Crises Investing
by Nihar Dalal, CFA
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Many shall be restored that are now fallen and many shall fall that are now in honor - Horace


George Elliot is half Greek. That could possibly explain his decision to start a Greece focused hedge fund. Or maybe he is one of those investors who realize that crisis often spells opportunity. Investors across the globe, concerned over Greece and the fallout of the European crisis, are running scared of investing even in their home markets. George, however, is busy raising assets for his newly minted fund that aims to snap up beaten down Greek equities.


Mr. Elliot began his career in finance sometime in 1997, just months before the Russian crisis hit in the summer of 1998. At that time Russia was walking in the same shoes as Greece is today. Then, as now, a debt crisis was roiling global financial markets. Back then, as now, the crisis had rendered local economies uncompetitive at the existing exchange rates. Russia at that time had pegged the ruble to the dollar. Greece today is locked into the euro zone.


When the East Asian financial crisis broke out in 1997, prices of Russia's two most valuable sources of capital flows, energy and metals, plummeted. Given Russia’s then fragile economy, the rapid decline in the value of those two capital sources resulted in an economic chaos in the country. GDP per capita fell, unemployment soared, and global investors liquidated their Russian assets.  The Russian stock market fell more than 70% from its peak. Owing to the devaluation of the ruble, the market was down almost 90% as measured in US Dollars. At the worst point of the crisis, Russian equities were trading at a forward multiple of 2.5X.


But the turnaround was quicker than anyone had imagined. Within a year, Russia’s economy had recovered to pre-crisis levels. The Russian Trading System Index (RTS) was up almost 300% in 1999. This was followed by a decade of rapid economic growth. By 2008, the Russian market was up more than 60 times. There is no doubt that this recovery was aided by the resumption of global economic growth and the rise of commodity prices. But this story is not atypical.


A study by Goldman Sachs of past crises such as the 1994 Tequila crisis, the Argentinean debt crisis of 2000 or the Asian financial crisis of 1997 suggests that:


·         The average decline in equity markets that were at the epicentre of the crisis or close to it was around 65%. For the worst hit markets like Mexico, Argentina, Thailand and Russia equities fell around 85% in dollars terms.


·         Most of these markets bottomed out at valuations close to where some of the troubled European countries are currently trading.


·         Post crises these countries experienced strong economic recoveries, helping to boost stock price performance.


·         In the 12 months following the trough, the markets, on average, more than doubled.


·         Many of these markets continued to deliver extraordinary returns 5 to 10 years after the crises.


Ireland provides a good recent template to understand how things can unfold in some of the other troubled European countries. It was one of the first countries to get hit by the global financial crisis of 2008. As property values collapsed and banks were left holding bad loans, the Irish stock market crashed more than 80% from its peak reached a year earlier. The market bottomed out by early 2009 and is up an impressive 77% since.


Each crisis differs from the prior ones in terms of its details but the recoveries all share two things in common – depressed valuations and rock bottom expectations.


If history is any guide, George Elliot could be a very happy man in 2015.


Nihar Dalal, CFA


September 9, 2012


Readers interested in the Goldman Sachs report can write to me at