As I argued on December 25, it is unwise for non-specialists to invest directly in emerging market stocks because:
- You can get exposure to EM economies with far less risk by buying U.S. or European multinationals.
- Emerging markets are very risky due to intrinsic financial weakness, corruption, high exposure to commodity prices, weak corporate governance, etc.
A couple of new data points underscore EM risks:
Dirty Oil
Petrobras, the giant Brazilian oil company that Wall Street loved after huge off-shore oil finds in 2007-2008, is, as The Financial Times put it, “awash in corruption.” According to the FT, “One lower tier executive has offered to repay $100 million.” As much as $20 billion may have been stolen. There is no valuation discount that would get me interested in such a stock. But I don’t mind owning Schlumberger, which I assume sells plenty of services to these guys.
China’s Purge Threatens Growth
The crackdown on corruption in China is starting to raise serious questions about the country’s growth prospects. Clearly, a great many projects were built by local governments over the past six years not because they made economic sense but, rather, because they would enrich corrupt officials and businessmen. This syndrome is hardly unique to China; nineteenth-century American railroad booms were great for bankers, builders and suppliers but not for European bondholders. Which is not exactly reassuring, because each of those railroad booms was followed by a multi-year depression. But, aside from the cyclical economic issues, Xi Jinping’s corruption crackdown is starting to look like a purge that will hurt long-term growth. According to the FT, “the crackdown has so far led to warnings or disciplinary action for about a quarter of a million cadres.” That’s a lot of warnings. Apparently the best way to protect your family from the crackdown is to commit suicide, which has become so common Beijing circulated a detailed questionnaire to families to get the measure of it. Here is why this is so worrisome: Party members are key economic decision makers; now doing their jobs properly is less important than staying alive and out of jail. One way to do that is to avoid launching big new projects. That can’t be good for growth.
It gets worse. I learn from The New York Times that China’s government is also reducing Internet freedom by interfering with Virtual Private Networks. This makes life miserable for knowledge workers ranging from scientists to bankers to commercial artists. When we were in Shanghai our hotel could not access the United Airlines website. This is no way to promote China’s shift from a low-wage exporter to a modern service economy.
Copyright Thomas Doerflinger 2015. All Rights Reserved.
