I often talk about generational cycles having major impacts over long-term trajectories in markets, and societies in general. To most, it sounds like a very fatalistic way of looking at things: no matter how hard we try, we're destined to repeat our failures. This was proven true again in 2008 as markets tumbled after debt levels rose uncontrollably for decades, securities fraud was rampant and corrupt politicians and regulators did their best to cover up these problems - and in many cases perpetuated them themselves. It was like a carbon copy of what led to the Great Depression.
But generational cycles are not always bad. Like all cycles of their sort, they have expansionary and contractionary periods - very much like the seasons. So while all signs point to much of the western world (more accurately, any nation that participated in WWII) being in the thick of a generational crisis era, there are other parts of the world, that are in different points in their own respective cycles. This may prove to be important for investors, looking for growth around the world as their own asset markets experience much needed corrections.
Many South American nations fit this description. Specifically, Argentina, Brazil, Chile, Colombia, Peru and Uruguay.
Whenever I am in conversation with other investment managers and economists, bringing up these countries as ideal areas for investment results in scrunched noses and shaking heads. After all, they have recent histories of hyperinflation, corruption, drug lords and brutal dictatorships.
"Precisely," I answer.
The recent histories of these nations are awful. Just 20 years ago, nearly all were controlled by corrupt dictators. Senseless killing was a way of life. Political opponents would simply disappear or fight guerilla wars with government armies. Socialist price fixing schemes left food and medical care in short supply.
In 1985, the military dictatorship was overthrown in Brazil. In 1988, democracy was restored in Chile. Pablo Escobar was killed in 1993 and the drug cartels that terrorized Colombia were nearly completely destroyed a few short years after. Argentina's "Dirty War" ended in the early 80's and democracy was restored. Unfortunately, continually poor economic policy has led to recurrent crises. Regardless, the standard of living has continually risen since 1990.
The recent memory of these issues provides the perception that South American countries were always this way and always will be. But this is not the case. Argentina and Chile in the early part of the 20th century were some of the wealthiest and most advanced nations in the world. European wars led to an influx of educated immigrants that embraced the resource rich lands and prosperity abounded. "He's as rich as an Argentine" was a popular expression.
After spending 5 months during '06-'07, primarily in Chile, I feel like I can offer some insight into how they have definitely changed their ways. The Chilean people are incredibly well educated. And they are consistently ranked as having the most economic freedom of any country in the developing world. One particular observation stuck: the Chilean's commitment to higher education. Riding on the subway in Santiago was the best way to experience this. In much of North America, the banner ads in the station and train cars are full of chewing gum, television shows, deoderant and other useless gimmicks. In Santiago, most are occupied by post-secondary schools. And if one were to ride the subway in the evening, many of the commuters are not going home from work, they're on their way to night classes. Chileans are intently focused on the future. And when one talks about the future there, one talks about 10 years, not 10 months.
The reason behind this can easily be found in demographics. In conjunction with the end of major crises and the beginning of new freedoms, people tend to be fairly jubilant, resulting in baby booms. And in the late 80's/early 90's most of these nations I've mentioned experienced enormous baby booms. Today, they have some of the youngest populations in the developing world with - according to the CIA world factbook - between 23-29% of their populations 14 years old and younger. China, in contrast, has only 19% (and enormous issues with male/female disparity). Germany and Japan sit around 13.5%. Other nations with higher ratios of young populations are typically marred by high infant mortality rates, famine and/or HIV.
With such a burgeoning young population and the recent memory of brutal dictatorships still ingrained in the memories of their parents, these societies are naturally disinclined to extremism, protectionism, violence and corruption. The best analogy for this is America in the decades following WWII. The generational High and generational Awakening eras are typically favourable eras for investment due to the natural increasing demand from younger generations. They are also characterized by something else: utter paranoia of the bad times returning. Again, think of America in the 50's and early 60's. Nuclear war with the Soviets was thought of as an inevitability. And every recession was met with fears of a depressionary repeat of the 30's. Each bout of this pessimism was met with large stock market declines, only to be followed with breathtaking rallies, innovation booms and a rising standards of living.
With that in mind, I came across an article yesterday about Colombia that typifies this mentality. The content of the article is not all that important (the Colombians are having continuous issues with neighbouring Venezuela and their lunatic dictator Hugo Chavez). But the fact that so many are fearful of this escalating into a broader conflict is typical of a generational Awakening era. These are the types of events that dampen positive social mood, creating huge selloffs in asset markets and allowing for low-risk entries into burgeoning markets.
South American stock markets have indeed come under the same allure as other emerging markets from the US Dollar carry trade. And they will likely succumb to similar panics when this inevitably unwinds. But the favourable demographic positions of many of these nations will have me buying dips in anticipation of continued future prosperity, stability and an eventual leadership role in world affairs.
South America is often lumped in with other emerging markets as part of the same US consumer dependent globalization trade. I have reason to believe their growth is based on firmer foundations.
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