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Offshore Investment Timing

We wrote recently about timing stock investments. The bottom line is that while fundamentals drive stock prices technical analysis of the market can accurately assess when an asset price has hit its top or bottom. This information is good to keep in mind for offshore investment timing. A case in point is Brazil which seemed set to become the superpower of Latin America and is now struggling even as it hosts the soccer world cup and is set to host the next summer Olympics. Fundamental analysis of business in Brazil before the recession looked great but to the technical analyst there were way too many overpriced assets. Using Brazil pre and post-recession as an example here are a few thoughts about offshore investment timing.

Where the Money Goes and Why

Successful foreign direct investment follows a strict set of guidelines. A successful investment involves continued growth, low or at least reasonable asset price, political and social stability and the ability to take earnings and spend them elsewhere. Obviously there are a lot dictatorships in the world where investing could be profitable except for the risk of having all of ones assets confiscated by the local strongman. And there are nations where you can make lots of profits but you cannot get your earnings back into dollars to pay dividends back home. And there are countries that show great promise and attract lots of investment and where prices go way too high before the fall. This was the case with Brazil. The following table is borrowed from our Foreign Direct Investment articles from February of 2014.

Foreign Direct Investment Comparison of 2007 and 2012

In Billions of USD

Taken from the United Nations World Investment Report 2013

Nation

2007

2012

European Union 859 323
UK 200 71
France 96 37
Germany 80 67
North America, incl. Mexico 363 408
Canada 117 54
USA 216 329
Mexico 31 26
Japan 23 123
China 84 84
China, Hong Kong 62 83
South Korea 9 33
India 25 9
South Africa 6 4
Russian Federation 57 51
Brazil 35 -3

 

Please note the entry for Brazil at the bottom of the table. This simple comparison shows billions of foreign dollars invested in a country in 2007 on the eve of the recession and five years later in 2012. In 2007 Brazil received $84 Billion in foreign direct investment, compared to $216 for the USA, $117 for Canada and $31 for Mexico. In 2012 the USA received $329 Billion. Both Canada and Mexico fell to $54 Billion and $26 Billion respectively. But, Brazil saw a withdrawal of $3 Billion in foreign assets in 2012. This flight of capital from Brazil is a lesson in foreign investment timing. The IBOVESPA, the Brazilian stock exchange index was less than 20,000 and rose to 72,500 in May 2008. It subsequently fell to 31,400 by October 2008. Despite a recovery in 2009 the IBOVESPA has settled into the 50,000 range for the last year. This index is a composite of the BM&F Bovespa market. A more apt example for offshore investment timing is the fall from grace of Brazilian Eike Batista and his companies. Batista was said to be the 7th richest man in the world a few years ago and now his oil company, OGX on the Brazilian stock market, has filed for bankruptcy. Its stock sells for eleven cents a share on the over the counter market in the USA. The company went public in 2008 for $4.1 Billion, never coming near producing the ten billion barrels oil its founder claimed he would bring to the market. When the oil company plummeted so did other companies in the Batista Empire. If one had invested early in this oil company and gotten out with a quick profit one would have looked like a genius. The basic point is that the booms in Brazil and especially the boom in Mr. Batista’s companies were exciting and misleading. A bit of fundamental analysis would have told investors to be wary and a bit of technical analysis would have told them to run for the exits!

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