Motley Fool producer Ricky Mulvey recently caught up with Motley Fool senior analyst Bill Mann to look at international topics including:
- England’s pension and interest rate problems.
- The challenges of investing in China.
- A massive raw material exporter with a currency that outperformed the U.S. dollar.
NOTE: This episode was recorded before Liz Truss resigned as Britain’s Prime Minister.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on October 22, 2022.
Bill Mann: Brazil is one of the few countries whose currency has outperformed the U.S. dollar in calendar 2022. Certainly, the largest convertible currency to have done so. The real has done quite well. It really has to do with the fact that Brazil is selling stuff that people need.
Chris Hill: I’m Chris Hill, and that’s Bill Mann, senior analyst and lead advisor for The Motley Fool’s Global Partner Service. I hope your passport is up to date because today we’re hitting four different economies outside of the U.S. Ricky Mulvey caught up with Bill to talk about the challenges of investing in China, countries with some opportunities for investors, and what’s going on with Britain’s pension crisis and if it’s a big deal for the rest of the world. One quick note, Ricky and Bill recorded this conversation before Liz Truss resigned as Britain’s prime minister.
Ricky Mulvey: There’s a strong dollar and that’s going to be a big theme. I feel like that’s going to be the big theme of this earnings season. Macrocurrency headwinds, if you will.
Bill Mann: Yeah, it feels awesome to us in America, doesn’t it?
Ricky Mulvey: It should. Well, it’s fun if you’re trying to plan maybe a trip to Europe or abroad. But when you hear this theme of currency headwinds, how seriously are you taking that from the companies you follow, and is it something that investors should really be concerned about?
Bill Mann: Yes and no. We’re here in the United States, so we do have the benefit of being the largest and most diverse economy in the world. We also have the benefit of being the reserve currency. But when you hear the U.S. dollar going in a rapid move one direction or the other, there are reasons to be concerned. Because this may not come as any surprise to you as a logician, because if we are the reserve currency then nobody else is. Almost every other country, they have their debt denominated in instruments that link back to the U.S. dollar. When you have a really expensive dollar, trade costs go up, resources prices go up, debt servicing goes up. Mostly these are countries that we get along with and we want them to do OK. Global commerce is not, I win and you lose. Global commerce has done well, is something that is aspirationally beneficial to both sides, so having economies, particularly in Europe, struggle so much against the dollar is in some ways really concerning and it should be to all of us.
Ricky Mulvey: It’s like the McDonald’s index where the two countries that have a McDonald’s have never gone to war together. That’s the point you’re getting at.
Bill Mann: That’s a little bit, although now that Russia invaded Ukraine, that McDonald’s index is no longer.
Ricky Mulvey: Oh, shoot.
Bill Mann: You’ve heard about this?
Ricky Mulvey: I heard about it, I guess.
Bill Mann: You just didn’t realize that there was a McDonald’s in Ukraine?
Ricky Mulvey: I didn’t.
Bill Mann: Fair enough.
Ricky Mulvey: I know. Speaking of England, let’s go there first. In European countries we get along with, you can’t see this if you’re listening, but Bill Mann is covering his face. Bad transition, No. 2 of the show.
Bill Mann: That was shame. It was straight shame.
Ricky Mulvey: It was bad. But this is an interesting country for a number of reasons. As an observer of financial news, I’m getting a lot of the contagion vibes where, hey, could England be the contagion that precipitates a larger financial collapse? They’ve also got plenty of problems and I don’t know how much of those are internal. A few of those problems to get you caught up. They’ve got low growth, higher interest rates, inflation in the double digits, they’ve got an energy crisis, they’ve got pension issues because of the interest rate problems. Where do you want to go first with that? Or is it all the same story for our friends in Britain?
Bill Mann: Well, if we thought describing backgrounds in an audio recording was great, talking about pensions in England is going to be equally great. Now, if you think about what pensions are, it’s a pool of money that it pays out on a schedule over 30 years plus. It ought to be the least likely pool of money to have any type of bank run on it. But the way that pensions work because they have current spending requirements where they have to pay the people who are already in their payout years as opposed to their earning years, pensions have to generate a gain.
They have to generate a gain each and every year. It can vary somewhat, but you know what’s bad for pensions earning gains is a decade of interest rates that were at zero or below. It’s really tough to generate gains when the baseline is no gains whatsoever. You might not know this about finance, Ricky, but the way that you get around that is you take more and more risk. That’s what pension funds have done. They’ve essentially taken the easiest-to-manage pool of money in the world and they’ve financialized them and made them more fragile. When interest rates have gone up like they have, suddenly, the English pension funds have been deeply at risk.
Ricky Mulvey: Kentucky in the United States has had the same problem for years among other state pensions, which is that you make promises. Essentially a lot of promises were made back in the ’80s and ’90s at a time of higher interest rates and it was easy to project that you are going to earn certain amounts on your dollar, and then interest rates go down so you have to take riskier investments. Sometimes that works out, a lot of times it does not.
Bill Mann: Here’s the thing. Pension accounting even better. For the last person who’s left that we haven’t inflicted boredom on yet, we’re going to talk pension accounting. Pension accounting is bonkers because they don’t want the pensions, because the pensions are obligations of the country or the company, or whatever. They don’t want the pensions to seem that volatile. You get to make up what your implied returns are going to be. You can say, well, at seven percent gains, maybe the pension isn’t viable. What about eight percent? Let’s just say we’re going to make eight percent. Then it changes nothing but you get to point to a pension that’s either fully funded or not fully funded, even though nothing has changed.
Ricky Mulvey: England’s got a big pension problem. The Bank of England’s what’s stepping in to buy billions of dollars worth of bonds. That’s what I’ve been seeing.
Bill Mann: The trigger for the pension problem in England was the new Liz Truss government coming out and saying we’re going to cut taxes. Essentially what that is is it caused pension funds everywhere to start selling what are called gilts, which is basically debt of Great Britain or the United Kingdom, I should say. They did a very logical thing. But once you start selling gilts, it turns into a spiral. The Bank of England had to step in. I would describe this as an unforced error. The thing that maybe someone within the government might have asked someone who knew something about finance to say, maybe it’s not a good idea just to come out and say, hey, we’re going cut taxes. But it’s what happened.
Ricky Mulvey: Well, and then the Truss government ended up backtracking on that a few days later, but it seemed that the damage was already inflicted from this confusion of the government of England saying, hey, we’re going to pump more money into the economy to stimulate growth, whereas the Bank of England had been saying we have double-digit inflation and we’re trying to extract money from the economy in order to quell that.
Bill Mann: That’s right. Then the super good news is that so much of that inflation comes in the form of energy prices and there’s not much way around that.
Ricky Mulvey: Speaking of optimism, let’s talk about the.
Bill Mann: I’m going to need to take a nap in the middle of this.
Ricky Mulvey: It’s getting bad. Well, the other thing that the English are trying to do is they’ve gotten energy crisis on their hands. I don’t know if they’re not buying Russian oil again. However, they’re instituting price caps. I think it’s about 2,500 pounds for an average household per year.
Bill Mann: That’s terrible.
Ricky Mulvey: However, this is a price cap that is for a demand problem, and I don’t think those charts mix well.
Bill Mann: No, they don’t mix well. Ricky, I have to say, I hate the logical outcome of what they ought to be doing, I really do. As a person of goodwill, I hate the fact that the logical outcome is that what they need to be doing is buying Russian oil. I hate it, but it’s entirely true because Russia they are the fulcrum energy provider. This is the way that commodities work. If you take out supply, the price goes through the roof. Who does that actually hurt? Does that hurt the seller? They sell less, but they sell it at a much higher price. It hurts the buyer. Putting price caps on something that you have a supply issue, that doesn’t really help. All that does is creates additional demand for energy that doesn’t exist. There’s other ways that you can create energy but not fast enough. I don’t know. It’s awful. But commodities work in an entirely different way. Higher tech goods, engineered goods, so you just have to be awfully careful and I don’t think they have been.
Ricky Mulvey: But before we move on to a country that is a buyer of Russian oil right now and the reasons why the price caps or the supply limitations don’t work out. When you look at what’s going on in England and I’m seeing the headlines that say economic spiral, financial contagion, that kind of stuff. Are you buying it? Or is this a problem for England and England only?
Bill Mann: I’m sitting on the sidelines at the moment. There’s some good English companies and there’ll be plenty of time to buy them. There are some companies that I adore in that are English. Next PLC, which is a retailer. It’s a fantastic company. I think that there is so much uncertainty just having to do with the basic currency and the basic macroeconomics situation in the United Kingdom right now, that there’s absolutely no hurry.
Ricky Mulvey: Speaking of countries buying Putin’s oil and let’s call it countries I’m afraid to invest in right now. Let’s fly over to China because this essentially China is happy to buy Putin’s oil they are probably delighted that the price has gone down. This is essentially why commodity, essentially cutting off commodity supplies does not necessarily work in a world economy. It only works if all the actors act the same way you do.
Bill Mann: Yeah. That’s exactly right. Which is why going back to Russia their amount of receipts for oil and gas hit a record in August. Again, that’s just the way it is. Because if we’re not buying, that doesn’t mean that no one is buying. China bought at a discount for China, but still at a much higher price than oil and gas were, say in January of this last year. Yet China’s another interesting story I would say it’s really easy for us as Americans to say you should just buy American companies.
Ricky Mulvey: Yeah.
Bill Mann: It really is. For years, I have been hopeful that there were going to be opportunities in China. I happen to think in particular with what’s happened with the most recent Communist Party conference, that China is going to remain functionally uninvestable.
Ricky Mulvey: The 20th Communist Party conference, the party told Xi Jinping that he’s been doing such a darn good job that we’re going to sign you on for another term. Which my understanding is that’s uncommon among Chinese leaders is that they usually serve two five-year terms at terms and then they bounce. But what specifically happened at the conference that cemented your belief that China’s uninvestable for Americans right now?
Bill Mann: Well, I think that we have always hoped. The hope has been that as the US and China integrated economically, that there would turn out to be more opportunities in China for American’s to invest, for American companies to invest, for American individuals to invest. What has happened under Xi Jinping is that China has made the decision to be China first. He has done so in a way that I think we’re going to look back and point to Xi Jinping as the person who has destroyed the Chinese economy and that’s slightly problematic. That’s not even a political discussion that is why would you go into a country with an autocratic leader who has put plans in place that could actually bankrupt the country. To me, it’s a pretty simple argument they have basically said that they are going to continue their zero COVID policy.
You can expect that massive cities in China are going to continue to be locked down over periods of time. Their growth rate is going to remain lower. I think lot of people don’t really recognize about China is that its local governments essentially finance themselves by selling land bank to developers. You hear about these ghost cities being built in China. Those are actually part of a process to fund local governments and state governments. That policy has run its course. It’s one of the craziest markets in the world over the last 20 years has been the property market in China and in a slowed-down economy, I do not think that there is much hope for that to continue. If that melts down, then local budgets in China are going to melt down as well.
Ricky Mulvey: One other policy that I’m struggling to wrap my head around it and a reason why it’s difficult to do business in China it seems is the Chinese government, will come in and simply take over companies when they see fit PricewaterhouseCoopers found that 2019-2021, the Chinese government acquired more than 110 publicly traded Chinese companies. I think as an investor that makes me extraordinarily hesitant knowing that at any point the company can be taken over. For someone like Jack Ma, your allegiance to the Chinese Communist Party is measured by your willingness to give up your company to the party makes it difficult to do business there.
Bill Mann: I think it does. Now it’s important to note that those 110 publicly traded Chinese companies were publicly traded in China. Now there are companies like Ant Financial, which was about to come public in the U.S. Then there’s Onbon, which have had I don’t know that I would describe that either of them as having been nationalized, but they were kneecapped by their own government like an absolutely full stop. I just don’t know if you don’t know what questions to ask in any market, I don’t know that there is a reasonable case to get really excited to invest in that country.
Ricky Mulvey: Any other highlights from the 20th Communist Party conference? Or are you ready to move on to some other countries?
Bill Mann: The easiest way to say it is corruption, but they are actually really pushing to ensure that the rising tide raises all boats so they are going after excess within China. There is now even for a communist country and even for a country that it was all authoritarian. There is a much higher control on public opinion and cultural factors that exist in China than has existed since the great awakening began 35 years ago.
Ricky Mulvey: Some of them aren’t a terrible idea like what is it? They shut video games off at 8:00 and TikTok is dedicated to like science-based programming.
Bill Mann: You sound like a parent?
Ricky Mulvey: I do, but it’s also because I don’t have any children. I also feel bad now because I’m just like autocracy, maybe not a bad idea.
Bill Mann: That’s right. Hear me out. I’m not going to say. I’m too afraid to say anything else.
Ricky Mulvey: Yeah, me too. Let’s go to Brazil. You’ve got some notes on Brazil. We’ve got a couple of more countries to get to before we get some mailbag questions.
Bill Mann: Brazil is one of the few countries whose currency has outperformed the U.S. dollar in calendar 2022. Certainly, the largest convertible currency to have done so. The real has done quite well. It really has to do with the fact that Brazil is selling stuff that people need. They are a massive exporter of raw materials, of timber, of all sorts of gold, metals, oil, things of this nature. Oddly enough, it’s actually a country that has a pretty decent current account. People think of the Latin American countries as being somewhat similar. You’ve got 100 percent inflation in Argentina once again. It’s been a couple of years, so they’re back at it. I think that there’s actually some really interesting long-term things to benefit from being invested more in Brazil.
Ricky Mulvey: Was it the bee at the bricks?
Bill Mann: It’s the bee at the bricks. The rest of them I wouldn’t touch.
Ricky Mulvey: Well, speaking of countries on this side of the hemisphere, we’re also flying over to Canada.
Bill Mann: Yeah.
Ricky Mulvey: Why is your mind on Canada right now?
Bill Mann: Canada, obviously, a highly developed economy. Canada has a little bit of its own issues, particularly, in their housing sector. If you think that the housing bubble has been bad in certain parts of the United States, allow me to introduce you to Canada. But Canada is also blessed with a really high-quality, deeply entrenched bureaucratic government. I use the term bureaucratic in the best of terms, meaning that you aren’t susceptible as they are in China, Russia, does in other countries, dozens I should say, of having an ideologue come in and change things all that much. Very well-run country, very highly developed, also rich in natural resources, especially oil and gas, and timber as well. Canada is another country where I think I would not be all that interested in certain parts of the Canadian economy, but oil and gas companies in Canada, natural resource companies in Canada, some of the high-tech companies in Canada like Constellation Software, very interested.
Ricky Mulvey: I like this, going on an optimistic note. But we got a couple of questions about international investing that I think are worth paying attention to. This one came from Alex. He says, “I want to do research on companies that are not based in the United States, but I’m having trouble finding basically something comparable to the SEC’s EDGAR database. So far, the best approach has just been going to a company’s investor relations website. But occasionally they only have the most recent report. Is there a good database to research international companies? Thanks.”
Bill Mann: Not for free, unfortunately. I think, to me, it’s not great that this is the case. What I would suggest that you do Alex is, and I know this is old school. This is really old school. Go to the investor relations website, get their email and ask them to give you information going back, and they’ll send it to you. They don’t send it to you. Maybe you’ve got the answer from them that they’re not wishing for you to take them seriously. But in general, investor relations websites are interested in investors learning about the businesses. They will send you really as much information as you ask for. I would ask them for two years of financial reports, proxies, and then any third-party research that they have, and a lot of times they’ll start sending you things like local investment bank reports on their companies, and it’s super helpful. But unfortunately, there’s not a great clearinghouse for information for international companies.
Ricky Mulvey: Next mailbag question comes from me. Dollar’s strong for me, that means there’s got to be some international bargain opportunities out there. That’s one way I’ve been seeing it. But you’ve talked about some companies of where to search Canada, Brazil. Any bargains that have your attention?
Bill Mann: From R. Mulvey out in the Colorado Heath, I think that there are. In Europe, in particular, I would be interested in a lot of their software companies, they’ve gotten hit really hard. Japanese small caps, which tend to be pretty hard to buy in the United States, although there are ETFs that will get you into them. I think it’s really important to note that even if we are in a state where we are right now where currencies have gone down substantially against the U.S. dollar, the thing that I’ve always told myself, as someone who’s invested internationally for 30 years, is that the only constant is change.
You remember a couple of years ago everybody said, they want to be paid in euros because the dollar was going to collapse, or they wanted to be paid in Chinese yen because the U.S. economy was doomed. Those things turned out to be wrong, and I think that they turned out to be wrong simply because every person who has ever made a prognostication has underestimated human ingenuity. I think human ingenuity will come through again, and I think that these types of issues also will pass over time.
Ricky Mulvey: Ending on an optimistic note. I like that.
Bill Mann: We have to get there eventually.
Ricky Mulvey: Yeah, the guy who talks about things. Bill Mann, appreciate your time as always. Hope we get to do this again. It’s fun going around the world.
Bill Mann: Anytime, Ricky. Take care.
Chris Hill: As always, people on the program may have an interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
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