Options Arena: Expat Edition
Fair warning…You might be tempted to call me “unpatriotic” after you read this week’s Arena. But you’d be wrong. I’ve lived in America my entire life. And for all its issues, I still think it’s the greatest country to live and prosper in the world. We take freedoms for granted that countless people risk their lives for, and I’ll always be conscious of and grateful for that. But that doesn’t mean we shouldn’t think critically about our country. With the U.S. very likely sprinting toward a recession, and the presidential administration looking rudderless in response, it’s crucial to expand our search for investment opportunities outside America’s borders. So I challenged our True Options Masters to do just that this week. They had to pick one investment outside the U.S. — whether it’s stocks, debt, or even farmland — and make their case for how to play it. As you’ve come to expect in Options Arena, the ideas our Masters produced were well beyond what anyone else is talking about right now. Let’s dig in to this week’s “Expat Trade”…
Mike: Saudi Arabia Cannot Be Ignored
I like oil. Prices may go down, but the boom-and-bust cycle of energy markets is over. And right now, the oil market is dominated by two countries: the United States and Saudi Arabia.It’s likely to stay that way for a while, thanks to policies that hinder new production. These policies are partly due to environmental concerns, and it’s uncertain if they’ll change. Even if they do, it will take years for new oil producers to be competitive. This benefits Saudi Arabia, the world’s second-largest producer after the U.S. Saudi Arabia is not a country everyone wants to invest in. But it is a country that cannot be ignored. It has the second-largest pool of oil reserves, behind Venezuela, a country unlikely to significantly increase production in this decade. Russia, the world’s third-largest producer, is also likely to struggle in the market for years as it faces sanctions. In addition to oil, Saudi Arabia is modernizing its economy. Four of six planned economic cities have been built. These cities provide tech and manufacturing jobs. “Vision 2030” emphasizes the importance of economic diversification, and the country is moving toward those goals. But for now, oil is driving the gains we see in iShares MSCI Saudi Arabia ETF (KSA). The chart below shows the ETF is a relative strength leader, with RS shown at the bottom. Given the long-term changes in the country, KSA is an ideal long-term international investment.
Amber: EMB Could Deliver 35% While Stocks Struggle
I might be early, but emerging market debt is attractive. There are risks, of course. Expect some defaults and restructurings, as well as lots of scary headlines.But a lot of that is already priced into the markets. The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is more than 25% below its high. In the 2009 financial crisis, it dropped more than 35% — but it seems unlikely to fall that much this time. EMB’s yield is already 6.15%, which is 35% above its long-term average. As the ETF moves back toward its average, the price will rise. This is a bet on inflation peaking, which certainly seems likely. Economists often say that the cure for high prices is high prices. That means high prices reduce demand, and lower demand leads to lower prices. This process is well underway and should continue. Now, like I said, I could be early. Panic selling could push EMB down another 5-10%. But EMB could deliver a total return of more than 35% over the next couple of years, while stocks could struggle for at least that long.
Chris: Go Long Great Britain
I don’t know if you heard… but Boris Johnson, the Prime Minister of the UK, resigned this week.Johnson was not a great leader. He frightened investors with Brexit, and then turned them off with his personality. A sweaty, scandal-ridden leader does not inspire investor confidence. But now, the true opportunity from Brexit could be realized — if they elect the right leadership. That’s a big “if.” Western nations have a short supply of good leaders these days. But regardless, the country has great fundamentals. It’s one of the strongest economies in the world. It’s also one of the most undervalued, after the country’s thriving tourism industry was splintered by Covid. No matter who’s elected next, this might be a great time to start going long Great Britain.
Alright folks, that’ll do it! If you’re feeling adventurous and have an “expat” trade of your own, share it with us at TrueOptions@BanyanHill.com. We always enjoy hearing from you.
Until tomorrow,Mike Merson Managing Editor, True Options Masters