSCI Egypt, which was in the third position before the last week, posted the second-best result during the week of October (5.5%) and won the October stage with a total return of 15.2%. In just one month, the MSCI Egypt’s total returns exceeded the 2021 average assumed annual rate of returns of state public pension funds of 7.2%. [4] (Of course, the index, as any other equity investment, does not always go up and may lose value as well). I believe that the MSCI Egypt has clearly benefited from the end of a state of emergency on October 25, four years after it was imposed. Egypt imposed the state of emergency in April 2017 after the deadly bombings of two Coptic Christian churches by the local ISIS affiliate that led to the deaths of more than 40 people and wounds to dozens more. [5] Since it was imposed, the state of emergency was routinely extended at three-month intervals. [6] The state of emergency was lifted because “Egypt has become ... an oasis of security and stability in the region,” as Egypt’s President Abdel Fattah Al-Sisi wrote in a Facebook post. [7] Egypt’s business community welcomed the President’s decision anticipating that it would bring more investments in Egyptian businesses in such sectors as Financials, Information Technology, and Communication Services. [8]
 
Year-to-Date Leaders: Due to high and still increasing oil prices in 2021, oil-exporting and oil-refining countries continue to occupy seven out of the top eight places in terms of their 2021 year-to-date performance. According to the US Energy Information Administration (EIA), the West Texas Intermediate (WTI) oil price increased by 392% from the end of April 2020 ($16.55) – the pandemic low – to the end of October 2021 ($81.48). [9] See Chart 1 for the monthly WTI prices. From the beginning of 2021 to the end of October, the WTI price increased by 73%, from $47.02 to $81.48. Saudi Arabia tops the list, followed by the UAE, Russia, Argentina, Netherlands, Norway, and Canada. The only Top Eight country that is not a traditional oil producer, Austria (in the fourth place), has a sizable Energy sector weight, 24.29%, as of September 30, 2021. [10] For as long as the oil prices stay high, especially if they continue to increase, the indices of the oil-exporting countries are likely to perform well.

Please let me know if you have any questions about BBIS, its investment strategies or would like to invest some of your funds with the firm. Thank you.
 
Best regards,

Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]
​


Footnotes

[1] Vitaly Veksler, Beyond Borders Investment Strategies, “Unknown Unknowns or a Delayed Confirmation Vote for Peru’s Cabinet of Ministers,” October 26, 2021.

[2] Reuters, “Peru’s Congress Postpones Cabinet Confirmation Vote to Next Week,” October 25, 2021.

[3] BBC, “Pedro Castillo Declared President-Elect of Peru,” July 20, 2021.

[4] Equable Institute, “State of Pensions 2021: National Pension Funding Trends,” September 23, 2021.

[5] Al Jazeera, “Egypt’s el-Sisi Lifts State of Emergency in Force since 2017,” October 26, 2021.

[6] Reuters, “Egypt's President Sisi Ends State of Emergency for the First Time in Years,” October 26, 2021.

[7] Ibid.

[8] Daily News Egypt, “Egypt’s Business Community Welcomes President’s Decision to Lift State of Emergency,” October 26, 2021.

[9] US Energy Information Administration (EIA), Petroleum & Other Liquids, Price Table, November 3, 2021.

[10] MSCI Austria Index, Factsheet, September 30, 2021.

​

BOSTON, MA – 10/26/2021 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), published a report on the concept of unknown unknowns and how these risks can impact stock market performance. To read the report in PDF format, please Click Here
 
Conversation with My Children: This Sunday (October 24, 2021), I was looking at the performance table for the month of October (see the second column in the chart below). I told my kids, “With one week to go, I think the index of Peru is uncatchable and is likely to win the October stage.” Then after a pause, I added almost automatically, “Of course, barred any major negative developments in Peru or positive developments in the countries that are pursuing Peru.” I often talk to my children, an eleven-year-old boy and a six-year-old girl, about countries and stock market investing. I would like them to learn about the subjects that I am fascinated with.
 
Global Stock Market Competition: To make it interesting to them when they were younger, I came up with a comparison of each year’s country stock markets performances to a global cycling competition consisting of 12 monthly stages and 52 intermediate weekly finishes. At BBIS, we use the MSCI indices for 48 foreign countries in the firm’s database. The US is represented by two indices: the MSCI USA Index for consistency purposes and the S&P 500 Index as the country’s most popular stock index. So, we look at the global equities performances as the competition between 50 cyclists.
 
Diversifying Among and Within Countries: I often add variations of the phrase about risks because so many seemingly unlikely events, which have seriously impacted country stock markets worldwide over the years since I have been managing money at Beyond Borders Investment Strategies, LLC (BBIS), happened (see below for some examples). To protect against unpredictable risks and more conventional risks that we are aware of and that can impact a country or a company, BBIS diversifies its investment portfolios AMONG and WITHIN countries. To achieve the former, we limit country positions to 10% of the portfolios’ total weights. To do the latter, we use single-country equity ETFs, or fund vehicles, to protect our clients’ portfolios from individual company risks.
 
The Unknown Unknowns: As an investor, I came to respect the concept of unknown unknowns, or risks that we do not even know exist, over the years. Donald Rumsfeld, US Secretary of Defense, popularized the concepts of the known knowns (or facts), the known unknowns (known risks), and the unknown unknowns (unknown risks). During a news briefing in 2002, Secretary Rumsfeld stated, “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.” [1]
 
The Unknown Unknowns in Stock Picking: The unknown unknowns can be very dangerous not only for countries but also for investors. Over the years, a few overconfident investment managers lost a lot of their clients’ money by taking concentrated positions in investments they considered could not go down. Many more investors joined the crowd started by the overconfident investors, with the same consequences for their client portfolios. Years before I founded BBIS, I thought about ways to protect investors from the unknown unknowns. To prevent one company or several companies’ bankruptcies from heavily impacting client portfolios at BBIS, I decided to use single-country ETFs that consist of dozens and hundreds of stocks rather than individual stocks as the client portfolios’ building blocks. I have made this decision in the wake of the Yukos Oil Company affair.
 
In the early 2000s, this Russian company was a superstar of not only emerging market or oil industry universes. It was the superstar of both of them. The capital was flowing into this company like a mighty river. However, everything changed after the founder and CEO of the company, Mikhail Khodorkovsky, was arrested in October 2003.
 
While he was charged with tax evasion, outside of the official media sources, people believed that he was arrested for accusing Russian tax authorities of taking bribes and for running for the country’s presidency. Within months of Mr. Khodorkovsky’s arrest, Yukos’ assets were transferred to Rosneft, a state-owned oil company. Yukos went bankrupt in November 2007. An investment firm where I worked during the Yukos affair lost its investment in Yukos’ stocks. I thought, read, and watched videos about the loss for years. Specifically, I tried to figure out whether it was possible to predict the loss in advance. My conclusion was that unless somebody was very close to the very top of the Russian political power, it was impossible to forecast that the government would bankrupt the country’s most successful company. The company and investors were hit by an unknown unknown. If you are interested in reading about the Yukos affair, please read pages 13-16 of the BBIS white paper titled “Investment Lessons from Fishing: Building Portfolios from Single-Country Equity Exchange Traded Funds (ETFs).” [2] The paper also briefly mentions some scandals that involved companies in developed markets. Below is a link to the white paper:
 
http://www.bbistrategies.com/our-publications--events/archives/07-2017
 
Unpredictable Negative Countrywide and Global Risks During the Last Three Years: I will be honest. Some of the significant countrywide and global events that happened over the last three years surprised me because they happened at all, or their magnitude totally surpassed my expectations. I believe that many other investors were surprised by these events as well. I am happy that I have developed the rules for the client portfolios’ protection through diversification not only within countries but also among countries. As I mentioned above, we do not invest more than 10% of our portfolios in any one country. [3]
 
I developed the rule to protect portfolios from being negatively impacted by developments in one or several countries. From the risk management standpoint, I do not want BBIS to follow a popular strategy of “index hugging” or keeping the stock and country weights very close to the indices’ weights. In my opinion, major international indices’ weights of the top country positions are too high. For example, the weight of China in the MSCI Emerging Markets Value Weighted Index, which BBIS’ Emerging & Frontier Country Value Equity strategy competes against, is 31.32% (as of September 30, 2021). [4] The weight of the ‘Big Three’ countries in the index (China, South Korea, and Taiwan) is 61.17%. [5] Suppose something happens to one or several of these countries (i.e., potential military confrontations between China and Taiwan or between North Korea and South Korea, or even threats thereof). In that case, the value of the index and funds closely following it would plunge. It would not matter what happens in the other 24 countries in the index because the average weight of their positions in the index is just 1.62% per country.
 
Some of the events that surprised me over the last three years include the following. Based on my observations of the Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome (MERS), Ebola, and other regional epidemics, I could predict that a deadly outbreak may impact a country or a region. But I was negatively surprised by the fact that the COVID-19 pandemic affected ALL countries worldwide.
 
Also, while crises often amplify existing or perceived problems, I was surprised by the recent developments in Chile, China, South Africa, and the United States. I was surprised that the most intense countrywide or multi-province demonstrations and riots happened in Chile, South Africa, and the United States. The intensity of the riots made them unknown unknowns. I do not think that many investors, or any other country observers, could have forecasted in September 2019 that the three countries would experience anything close to what happened in reality. These three countries have some of the most robust economies and the highest income levels among countries in the BBIS research universe on the three continents (see the footnotes for the GDP and GDP per Capita levels). [6] [7] In the United States and South Africa, protests, demonstrations, and riots started during the pandemic in 2020 and 2021, respectively. In Chile, they began before the COVID-19 pandemic in October 2019 and intermittently continued during the pandemic.
 
The protests, demonstrations, and especially riots impacted stock markets in these countries differently. In the United States, ironically, large companies, such as Amazon, Nike, Wayfair, and other companies that could deliver goods to people’s homes, benefitted from the summer 2020 riots. While one of the banners under which the rioting was going on was erasing income inequality, the rioting actually enhanced it by strengthening these large companies’ competitive positioning. Most firms, which did not recover from a double punch of lost revenues due to the US economy’s closing because of the COVID-19 pandemic, and lost merchandise and vandalized workspaces due to the riots, were mainly small businesses. They included local food stores, grocery stores, clothing stores, shoe stores, furniture stores, restaurants, etc. Before the pandemic, these small businesses served as tiny but numerous competitors to Amazon and other large companies with the delivery infrastructure. In most communities across the country, there are fewer local businesses in 2021 than before the pandemic in 2019.
 
Also, many large companies benefitted from the Fed’s Quantitative Easing (QE) policies of infusing money into the economy in its fight against the pandemic. The QE policies led to lower interest rates and consequently lower bond yields in the economy. These lower yields made stocks even more attractive compared to bonds and other fixed-income investments. During the pandemic, US stocks attracted a large portion of the Fed’s more than $4 trillion infused in the US economy in 2020-2021. As a result, the US stock markets’ total returns (price appreciation plus dividends) were excellent in 2020 and 2021. For example, the S&P 500 Index’ returns were 18.4% (11th place) in 2020 and 22.4% (also 11th place) in 2021 (as of October 22, 2021). To read more about the impact of the QE policies on the US stock markets, please read pages 6-17 of the recent BBIS paper titled “Potential Change of Leadership from US and Growth Stocks to Value and International Stocks in 2021-2023.” [8] Below is a link to the paper:
 
http://bbistrategies.com/our-publications--events/report-potential-change-of-leadership-from-us-and-growth-stocks-to-international-and-value-stocks-in-2021-2023
 
In South Africa, the riots that started after the imprisonment of former President Jacob Zuma were intense and deadly. In just ten days from July 9 to July 18, 2021, they resulted in more than 300 deaths and looting of more than 200 shopping centers in the KwaZulu Natal and Gauteng provinces. [9] [10] The rioters ransacked shops, stealing groceries, liquor, electrical appliances, and clothes. They also robbed and burned factories and warehouses. The riots became some of the most expensive ones over the last ten years. According to the state insurance company handling the claims, the damages from the riots ($1.7 billion) even surpassed the insurance claims from the US riots in 2020 ($1.5 billion). [11] Of course, the insurance claims underestimate the total negative impact of the riots on the economy. Many business owners may decide not to rebuild their businesses that took years to build but were destroyed within days. However, the impact of the South African riots on the country’s stock markets was limited. Since the riots lasted only ten days, the South African stock markets have recovered losses incurred during the riots, and now the MSCI South Africa index has total year-to-date returns of 9.2% (29th place) as of October 22, 2021.
 
The Chilean protests and riots against the high cost of living and inequality were sparked by a seemingly routine 3.6% increase of metro fare from $1.12 to $1.16 in October 2019. [12] The protests lasted through 2020, with some smaller aftershocks happening in 2021. [13] The demonstrators damaged or burnt at least 118 metro stations, burnt public buses, and looted supermarkets, warehouses, pharmacies, and shopping centers. [14] They also targeted banks, cash machines, gas stations, churches, government offices, and police stations across the country, especially in large cities such as Santiago, Valparaiso, and Concepcion. These protests led to 36 deaths. [15] They also resulted in close to $6.0 billion in damages to the Chilean economy by November 2019. [16] According to Chile’s Construction Chamber of Commerce, the damage to public infrastructure was $2.3 billion, while the damage to non-residential property (i.e., shops, offices, and churches) was almost as significant - $2.25 billion. Separately, losses to the retail sector due to looting and business closures were estimated to be $1.4 billion. [17]
 
The protests and riots in Chile lasted longer than in South Africa or the United States. As a result of these ongoing adverse developments, the MSCI Chile Index became the second-worst market (49th place) in 2019, with a total loss of 16.0%. The index was one of just six indices that had negative returns during that year. During 2020, the MSCI Chile Index declined by an additional 4.1% (35th place) due to lower demand for copper, Chile’s most important export, caused by the closures of various economies worldwide. Some of the declines can also be attributed to the higher risk of investing in Chile due to the country potentially becoming less business-friendly in the future. After massive protests and riots sparked in October 2019, several political parties agreed to write a new Constitution. [18] The new constitution would replace the existing neoliberal one written during the Pinochet era by the US-educated economists. That business-friendly constitution helped to make Chile the best-performing country in Latin America, a Latin American Tiger. The new constitution will be written by representatives from all sides of Chile’s society, including Communists. They would be a part of the second-largest faction of authors writing the constitution. [19] It would most likely make the new constitution less business-friendly.
 
In 2021, the political risk increased further due to the presidential elections on November 21, 2021. While it is unclear which of the candidates – right-wing, left-wing, or centrist – would win the election outright or go to the two-person runoff, in my opinion, the MSCI Chile Index is not going to appreciate much before the elections. The index’s total year-to-date return as of October 22 was negative 12.8% (46th place). Over two years, since just before protests and riots started (October 11, 2019) to October 22, 2021, the MSCI Chile Index declined by 26.6%, hardly a performance worthy of a country that just recently was one of the most respected and admired economies not only in Latin America but around the world.
 
In China, the largest economy in Asia, the authorities unexpectedly started purges against tech billionaires, celebrities, and rich people in general in the middle of 2021, just several months ago. [20] While the socialist purges as a fact of life are not surprising to anybody who lived in socialist countries or observed them carefully, the timing of this purge surprised many people not only around the world but even in China. The timing of the purge makes it an unknown unknown. For example, the timing was a surprise to the Head of the Beijing Bureau of The Los Angeles Times, a person very informed in the current affairs in China (see the title of her article in the footnotes). [21] Over the last several decades, business people, entrepreneurs, and entertainers were celebrated in China. [22] But as the economy slows, the Party needs to show who is in charge. It is not surprising that the MSCI China index is one of the worst-performing indices in 2021, with a total return of negative 10.1% (see the Year-to-Date performance as of October 22, 2021).
 
From the investment standpoint, it was good that none of the BBIS investment positions in the countries impacted by crises exceeded 10% of the total portfolios’ weights.
 
Unpredictable Positive Countrywide and Global Risks During the Last Three Years: During the last three years, I was also surprised by some positive developments or positive risks. The fact that BBIS invests only 10% per country as a maximum (rather than 20-30% as in some broad-based international indices) allows the firm to build sizable positions in stock markets of countries going through unpredictably positive situations. [23] For example, the Abraham Accords, or a series of treaties that normalized diplomatic relations between Israel on one side and the United Arab Emirates (UAE), Bahrain, Sudan, and Morocco on the other, were hardly predictable. The results of the negotiations masterminded and facilitated by the US Administration between August and December 2020 were nothing short of amazing. [24] Since 1947, when Israel was established, only two Arab countries established diplomatic relations with it: Egypt and Jordan. Just in several months, the US Administration was able to convince twice as many Arab countries to do it. Three of the countries mentioned above are in the BBIS research database: there are single-country ETFs tracking stock markets of Israel, UAE, and Egypt.
 
The development of COVID-19 vaccines under the aegis of Operation Warp Speed within less than a year after the epidemic entered the United States was another unpredictable positive surprise. [25] Like many business students, especially in such a Life-Sciences oriented global center as Boston, I studied business cases focusing on the development of new medicines by pharmaceutical and biotech companies that lasted for many years, sometimes decades. The development of the vaccines in such a short timeframe was a positive development for limiting the numbers of COVID cases and deaths not only in the US but worldwide.
 
An Unpredictable Delay of a Key Vote in Peru: I am glad that I added the phrase about major developments in Peru when I talked to my kids on Sunday, October 24. I thought it would be difficult for any other index to overtake the MSCI Peru Index in October. With its total appreciation of 17.6% as of October 24, the index had a very sizable lead over all other indices with just one week to go. The MSCI Peru Index led the MSCI Indonesia Index and the MSCI Egypt Index, the two closest competitors, by 6.9% and 8.4%, respectively. However, an unexpected negative development, an unknown unknown, did happen in Peru. The vote to confirm the nomination of Prime Minister Mirtha Vasquez and her cabinet scheduled for Tuesday, October 26, was postponed by more than a week. [26] It is now to occur next Thursday, November 4, due to Lawmaker Fernando Herrera Mamani’s death from a heart condition. [27]
 
The rally in the Peruvian stock market started on October 6, before which MSCI Peru was the worst-performing stock market in BBIS’ database in 2021 (see the Year-to-Date performance as of September 30, 2021). The rally was caused by the replacement of a Marxist Prime Minister, Guido Bellido, by Mirtha Vasquez, a moderate leftist politician. As many people following Peru may remember, Guido Bellido threatened to nationalize Peru’s gas sector during his short (just two months and nine days) but tumultuous stint as Prime Minister. While entertaining, in a sad sense of this word, some people are talented in starting new conflicts instead of finding solutions to the existing ones. Judging by the rally’s strength, the markets believe that Ms. Vasquez can govern and lead constructively without the use of nationalization or other threats and would be a big step-up over her predecessor. 
 
Most investors who worked on forecasting the vote results in Peru focused on the possibilities of Mirtha Vasquez’s cabinet being confirmed or not on October 26, 2021. As Philip E. Tetlock and Dan Gardner, the authors of a wonderful book on forecasting titled “Superforecasting: The Art And Science of Prediction,” suggest in the “Judging Judgements” section of Chapter 3, “Keeping Score,” forecasts have to be done with dates attached to them. [28] In this light, the delay in voting was an unknown unknown that heavily impacted the precision of everybody’s forecasts of whether the cabinet would be confirmed on October 26, 2021. The MSCI Peru Index may still win the October stage, but the confirmation vote delay may negatively impact its October performance. What was supposed to be a sure victory for the MSCI Peru Index had the new cabinet been confirmed now may or may not happen.
 
Please let me know if you have any questions about BBIS, its investment strategies or would like to invest some of your funds with the firm. Thank you.
 
Best regards,

Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]


[1] Wikipedia, “There Are Known Knowns.” Downloaded on October 25, 2021.

[2] Vitaly Veksler, Beyond Borders Investment Strategies, “Investment Lessons from Fishing: Building Portfolios from Single-Country Equity Exchange Traded Funds (ETFs),” Pages 13-16, July 31, 2017.

[3] We may allow a country position to grow up to 15% if it outperforms other markets quickly and dramatically over a period of time, and the catalysts for the outperformance remain, but we cut all country positions at 15%.

[4] MSCI Emerging Markets Value Weighted Index, Factsheet, September 30, 2021.

[5] Ibid.

[6] According to the IMF’s World Economic Outlook Database (October 2021 Edition), Chile is the fourth largest economy in terms of the 2020 GDP measured in current US Dollars in South America after much more populous Brazil, Argentina, and Colombia. South Africa is the third largest economy in Africa after much more populous Nigeria and Egypt. The United States is the largest economy in North America. 

[7] According to the IMF’s World Economic Outlook Database (October 2021 Edition), Chile has the second highest income (after Uruguay) measured as the 2020 GDP per Capita calculated in current US Dollars in South America. There are no single-country equity ETFs following performance of Uruguay’s stock markets. South Africa has the fifth largest level of GDP in Africa after Seychelles, Mauritius, Equatorial Guinea, and Botswana. There are no single-country equity ETFs that track the performances of these four countries’ stock markets. The United States has the highest level of income in North America.

[8] Vitaly Veksler, Beyond Borders Investment Strategies, “Potential Change of Leadership from US and Growth Stocks to Value and International Stocks in 2021-2023,” September 28, 2021.

[9] Wikipedia, “2021 South African Unrest.” Downloaded on October 25, 2021.

[10] Mogomotsi Magome, AP News, “South African Riots to Cost $1.7 Billion in Insurance Claims,” September 8, 2021.

[11] Ibid.

[12] DW, “Chile Suspends Fare Hikes Amid Violent Metro Protests,” October 20, 2019.

[13] Wikipedia, “2019–2021 Chilean Protests.” Downloaded on October 25, 2021.

[14] Carla Selman, IHS Markit, “Protests and Terrorism in Chile: Examining the Data and What to Expect in the Coming Year,” May 3, 2021.

[15] Wikipedia, “2019–2021 Chilean Protests.” Downloaded on October 25, 2021.

[16] Carla Selman, IHS Markit, “Protests and Terrorism in Chile: Examining the Data and What to Expect in the Coming Year,” May 3, 2021.

[17] Ibid.

[18] Wikipedia, “2021 Chilean Constitutional Convention Election.” Downloaded on October 25, 2021.

[19] Will Freeman and Lucas Perello, Foreign Policy, “Chilean Voters Have Turned Their Backs on Traditional Coalitions. What’s Next?” May 17, 2021.

[20] Alice Su, The Los Angeles Times, “China is Purging Celebrities and Tech Billionaires. But the Problem is Bigger than ‘Sissy Men,’” September 14, 2021.

[21] Ibid.

[22] Ibid.

[23] The weight of China in the MSCI Emerging Markets Value Weighted Index that the BBIS Emerging & Frontier Market Country Value Equity portfolios compete against was 31.32% as of September 30, 2021. The weight of Japan in the MSCI ACWI ex-US Value Weighted index that the BBIS Global ex-US Country Value Equity portfolios compete against was almost 20% (19.44% to be exact) as of September 30, 2021.

[24] Wikipedia, Abraham Accords. Downloaded on October 26, 2021.

[25] Wikipedia, Operation Warp Speed. Downloaded on October 26, 2021.

[26] Reuters, “Peru’s Congress Postpones Cabinet Confirmation Vote to Next Week,” October 25, 2021.

[27] Ibid.

[28] Philip E. Tetlock and Dan Gardner, Crown Publishers, “Superforecasting: The Art and Science of Prediction,” Pages 52-53, 2015. 

Sources: Refinitiv, Beyond Borders Investment Strategies (BBIS). Used MSCI country index performance for 48 countries - all but the US. The US performance is represented by MSCI USA and S&P 500 indices. All performance series measure total returns of US Dollar-denominated indices.
​
Disclaimer: Opinions expressed in this report are of BBIS and are for information purposes only. This report does not represent investment advice. BBIS holds investment positions in single-country equity ETFs of some or all countries mentioned in the report. Past performance is no guarantee of future results

BOSTON, MA – 09/28/21 – Vitaly Veksler, CEO and Portfolio Manager at Beyond Borders Investment Strategies, LLC (BBIS), published a report titled, “Potential Change of Leadership from US and Growth Stocks to International and Value Stocks in 2021-2023”. The leadership change would happen after a historically long combination of underperformance of International and Value stocks. International stocks, which include stocks of developed countries and emerging markets, underperformed US stocks for eleven years. Value stocks underperformed Growth stocks by even longer – fourteen years. 

To read the full report in PDF format, please Click Here
 
The Setting: The initial catalyst for the stock leadership change would be the Quantitative Easing (QE) tapering in 2021 and ending in the middle of 2022. These policies stimulate economic growth by lowering interest rates and infusing freshly created money into the economy. While in modern history, the QE policies were first introduced in Japan in 2001, the US Fed has started using them in response to the Global Financial Crisis in 2008 and used the policies through the end of October 2014. During the new round of the QE that started in response to the COVID-19 pandemic in March 2020, the Fed has been purchasing the Treasury bonds from the banks. The banks have been using the cash they were receiving from the Fed to extend loans to businesses and consumers. And since interest rates have been reduced by the abundance of money in the economy, valuations of most stocks went up. The impact was especially pronounced for Growth stocks, which are more sensitive to discount rates that depend on the Treasury yields impacted by the Fed rates. Generally, Growth stocks’ valuations benefit from very low rates more than Value Stocks. Since the US stock markets are Growth heavy, they outperformed stock markets of many developed countries and emerging markets, the majority of which have a much higher weight of Value stocks in them.
 
The Primary Catalyst: As the economy recovers from the pandemic, the QE policies that are akin to economic medicines are no longer needed. High inflation is a dangerous byproduct of the QE policies. In 2021, we have seen that inflation rates increased far above the Fed’s 2% target. In August 2021, for example, Consumer Price Index (CPI), which measures consumer inflation, and Producer Price Index (PPI), which measures business inflation, increased to 5.2% and 8.3%, respectively, over the August 2020 levels.
 
In his September 22 press conference at the end of the September meeting of the Federal Open Market Committee (FOMC), Jerome Powell, the Fed’s Chair, indicated that the Fed may start tapering the QE policy of purchasing assets (i.e., Treasury bonds) in 2021 and end the program entirely by the middle of 2022. Mr. Powell also indicated conditions that the Fed is thinking about starting raising interest rates. He stated that half of the FOMC members believe that these conditions may be reached by the end of 2022. So, the Fed may start raising rates from the ultralow range of 0-0.25% at the end of 2022 or, more realistically, in 2023. The rate liftoff would be another catalyst for Value and International stocks to outperform Growth and US stocks. The weight of Growth in US stock market indices is high.
 
Catalysts for the Potential Future Outperformance of Value vs. Growth Stock Markets: Potential catalysts may help Value stocks outperform Growth stocks over the next several years.

1. QE tapering that would lead to higher Treasury yields that may not support expensive valuations of Growth stocks, prices of which may fall, but may result in higher prices of Value stocks in such sectors as Industrials and Materials, but, especially, Energy and Financials
2. Outright interest rates’ increases that would be positive for Value stocks and especially the ones in the Financials and Energy sectors;
3. Increases in revenues and profits of companies in the Energy, Industrial, and Materials sectors due to potentially large-scale construction around the world, and those in the Financials sector that would benefit from the borrowing by the companies in the first three sectors. All four sectors include predominantly Value stocks:

• Rebuilding of corporate supply chains in the wake of the COVID-19 pandemic;
• Moving of some manufacturing facilities out of China;
• Potential adoption of the $1.2 trillion US Infrastructure Bill; and
• Possible adoption of the $3.5 trillion Democrats Budget Reconciliation Package that includes    some construction in it.

 
Catalysts for the Potential Future Outperformance of International Markets vs. US Markets:

1. The end of the COVID-19 pandemic makes markets outside the US, the world’s largest “safe haven” market that during crises attracts investment inflows from all over the world, more appealing;
2. Potential sentiment and valuation reversion have historically made Value stocks more attractive than Growth stocks during recessions and recoveries. Once again, International stocks may outperform because the weights of Value stocks in the International indices are higher than in the US indices; The rebound of the economic growth rates in countries that were heavily hit by the COVID-19 pandemic may improve investment sentiment around them;
3. Lower valuations of many countries’ stock indices vs. the US stock market valuation may make these markets more attractive to investors. As of August 31, 2021, stock markets of 40 out of 49 countries in BBIS’ investment universe (all countries that have single-country ETFs) had lower valuations than the US on the GDP-to-Market-Capitalization ratios (i.e., Warren Buffett Indicator). Importantly, we compare all country valuations to their own histories rather than to other countries’ valuations – all countries have different risk levels, and riskier countries would almost always have lower valuations than less-risky countries;
4. The same four construction-related catalysts may lead to the increased demand for Value companies in the Energy, Industrial, Materials, and Financials sectors as these sectors are more represented in the International rather than US indices (see points four points in Item 3 in the previous section);
5. The US Dollar (USD) may potentially depreciate due to the following seven groups of problems. Some of these problems may also impact market valuations of the US market directly (not via the USD depreciation)

---------- 1) Rising Attractiveness of International Assets When COVID-19 Pandemic is Mostly Over:
---------- 2) Boost for international currencies due to rising US consumption and higher US trade deficit;
---------- 3) Rising US government deficit and debt;
---------- 4) Potential tax revenues on the wealthy and corporations may disappoint and could make the US tax base even smaller due to the capital flight;
---------- 5) High US inflation may not be transitory as the Fed expects (Domestic Causes of Inflation):

• Historically high money supply far exceeding the country’s ability to produce goods and services has led to inflation that may continue in the future; and
• Minimum-wage increases in 24 states can exert upward pressure on the above-minimum wages and all wages above them in these states and on the minimum wages in the other 26 states.

​---------- 6) US & Global Inflation May Stay High Due to Supply Chain Disruptions, While Demand for Goods Stays High (Partly International and Partly Domestic Causes of Inflation):

• China’s Zero-COVID policy may continue to create a bottleneck in the global trade system;
• Covid-19 may wreak havoc in other important manufacturing countries (i.e., Vietnam);
• Freight rates may continue to stay high due to the unpredictability of factories’ closures and the shortage of containers;
• Upcoming negotiations between ports of Los Angeles and Long Beach with Trade Unions may lead to lasting cargo handling slowdowns;
• New climate regulation rule that would require ships to sail at lower speeds to cut emissions is likely to add to the shortage of containers and ultimately to inflation through increases of goods’ prices; and
• Finally, the shortage of truck drivers may continue to exert pressure in the US for reasons ranging from the relative dearth of younger people in the generations following the Baby Boomers to the lack of desire by potential drivers to drive in the civil unrest or high crime areas to the lack of potential applicants’ confidence in their ability to pass the drug test after marijuana was legalized.

---------- 7) Potential draconian new banking regulation provision in the Democrat Budget Reconciliation Bill, which would require banks to provide information on all transactions in the accounts that had              annual inflows or outflows of $600, can backfire spectacularly for many reasons

• The proposed legislation is basically not written (its current length is only one page and six lines), and if adopted “as is” would give the Treasury Secretary too much power to write whatever she desires without any oversight by the Congress and Senate;
• The groups that would be mainly targeted for the tax gap enforcement are not the same in two different Treasury’s documents about the provision – but both groups (small and medium business owners and the Top 1% of income earners) contribute above their weights to the US economic growth, and frequent indiscriminate audits against their members would slow the economic growth;
• The language of “The Case for a Robust Attack on the Tax Gap” report, written by the Treasury’s Deputy Assistant Secretary for Economic Policy, stirs up negative emotions against the Top 1% of income earners as tax cheats. It ranges from unfair to blatantly wrong and may convince some honest people in the Top 1% not to work as hard to get out of the group. This would lead to lower economic growth;
• The adoption of the provision could accelerate capital flight from the United States that started after the 2020 elections. It is dangerous because as warmer waters make hurricanes bigger and stronger, the lack of domestic investors makes crises more intense and last longer;
• Intrusive regulations may lower demand for the US Dollar in foreign countries leading to the USD depreciation and potential weakening of its status as the world’s top reserve currency. The US’ attractiveness as a destination for storing money for wealthy foreign investors may diminish;
• In its quest to get unpaid taxes from wealthy tax evaders, the IRS may turn into Big Brother from a police state masterfully depicted by George Orwell in his famous “1984” novel. The Treasury’s goal behind the provision is to find wealthy tax evaders and make them pay the taxes. But to find several percent of tax evaders, the provision would intrude on the privacy of the overwhelming majority of law-abiding citizens. It would collect data on accounts of all other but the lowest-income Americans. If the provision passes, the IRS will gather information on inflows and outflows of pretty much all citizens, including hundreds of millions of middle-class and even lower-middle-class families, which the IRS would have no actual reason to do;
• The comprehensive IRS database would become one of the most valuable targets for cybercriminals and spies. If profit-seeking cybercriminals hacked the IRS’ bank account database, their pitches to potential victims would become more convincing after they mention all of the victims’ accounts with inflows to and outflows from them. The database would also open a whole new avenue for collecting data to foreign intelligence agencies that could use the data from the government officials’ accounts, for example, to make these officials do things against the US national interests;
• A giant regulatory wave that the current administration has unleashed will likely slow the US economic growth the same way it happened during the Obama-Biden era. Flashback – The Obama/Biden administration’s regulations cost was equal to combined individual and corporate income taxes in 2016, its final full year in power. While the number of regulations increased, the economic growth slowed significantly. The US GDP grew by just 1.6% per year on average during the Obama/Biden term (2009-2016);
• The annual tax gap may be dramatically lower than the IRS estimate of $600 billion. The provision is based on a debatable theoretical background. The paper that the “Attack” report is based on was criticized by US Treasury’s and US Congress’ economists for using methodology that “tends to overestimate total [tax] underreporting, overstate true top incomes, and allocate too much underreporting to the top of the distribution.” Additionally, making long-term forecasts of tax gaps based on past estimates for 2011-2013 (8-10 years ago) may lead to imprecise tax gap results in 2021 and beyond. Also, the tax gap in 2017-2019 may be smaller because tax compliance increases when tax rates are cut; and
• Finally, even in the best case, the provision would provide the US government with a minimal financial benefit but would cause a big fight within the society. Even if all current Treasury officials’ estimates are correct, which we doubt for the reasons described above, the Treasury will collect $460 billion over the next decade as forecasted in The American Families Plan Tax Compliance Agenda. It is only 0.16% of the projected total 2022-2031 GDP of $287,702 billion. An almost $80 billion investment in the IRS over the next decade would further reduce the financial benefit of the provision. The tax revenue collected as a result of the provision would increase the projected total 2022-2031 GDP by just $381 billion, or all of 0.13%. In our opinion, the financial benefit from the provision is so minimal that it would not make it worth implementing a measure that may add to the simmering internal societal conflict and capital flight that has already started in earnest after the 2020 elections. In our view, the provision exemplifies a saying, “Some wars are not worth fighting.”
• In addition, we believe that the provision would most likely increase capital outflows from the US, turning the provision’s impact on the US economy from almost zero to negative. It is worth remembering a famous lesson from Aesop’s tale, “The North Wind and the Sun”: “Gentleness and kind persuasion win where force and bluster fail.”  After World War II, the US economy became a leader and a magnet for people and capital from all over the world, not because it had a byzantine pyramid of inflexible and punitive laws and regulations, or was a country where citizens were forced to comply with these laws and regulations by the regulators. Instead, the US economy started to prosper because of its business-friendly laws and regulations that most people considered fair and gladly chose to comply with. 

Risks to Our Forecasts

1. The Quantitative Easing’s Tapering, a major catalyst for the Financials and other Value sectors, may be delayed;
2. The Budget Reconciliation Bill may be more expensive than its already shocking $3.5 trillion tag, and it may have many negative surprises inside that can impact the US productivity for decades (as the provision on accounts with $600 flows);
3. The US Infrastructure Bill, a major catalyst for the Materials, Energy, and Industrials sectors may not be adopted;
4. The COVID-19 pandemic gets from under control: investors may move the capital to the US and several other safe-haven countries; and
5. After the mistakes-ridden US military withdrawal from Afghanistan, US’ rivals and enemies may think that the country’s allies may be attacked. A military crisis can spur capital Flight to safe-haven countries

 
Best regards,
Vitaly Veksler, CFA
CEO & Portfolio Manager
Beyond Borders Investment Strategies, LLC
[email protected]