Russia’s brutal invasion of Georgia, which threatens a crucial oil and gas transit route (the Baku-Tbilisi-Ceyhan [BTC] pipeline - originally built to skirt Russian territory and diminish Moscow’s domination of energy routes to Western Europe), is a painful reminder of how dangerous a place the world remains for investors—not to mention its inhabitants. In fact, Europeans in particular—who have continued to invest heavily in Russia despite its increasingly bellicose behavior—may be thinking twice about the wisdom of such investments going forward. Before the bloodshed in Georgia pushed it off the headlines, one of the major stories coming out of Russia was the TNK-BP debacle.
TNK-BP is a joint venture between Britain’s BP (BP) and a group of Russian investors: Alfa Group, Access Industries and Renova [AAR]. The company was formed in 2003 and merged the majority of BP’s Russian assets with those of TNK (Tymen Oil Co.), Onako, and Sidanco in order to better exploit the remote and difficult-to-extract oil and gas resources of Siberia. Over the past few months, the Russia billionaires that own half of the enterprise have been using strong-arm tactics to wrest complete control of TNK-BP. The Russian government has made no effort to placate TNK-BP’s British co-owners and have made it increasingly difficult for them to operate in Russia—with the standoff culminating in the departure of TNK-BP’s American CEO Robert Dudley from Russia late last month. Along with the Georgia crisis, the troubles at TNK-BP were just another example of increasing Russian assertiveness–if not thuggishness– that should give Western investors pause.
Russia, first under Vladimir Putin and now, nominally, under Dmitri Medvedev, has shown increasing willingness to stop at virtually nothing to re-assert Russia’s status as a global superpower. Now, with near-record high oil and gas prices giving Moscow new-found financial clout, Russia is likely to become much more assertive and a much less appealing place to do business for the West.
Indeed, over the past couple of weeks, many events are occurring that may well make the relative safety and stability of the U.S. market far more appealing to foreign investors in the months ahead. Most notably, the commodities “bubble” has clearly begun to deflate. Oil, gold and other commodities have all rapidly entered bear market territory (20%+ losses). Worries are starting to mount that China—which has already seen a bear market for its stocks this year—will be a less appealing place to invest post-Olympics. It is clear that European economies–with the European Central Bank keeping rates stubbornly high despite signs of a gathering economic storm–are heading for what could be a nasty recession. Other Asian economies as well as most in Latin America also have issues which auger poorly for short-term growth.
As such, U.S. equities are starting to have some appeal to global investors fearful of a growingly perilous international investment climate. While the U.S. financial system faces years of work to rebuild it souring-real-estate-ravaged capital base, thanks to a weak dollar, U.S. manufacturing has reached a competitiveness level not seen in decades. In fact, Toyota (TM) plans to start exporting U.S. made cars and trucks to overseas markets as the U.S. has become a low-cost producer relative to other nations.
Despite our tort system, Sarbanes Oxley and the possibility of a more tax and regulation-friendly government in the coming months, America still provides one of the world’s most transparent, dynamic yet stable and investor-friendly economies on earth. The dollar’s weakness has enhanced the appeal of U.S. assets and, while we expect the dollar’s weakness against other currencies—especially the Euro—to continue to reverse course over the coming months, our markets must appear very attractive from a valuation standpoint to foreign investors.
While the domestic economy faces many challenges and may well be in the midst of a recession, from an investment standpoint, the U.S. stock market will likely see its relative appeal skyrocket in the face of international turmoil—such as Russia’s invasion of Georgia. Periods such as this tend to remind investors that risk is an equal part of the risk-reward equation. Some global markets have seen more reward than risk over the past few years—an unsustainable situation. In the words of Dorothy in the Wizard of Oz, there really is “no place like home”.