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5 Geopolitical Risks to Watch

The world is on fire.  It would seem that every inhabited continent sans Australia is facing some degree of crisis, whether it be armed insurgency, foreign invasion, civil unrest or the death of a promising politician.

Yet from the stock market’s recent moves, you could be forgiven for believing that all was well in the world.  The S&P 500 is hovering near new all-time highs, and after a brief pause in July and early August, the bull market remains very much intact. The selloffs have been slightly more severe in some foreign markets, but overall stock investors are surprisingly complacent given the state of world affairs.

Let’s take a look at the world’s major flashpoints today and handicap any potential investment risks.  We’ll also look for potential opportunities.


The biggest and potentially most disruptive geopolitical situation is the ongoing Russia/Ukraine standoff.  On Thursday, Russia essentially opened a new front in the war along the coast of the Sea of Azoz, and it now appears that Russian soldiers are participating directly in the fighting rather than just providing hardware and logistical support.  Allegedly, over 1,000 Russian troops now have boots on the ground in Ukrainian territory, and this came after the capture of ten Russian paratroopers in Ukraine earlier in the week.

Events in Ukraine are changing quickly.  As recently as Tuesday, Presidents Putin and Poroshenko had met in person, and Poroshenko announced that a “roadmap” to end the fighting was on the verge of being prepared.  And then two days later, the fighting actually escalates.

The truth is, no one really knows what is happening in Ukraine or what Putin’s endgame is.  I doubt if Putin himself knows at this point. It looks to me like the “mini invasion” is an attempt to strengthen his hand at the negotiating table, but if this is the case, we’re not likely to see it reported on CNN.

We can be reasonably sure that the fighting will remain localized in Eastern Ukraine; were to Putin to lose his mind and order the invasion of a NATO country, I would expect him to be deposed in a coup.

What does this mean for our investment portfolios? As I recently wrote in Russian Countersanctions, the risk to most countries—even those with close ties to Russia, such as Germany—is vastly overstated.  Individual companies that get a large percentage of their sales from Russia—such as Danish brewer Carlsberg (CABGY)—would have to be considered at risk.   But it’s hard to see the Russia-Ukraine war having any sort of lasting impact on the broad market averages of the major western markets.

In Macro Trend Investor, I recommended a speculative position in the Market Vectors Russia ETF (RSX) in the belief that Russian stock prices were cheap enough to warrant a contrarian trade.  I would reiterate that view here, but I would also advise you to be careful: Russian stocks promise to be volatile for as long as the standoff persists.

Middle East

Where do I even start here.  The war between Israel and Hamas appears to be over, at least for now, though Hamas’ leader vowed that it would not be the last.  The Israel-Hamas conflict was costly for Israel and caused enormous damage in the Gaza Strip. But its damage was negligible outside of the immediate area of the conflict, and it had virtually no impact on the global markets.  Even Israeli stocks, as measured by the iShares MSCI Israel ETF (EIS), are only down by about 5% from their July highs.

A far scarier development is the sudden rise of ISIS (also called “Islamic State”) in Iraq and Syria.  The terror group has overwhelmed both the Iraqi army and the Kurdish militia—and I should emphasis that the Kurdish militia is an experienced guerilla force.

ISIS is wreaking havoc in the Middle East.  But what are the implications for the markets?

The standard answer is that energy prices should spike, particularly given that the biggest energy exporter outside of the Middle East—Russia—is engulfed in a crisis of its own in Ukraine.

I wouldn’t bet on it.  With much of Europe in recession and with U.S. production rising every day, oil and gas prices should be subdued for a long time to come.

The biggest risk in my view is that of domestic terrorism.  At least two Americans have already been confirmed killed fighting for ISIS.  If ISIS is effectively radicalizing Westerners to take up arms, then it may be just a matter of time before we have an act of terrorism at home.  Should that happen, the effects on the markets would probably be short-lived.  But let us hope we don’t have to find out.


ISIS could also be a problem for neighboring Turkey.  But Turkey’s problems are mostly of the homegrown variety.

Former Prime Minister—and now President—Recep Tayyip Erdogan emerged as the first democratically-elected president of the Turkish Republic.  Previously, the president was selected by parliament, and the presidency was largely a ceremonial role not unlike that of Britain’s Queen Elizabeth.  But Erdogan has big plans for the office and wants to change the role to something closer to the executive presidency of the U.S. or France.

In a vacuum, this wouldn’t be a problem.  But Erdogan has become more and more authoritarian in recent years and has stopped respected constitutional niceties and the independence of Turkey’s courts and—critically—its central bank.

This is where the risk comes into play.  Erdogan has effectively strong-armed the Turkish central bank into lowering interest rates even while inflation is heating up.  Turkey also has one of the highest current account deficits in the world, meaning it needs a constant supply of foreign capital to keep its currency and economy afloat.  Should investors get spooked by Erdogan’s increasingly lax attitude towards monetary sobriety, the lira could take a nosedive—and take the Turkish stock market with it.

I’m currently long the iShares MSCI Turkey ETF (TUR), and consider it a fantastic contrarian value play.  But I’m not blind to the risks involved, and I would recommend that anyone investing in Turkish stocks have an exit plan in place in the event that the Turkish market crumbles.


Brazil’s President Dilma Rousseff is not popular with investors; she’s developed a reputation of being hostile to business and—fairly or not—she has become a scapegoat for Brazil stagnating growth of late.  The prospect of her losing the October election has been a factor in the recent strength of Brazilian stocks.  The iShares MSCI Brazil ETF (EWZ) is up about 11% in 2014 after losing more than half its value from its 2010 high.  The ETF is still sitting at levels first seen in 2007.

Things just got a lot more complicated.  Eduardo Campos—one of the strongest contenders in the presidential contest—was killed in a plane crash earlier this month.  His replacement Marina Silva is polling well and has a good chance of beating Rousseff in an expected runoff election (a third candidate, Aecio Neve, is expected to pull enough votes to prevent any candidate from winning a majority in the first round).

The Brazilian market’s strength in the face of Silva’s popularity might seem a little strange at first given that, as the candidate of the Socialist Party, she is nominally further to the left of Rousseff.  The market seems to be taking the view that anyone is preferable to ol’ Dilma.

Is there an investment theme here?

After six years of bear market conditions, Brazilian stocks are attractively priced.  Likewise, the Brazilian real, while still overvalued according to The Economist’s Big Mac Index,  is far less overvalued than it was four years ago.  The presidential election might be the catalyst for the rally this year, but regardless of who wins the election, Brazilian stocks are priced to deliver very respectable returns.


Oh, Argentina. You’ve done it again. Argentina defaulted on its debt last month, the second time in 14 years.

Yet the situation is a little different this time around.  When Argentina defaulted in 2001, the country was broke and lacked the means to pay.  And the default rattled the global bond market, leaving a lot of bond investors nursing substantial losses.

This time around, the default is technical; Argentina has the money to pay and in fact duly paid the funds its owes into it trustee bank account.  But the funds have been blocked by court order because of Argentina’s refusal to pay it “holdout” creditors—those investors who refused to accept the haircuts that came with Argentina’s debt restructurings in 2005 and 2010.  The Argentine stock and bond markets have been remarkably quiet; there has been no panic or rush for the exits.

The legal mess continues to unwind.  An investor group including George Soros and Kyle Bass are suing the bond trustee in British court, arguing that the U.S. ban on payments is extraterritorial and illegal.  We shall see.

I don’t see much in the way of fallout beyond Argentina’s borders should this dispute linger. Argentina has been a financial pariah state for so long that it has lost its ability to roil markets.

As for Argentine stocks, I would be on the lookout for bargains.  YPF (YPF) is a fantastic play on Argentina’s vast oil and gas deposits for any investor with patience and a long time horizon. Should YPF see a significant price correction in the coming months, I would recommend using it as a buying opportunity.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Terrorism in Iraq and Turkey: How to Trade It

For the first time in years, Iraq news is moving the markets again.  Turkish stocks took a beating on Wednesday, with the iShares MSCI Turkey ETF (TUR) shedding 5.2%.

The apparent reason?  Armed militants from the terrorist group the Islamic State in Iraq and Syria (“ISIS”) seized the Turkish consulate in Mosul, taking the consul and his staff of nearly 50 people hostage.  This follows a separate incident in which ISIS kidnapped and held for ransom about 30 Turkish truck drivers working in Iraq.

The fear is that Turkey will get pulled into what is now a low-grade civil war in Iraq.

Could it happen?  Of course.  But as an investor, it is not something I’m particularly worried about.  In fact, I would even view it as a potential opportunity.

I genuinely hope that the Turkish citizens are returned without bloodshed.  But let’s say that the situation deteriorates and Turkish tanks roll across the Iraqi border in retaliation.  What then?

A Turkish invasion of Iraq would, at least temporarily, stop the internal instability that caused investors to dump Turkish stocks and other financial assets this time last year.  Nothing unites a divided country like an external enemy.

Furthermore, Turkey’s military is the largest in Nato after that of the United States, and unlike American soldiers—who have a difficult time winning the “hearts and minds” of locals due to being Western and predominanatly Christian—Turks are coreligionists with the Sunni Muslims they will potentially be invading. So, a Turkish invasion is unlikely to devolve into a messy quagmire.

Finally, let us remember that while terrorism is an awful thing for a country to have to endure, its effects on the financial markets tend to be short-lived.

Action to take: Go long Turkey via the iShares MSCI Turkey ETF (TUR).    Take an initial one-half position,  and wait another 1-2 weeks to see if the situation escalates.  If we see more short-term weakness in Turkish stocks, so be it.  We can average in at a lower price with the second half of the trade.  And if this week marks the low, no worries.  We’ll end up buying the second half of the position at a slightly higher price.  Plan to hold for 6-12 months and use a 15% stop loss on your average cost basis.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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More Russia Sanctions…and Putin’s Endgame

The United States leads another round of Russia sanctions…and Russian stocks enjoy a nice bounce.  The Market Vectors Russia ETF (RSX) is up more than 2% today following the news.  This seems to be something of a recurring theme.

It’s not difficult to see what is happening here. The new Russia sanctions—which cover visa bans and asset freezes on seven new Russian officials and asset freezes on 17 companies linked to close associates of Putin—are not strong enough to have a meaningful impact on Russian President Vladimir Putin personally or on the Russian economy.  President Obama, in an odd admission that raises the question of why the U.S. is bothering to impose Russia sanctions at all, acknowledged as much by saying “We don’t yet know if it’s going to work.”

The Russia sanctions are more noteworthy for what they do not include rather than what they do.  Vladimir Putin was not targeted personally, nor were Russian energy majors like Gazprom (OGZPY) or Rosneft (RNFTF).  If Obama’s goal is truly to “change Putin’s calculus,” then it’s hard to see these new sanctions meeting that goal.

Meanwhile, Putin is not the type to sit back and play the victim.  He’s striking back with a May 7 deadline for Ukraine to pay its outstanding debts to Gazprom.  If  Ukraine does not pay—and without financial aid, that cannot happen—Russia will require prepayment for future gas flows, which means that Russia would have a legal basis for simply turning off the tap, starving Europe of nearly a third of its imported gas.  Ukraine has $2.2 billion in overdue debts to Gazprom and Russia recently invoiced Ukraine for an additional $11.4 for breaching the “take or pay” clause in its contract.

What’s the endgame here?

It is not entire clear what Vladimir Putin really wants.  But we can speculate on what he doesn’t want.

Putin doesn’t want to invade and occupy Ukraine.  By one estimate, doing so would require 500,000 to 800,000 Russian troops—or substantially the entire Russian armed forced.

But Putin also does not want a Western outpost, via EU or NATO membership, at his immediate doorstep.  My best guess is that Putin is stirring up trouble in Ukraine to improve his position at the bargaining table.  If he gets guarantees that Ukraine cannot join NATO or the EU, then the unrest in eastern Ukraine will probably dissipate in a hurry.

While the sanctions have not bitten Russia hard enough to warrant a change of course, a prolonged financial war with the West would be costly for Russia.  Already, Russian bond yields have risen, and the decline in the rouble has caused the price of imports to rise.

Of course, Russia sanctions are costly for the West as well.  Europe cannot afford higher energy prices at this stage in its recovery, and the UK and Germany both profit handsomely from economic ties to Russia.  No one has a vested interest in this crisis dragging out much longer.

How do I see it ending?  Ukraine is partitioned into a federal republic.  Russia has said that this is what it wants, and the West has no compelling reason to object.

Does any of this make RSX a buy?  Not in a vacuum.  Russian stocks are, however, among the cheapest in the world, trading at a cyclically adjusted price earnings ratio of about 6.  At that price, they are worth buying on dips.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. This article first appeared on InvestorPlace.

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Does Syria Matter?

The Senate Foreign Relations Committee gave its blessing to President Obama’s plan to take limited action against the Syrian regime for using chemical weapons against its own people.   A full Senate vote is expected in the next few days and will likely pass.  Barring any hiccups in the House, the bombs could start falling as soon as next week.

Whenever the words “Middle East” and “war” get mixed in the same sentence, people get nervous.  It’s a messy and complicated part of the world with ever-shifting alliances and unlikely bedfellows.  Devoutly Sunni Saudi Arabia supports the secular military regime in Egypt, while constitutionally secular Turkey supports the deposed Muslim Brotherhood.  In Syria, a secular nationalist regime is supported by radical Shia Iran and Orthodox Christian (and formally communist) Russia.  And Lebanon?  Its political arrangements resemble something from the Godfather.

You might think that hatred of Israel is the tie that binds, but even this is a half-truth.  Though the two countries have no formal relations, Israel and Saudi Arabia have become allies of sorts, and rumors have flown in recent years that the Saudis have given the nod to the Israelis that it might <wink wink> be ok for their jets to cross Saudi airspace en route to bombing Iran’s nuclear facilities.

This is why an airstrike on Syria gives us the jitters.  The fear is that, given how complicated the relationships are, a “limited” response could escalate into something much bigger, dragging in other regional players such as Iran, or even Russia.  Colin Powell warned George W. Bush that if he broke Iraq, he owned it.  No one in Congress or the White House wants to “own” Syria.

So with all of this as background, should investors worry about Syria?

Not really.  You should watch the headlines and be aware that events can change quickly.  But consider the following:

  1. The Western response is intended to punish the Assad regime but not remove it.  Assad will not escalate and give the West an incentive to remove him…particularly since he is winning the war.
  2. Syria’s options for retaliation are few and likely ineffective.  Could they attack Israel in the hopes of rallying the Arab street?  Maybe.  But Saddam Hussein tried that in the first Gulf War to little effect.
  3. Iran is not likely to join the fray.  Think about it.  If they sit tight, their ally in Syria will take some damage but will hold on to power.
  4. Vladimir Putin’s Russia likes to antagonize the West, but this isn’t the 1980s. Russia has little to gain from letting this escalate too far, particularly given that their ally is winning the war.
  5. Syria is not an oil-exporting country.  Unless Iran enters the fray and closes the Straits of Hormuz—which again, is unlikely—any spike in the price of oil should be a temporary blip.

There are plenty of macro risks out there to consider.  Front and center is the Fed’s tapering of its quantitative easing program, and Europe’s sovereign debt debacle is the crisis that never seems to end.  But Syria is not something you spend time worrying about.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

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The Nicaragua Canal: China’s Secret Motive

I first saw the Panama Canal in action in 2002.  Though nearly 90 years old at time (and soon to be 100 years old at time writing), it was an impressive piece of engineering to behold even by modern standards.  A series of locks lifts ships 85 feet above sea level and then lowers them again on the other side.  And it does it through some of the least hospitable terrain on the planet.

You absolutely cannot underestimate the importance of the Panama Canal to the modern global economy.  The existence of the Canal has done more to promote free trade and globalization than all of the international summits in history.  It has massively reduced costs and transit times and allowed for much tighter economic integration between the countries of the Americas and between the Americas and the Old World.

The Canal currently handles about 5% of all worldwide shipping traffic—and it would be substantially higher were it not for the fact that the Canal is currently running at maximum capacity, pending the opening of a new, wider lane set to open in 2014.  The new lane will accommodate significantly larger ships and is expected to double the Canal’s current capacity.

Note: The Canal is something that would make any red-blooded American proud.  It was started by the French—who ended up giving up on it due to engineering difficulties and a high mortality rate for their workers.  It took American innovation and engineering prowess to get the job done.

Proposed Nicaragua Canal Route

Proposed Nicaragua Canal Route

Yet recent moves by China add a new wrinkle to this story.  Even while the capacity of the Panama Canal is being doubled, a Chinese company is in serious discussions with the Nicaraguan government to build a rival canal.

The cost?  $40 billion and 11 years of construction.

Based on economics alone, it’s hard to understand the Chinese motivation.  Panama nets about $1 billion per year in tolls on its Canal and has the ability to undercut any potential rival on price.  The Canal expansion—which, again, doubles capacity—cost just $5.2 billion.

China may be betting that world trade will be high enough to justify two Central American canals by the year 2025, but I believe their motivation is less economic and more geopolitical.

The Panama Canal has been under the control of the Republic of Panama since 1999.  But under the original treaties, negotiated by the Carter Administration, that ceded control to Panama, the United States retained a permanent right to defend the Canal if its openness and neutrality were ever at risk.  The Canal may belong to Panama, but the United States still considers it a vital asset necessary for national defense.

Could China have similar motives in Nicaragua?  It would appear so to me.

In Nicaragua, China has the potential to essentially bribe one of the poorest countries in the Western hemisphere into being a loyal ally.  By some estimates, a new canal could double the country’s GDP per capita.  And Nicaragua is not a country known for being friendly to the United States.

Will the canal happen?  Maybe, maybe not.  We’ll see.  But if it does, it should benefit the world economy by increasing capacity, speeding up transit times, and, presumably, forcing Panama to lower its tariffs in order to compete.

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