How To Make Money Investing In Eastern Europe
Jordan: Tiho, my friend, I'm very excited to be hosting your podcast. Now before we begin with episode one, let's give listeners a background of what they can expect from the podcast.
Tiho Brkan: Jordan, thank you for having me on the show. I really look forward to doing many of these podcasts with you in the future. What listeners can expect, I think is going to be a terrific 30 to 40 minutes. And the way that we're going to do it, is first and foremost we're going to do “Adventures on The Road”. Since I travel and visit anywhere between 15 to 20 countries a year for my work, on behalf of my clients, and for my own pleasure, we will be covering these countries in depth and in detail, including their economy. We'll be looking at business opportunities, real estate markets, taxation, and also immigration purposes too. Afterwards, we'll be doing the “Global Macro”, which is a segment that I think many of my former readers and followers on Twitter will enjoy very much.
Every week to a fortnight, we'll be covering a different asset class and discussing it in depth. It will be a very interesting segment from many aspects. In particular for investors who are interested in exposing themselves to beaten down and depressed markets, and staying away from risky prospects, which might turn sour. Finally, we'll be doing a Q and A, where I will take a listener's question and I will attempt my best, Jordan, to try to answer that question from week to week.
Jordan: And I just want to let the listeners know if you have a question that you want Tiho to answer, please email us at podcast at The Atlas Investor dot com. Podcast at The Atlas Investor dot com. And Tiho we're also, for those, you can listen to the podcast on audio with iTunes. But for those listeners who are able to listen and watch it on YouTube, for example, we are going to include some charts. Can you give a little detail about that?
Tiho Brkan: This is going to be the best part. So what we want to do is we want to make this podcast visual. So as we discuss and profile a certain country, we will have an actual map of where it's located in the world or its region, and all the facts about that country. When we're discussing various real estate developments or interesting parts of the world where real estate might be booming, we'll be having pictures and charts about that. In the global macro section, the charts that have regularly appeared on my twitter and the old Short Side of Long blog, as well as the new Atlas Investor website will be posted. The charts the readers have fallen in love with I think, and really follow and comment on every week. I receive emails on how nice the charts are and how informative they are, which I'm very grateful for. All of those things will be included in the YouTube video. And I think it makes the visual appeal of the podcast that much better for a listener at home.
Jordan: And Tiho, we've designed this podcast so it can benefit a wide range of people who listen. I mean whether you're a financial professional, a high net worth investor, a student, someone just starting out in finance, or a baby boomer retiree or someone who's already retired. You can benefit from the material in this podcast. I mean we want to inform and educate everyone. But our primary goal is to help people make money.
Tiho Brkan: That's exactly right. I think a lot of the finance industry has forgotten that. Their main purpose is to produce as many financial reports as possible to make money on research, on newsletters, on various advice and consulting products. Which not necessarily benefiting people's accounts. They more so benefit people's knowledge, and knowledge doesn't equal profits in financial markets or in investing. So our job and our purpose will be to try to educate anyone who's an investor or a student, as you just said, or anyone in between, on how we are investing… why we are investing in a certain asset and what we expect from it going forward. We've had very good returns over the years and I think we will continue to do so. This year, some of my more opportunistic clients have made over 24%, Jordan. So let's hope that continues. And the goal of this podcast is to help everybody make some money.
Jordan: Absolutely, Tiho. So with all that being said, let's get right into the first podcast. What are you going to be covering today?
Tiho Brkan: I'm currently actually in Serbia. It's a very interesting country. The Former Yugoslav Republic, situated in the Balkans, neighboring Romania, Bulgaria, Macedonia, Croatia, and Hungary. And in the global macro talk section, we'll be discussing an asset class that tends to be in just about everyone's portfolio, Jordan. United States' stocks and the current valuations and momentum of this very popular asset.
Jordan: So Tiho, tell me where have you traveled this year and specifically where are you’re right now as we're recording?
Tiho Brkan: So this year I've covered Asia Pacific region and the European continent. Started off in January in Australia. That's a little bit of a family tradition because my parents live there. And after leaving in January, I went back to Vietnam, where I've been residing as of the last year, or year and a half. I have an apartment in Saigon. Saigon, or as it's formally known right now as Ho Chi Minh City, is a very exciting place. Vietnam has been booming and this is the reason why I'm there. Saigon is also very central in Asia and very easy to access different cities from Saigon. Whether it's Hong Kong or Shanghai, Manila or Kuala Lumpur or Singapore. Those flights are usually two to three hours away. And then Bangkok is just around the corner, really.
Now I'm in Belgrade, which is the capital city of Serbia. It's quite an interesting place. Before coming to Belgrade though, I covered England, France, and several other Eastern European countries. I've picked Eastern Europe to spend a large amount of time in because there are a lot of opportunities after the recent two crisis. In particular, the Eurozone Debt Crisis and the recent Russian sanctions in the Ukrainian crisis.
Jordan: So we're talking about Serbia today. Why don't you start off and tell the audience just a little bit of general information about the country?
Tiho Brkan: Of course. Well, this is the former Yugoslav Republic. Yugoslavia was a large country in the Balkans, which broke up into six, and it looks like it might be even seven or in the future eight, countries, jurisdictions. Serbia has seven million people with a capital city of Belgrade which has around 1.5 to 2 million. Depending on the temperature, if it's summer or winter. The GDP of the country is 38 billion dollars, American. And the GDP per capita is about 5.5 thousand dollars. The currency that's in use is the Serbian dinar and the exchange rate is one euros dollar is equal to about 100 dinars right now.
Jordan: Now with respect to investors, could they find Serbia an interesting country? I mean what potential investment opportunities do you see, if any?
Tiho Brkan: Well, it's interesting. Serbia is a very difficult place to invest. It's not as easy as sitting behind your desk in New York, London, or Singapore and buying the stock market ETF. It's not possible to gain exposure that way. So I think the way a normal investor would play Serbia — if they wanted to — would be maybe through real estate, Jordan.
Jordan: Give us a sense of the trends in the real estate market right now, if there are any trends that you see. And also, what are the prices? What are the values there? How does it compare to major cities throughout the rest of the world?
Tiho Brkan: Of course. Well, the pricing is very interesting. Belgrade is really where all the action happens in Serbia. So out of all the population, the majority of the activity is in real estate, I think it's wise to just focus on Belgrade. Pricing per square meter is about two and half thousand dollars in the center of the city, in the good areas. Which is about 240 dollars per square foot. What I would say the trends are right now is a focus towards tourism. So the tourist arrivals have been growing. Serbia has an incredibly low cost of living relative to let's say Western Europe. And from that aspect, hotel rates are very low, relatively speaking. Restaurant costs are very low. A dinner out, for example, would be anywhere from 15 to 25 euros for two people. Sometimes with wine included. So about 10 to 15 euros per person with alcohol, is about as far as you would pay.
And Serbia recently signed a visa-free agreement with China. Already has one with Russia and the overall eurozone, the Schengen area as it's called. So when you think about it, the majority of the European Union tourists, especially the more budget orientated ones, are being attracted towards coming to Serbia. The Eastern European countries including the big population of Russia is interested in visiting Serbia because they have a visa-free access. And now Chinese too. And Chinese tourism is one of the big things that's happening in the world economy today. Recently I think they've already started a direct connection between Belgrade and Beijing. And actually, as I was walking around the streets today, and I just met some Chinese people who came from Guangzhou. We exchanged WeChat, which is very popular in China and got talking. And they really love it here, Jordan.
Jordan: Just to follow up quickly, Tiho. A four or five-star hotel in Serbia, what's the cost of that?
Tiho Brkan: You're looking at about 80 to 120 euros per night. Sometimes a little bit cheaper depending on discount. Sometimes a little bit more expensive if it's in season. So it's very, very affordable. I'm looking here mainly at four stars and sometimes even five stars. The best hotel in the city center is called Square Nine. And I think they do about 180 to 200 euros a night. And that's five-star luxury. Actually, interesting you bring that up, I think they just had Naomi Campbell here last week. So, famous supermodel staying in the center of Belgrade. Shame you're not here, Jordan.
Jordan: Indeed. Now let's talk about the business opportunities there. Which kind of business opportunities do you see?
Tiho Brkan: Well, I'm not a businessman per se. Because I really focus a lot more on investments, but every country that I travel to, I always try to see if there are some interesting opportunities to either invest in a private business or to think about ideas of what I might start or send general information to people that I work with that they might find interesting. In Serbia, I've noticed that the youth is generally very, very educated — very well actually. And the command of English language is very high. It's a great standard of English spoken here. As well as some other languages, too. Especially European ones. At the same time, southern Europe has a very similar mentality to the Western world. So I think outsourcing talent, especially tech-savvy talent, is a great way to play the business opportunities. Something one can take advantage of.
For example, somebody might be earning Western kind of income, revenues and invoicing for their private company and then outsource Serbian talent on the cheap. Because wages here are approximately anywhere between 200 to 400 euros per month. So incredibly cheap to outsource high level of talent. And I think as I've already mentioned to you, Jordan, Serbian mentality or just generally speaking Balkan mentality, which is this whole area of southern Europe where I'm currently at, is a lot closer to let's say outsourcing somebody from India or Philippines or Thailand. Which sometimes can be quite difficult, as I'm sure you know.
Jordan: Now let's talk about the taxes in Serbia. Has the government there lowered taxes in recent years?
Tiho Brkan: Well, taxes are very important part of any investor's strategy. And yes, Eastern Europe, in general, has been doing the right thing after the fall of communism. They really have done some interesting reforms. Corporate taxation in Serbia is 15% and so is individual taxation. The VAT, the value-added tax, or as we call it in Australia, the GST — goods, and services tax — that's 20% and that's quite high. So that's basically the way that the government raises revenue. Because I would say quite a lot of businesses don't pay the tax fully when it comes to taxation. And some of it's done in cash transactions and some of it's done by keeping things off the books. Withholding taxes for investors are at 20% dividends and interest, which is very interesting. And Serbia has quite a lot of tax treaties, too.
But one of the things that's difficult with Serbian tax law is the social security taxes, with both the payroll tax and then the social security tax. So that's the part that really gets you. So employing people here, while it's cheap, employing them properly would mean very high taxes that the government will ask. So I've noticed the trend that some Serbian companies, especially small businesses do, is they employ 33% of their workforce officially and maybe 66% of their workforce on the black market where they just pay them cash.
Jordan: Before we get your final verdict on Serbia, I will just add a few thoughts on Serbia. Be coincidentally one company I'm invested in, one junior exploration company in the mining industry. They're actually in Serbia and the CEO has told me how she expects Serbia to be an up and coming jurisdiction for mining and exploration investments, but also within other industries. Because she talks about how it's changed their laws. It's opened up. And that it's an incredibly cheap place to work in.
Tiho Brkan: Definitely. I mean as I've said, I've noticed that too. And I actually have a friend here from Canada who just visited the other day. And his main purpose is to look at the whole Eastern Europe. In particular Serbia, Bulgaria, Montenegro, and some of these other countries we'll be discussing in future podcasts. To look for tax opportunities, new residencies, and outsourcing talent. And he's very impressed by Serbian youth and the talent that they possess. Especially in the world of digital marketing, website development, and copywriting. And I'm not surprised to even see mining on the list, Jordan. So very interesting, indeed.
Jordan: Tiho, so with all that being said, what's the final verdict on Serbia?
Tiho Brkan: Personally for me, I am not doing any investments in Serbia at the moment and I'm not looking to do any in the near future. Having said that, if an investor was to play Serbia, the only way would be through the residential real estate and possibly commercial real estate depending on the funding and whether the investor has a large partnership behind him or large financing behind him. I personally am not doing anything here and I'm watching carefully. But there is quite a lot of opportunities developing. And I've noticed that the country and the city as a whole, especially the city of Belgrade is developing in a positive trend. Prices are still very cheap. I think if the tourism starts to pick up even more from the Chinese coming in, I would definitely consider maybe playing the real estate market through short-term rentals by using an Airbnb strategy or something similar. The yield there could be quite high, I think. But other than that I'm not doing anything in Serbia. And I'm just kind of watching and thinking about it.
Jordan: And I'll just add, Tiho, correct me if I'm wrong, but it sounds like to me that the opportunity right there is more for someone to employ Serbian talent particularly in the tech world.
Tiho Brkan: That's the arbitrage. That's correct. That is really the arbitrage opportunity for businesses because that's when they can really lower their costs and increase their margins. For investors, it's a little bit of a different story. And I haven't found anything of very high interest that grabs my attention just yet. So you're correct, Jordan.
Jordan: Well, Tiho, speaking of investors I'm sure most of our investors, as you noted, they probably own US stocks. So let's get into that. In this episode that's what we're going to focus on. Starting off here, what's your general view on US stocks?
Tiho Brkan: Well, whenever I look at an asset class I try to let the market do the majority of my thinking, as opposed to me developing my own narrative. Clearly, regardless of what anyone thinks, including me, of US stocks — the truth of the matter is that United States stocks are in a strong bull market. And the uptrend continues. So they're up nine years in a row since 2009 bottom. Specifically on the 6th of March, 2009 where S&P bottomed at the devilish 666 number, as we all might recall. And we are up over two and half thousand points now. So the US stock market continues to power on, Jordan.
Jordan: Yes, it does. I know one thing that you want to touch on are the two key elements to investing.
Tiho Brkan: That's right. So usually when I look at any asset class, as I said, I look at valuations and I look at momentum. I will probably like to discuss valuations first with you and then we can get into momentum. How does that sound?
Jordan: That sounds excellent. Let's start with valuations.
Tiho Brkan: So there are many ways that an investor can look at valuations. It ranges from price to book values to price to cash flow values. Price to sales. Price to earnings. And then there's the Robert Shiller’s cyclically adjusted price to earnings ratio. And then there are median ratios of that. And so forth, I guess a handful of others too. We can get very creative with that. The interesting thing about valuations, it's good to try to get a summary of it, the average of the readings. And for me personally, for US stocks, we have CAPE. Which we discussed is cyclically adjusted the price to earnings ratio. CAPE data going back to 1900s or even late 1800s, thanks to Robert Shiller once again. So US stocks, Jordan, they look quite pricey by looking at the normal CAPE. So it's definitely a risk.
Jordan: What about with median CAPE data? Because I know that you like to break it down into percentiles. Which are the dates that stand out to you as far... with reference to where we are now?
Tiho Brkan: Before we get into the dates, I just want to touch upon median CAPE. And that's a very interesting point. Let's assume for a listener at home that you have an index of 30 companies. Like the Dow Jones, for example. And Apple and ExxonMobil under this case scenario might be very cheap and they might be the largest part of the index. And then the other 28 companies tend to be very expensive, but their market cap is quite low. So this index itself is going to end up looking moderately priced. Not very attractive, but not very cheap as well. Which is kind of an underlying assumption, but a mistake. So using median data it's much, much better. For those that are watching the YouTube channel right now, I have a wonderful chart for you which shows the percentile rank of the price to median 10-year earnings. And basically we're at 94th percentile, Jordan, which quite scary I would say.
Jordan: Now what are some of the other dates that compare to where we are now in the 94th percentile?
Tiho Brkan: Of course. So when looking back through history we had the early 1900s, which was 92nd percentile. 97th was in 1929. 91st percentile was in the mid-'60s. And then 100th percentile, the most expensive time in history, modern history I should say — that US stocks were in a bull run and this bull run ended in March 2000 where it's 100 percentile. 96th percentile in 2007, as of October 2007. Just knocking on the door of the infamous GFC. The global financial crisis. And right now in the 94th. So what I'm going to do for you is I'm going to touch upon what happened during each of those years and the proceeding years after that.
Basically, as we came into the 1900s the CAPE got up to 25 times. Currently, it's trading close to 31 times earnings. And it was 92nd percentile. Basically, we encountered about three to four bear markets of 25 to 30 percent drawdown. Ending finally with the first depression, first the United States depression post World War I into 1921. So it was quite a bad period for the stock market. But mainly in a sideways trend. I like to call these a lost decade. Or in this case, it was actually lost two decades. So the market went sideways with some serious drawdowns. These were buying opportunities for those who were good at trading. But there was no clear trend in place. The market did bottom in 1921. And a huge roaring 1920 bull market developed. Eventually, this peaked in 1929, as we discussed before. And there was, as we all know now, The Great Depression crash. And the bottom occurred in March 1932. This decline was actually over 90%. It was probably the most devastating stock market decline in modern history that we have a really decent data to track, to view, and to analyze.
Not only did we have a crash of mega proportions, but we actually had two lost decades, which was The Great Depression. So it wasn't until the 1940s that the market really started to break towards new highs. And really late 1940s. So lost two decades as well as a mega crash. Moving on, the 1960s was an interesting one during the JFK era. The stock market started to peak as inflation got out of hand, Jordan. So 91st percentile when it comes to CAPE ratio. And that was about 25 times on the CAPE as well. What followed was 1970 bear market of about 30 percent drawdown and then the 1974 oil embargo — which was over 40 percent decline in US stocks. And it wasn't until 1982 that the stock market really started to enter another bull phase. Especially on an inflation-adjusted basis.
What followed was the great bull market of the prosperous '80s. And then the roaring '90s. The technology boom of the '90s. And the market peaked, as I just stated before, in March 2000. It was a mega bubble, really. But mainly TMT bubble. Telecommunications, media, and technology. Some of the other areas of the stock market, as well as other asset classes, were actually undervalued. 100 percentile and the CAPE ratio got up over 40 times. So close to 45 times CAPE. This was the most expensive in recent 150-year history. And the stock market declined by about 50%. Including the September 11th attack on the USA, which pushed the markets quite far down in a panic stage. A bull market from 2003 to 2007 recovered us back towards new all-time highs. But that only lasted several weeks. And then we had the GFC. The global financial crisis. The CAPE at that point in time was once again close to 28. 96th percentile in this case. And a mega crash of 50%, over a 50% drawdown.
And I think all-time highs to intraday lows, it was a decline of more than 60%. So that was a devastating one. And as we all known now, the financial sector got into very bad trouble. Since the bottom, we’ve gone up nine years in a row now. And as of late, the market has become overvalued again and we're at the 94th percentile. Now in future episodes, depending on what happens, Jordan, we'll be discussing history as we see it develop.
Jordan: Now obviously our listeners are more in tune with recent performance. The recent bear markets. You noted the tech crash of the early 2000s and of course the GFC in 2008. Is it possible we could see a repeat of that in the years ahead?
Tiho Brkan: Look, of course, it's possible. In markets, anything is possible and everything is probable. I don't want to sound like an ultra-bullish nor an ultra-bearish person. I try to be rational. Whenever CAPE percentile has gotten this high, which means basically above 90% — whether it was the early 1900s or 1929, as we discussed or mid 1960s or the tech bubble of the late 1990s or just knocking on the door of the GFC in 2007 — the stock market either had a massive crash of somewhere between 40 to 50% and or, sometimes including both, as we saw in the Great Depression, a sideways trend of a lost decade or two. So whenever we had valuations get this high, something bad tends to happen. The question is of course when Jordan. The trend is your friend. As long as the market continues to move up, it's fine for now.
Jordan: Now, staying with valuations, Tiho. Obviously as far as valuations, the US doesn't look attractive. Can you tell us which countries as far as valuations do look attractive?
Tiho Brkan: Of course. I created a table for those watching on YouTube and I highly recommend if you're listening to the podcast to jump on our YouTube channel and have a look. Because we have wonderful charts for our listeners at home. Basically, US doesn't look attractive. You're right, Jordan. What does look attractive from my perspective is South Korea, Austria, Italy, Poland, Portugal, Turkey, Spain, Russia, China, and Singapore. A basket of those 10 countries has an average CAPE of 13 and an average price to book valuation ratio of 1.3. Now, when we compare that to United States which has a CAPE ratio of 31, which is basically the 94th percentile and price to book of 3.1. So on a price to book ratio, we're almost at two-thirds of a discount. And on a CAPE ratio, we're almost at I guess let's say almost two-thirds discount as well. In this case a little bit less. So the basket of very cheap stocks, stock market indices is about 50 to 60% than what the US is trading right now, Jordan. And by the way, US is not the only country that's highly overvalued.
Jordan: Right. Would you like to mention some of the other countries that you find overvalued based on these statistics?
Tiho Brkan: Sure. Netherlands or Holland, Denmark, Switzerland, and Belgium. And then some of the Asian countries, which had a crisis about 20 years ago and have had a phenomenal performance since then. These include Indonesia, India, and the Philippines. So I've been watching those countries perform magnificently well over the last 20 years. And they're finally getting quite expensive. Some of their CAPE ratios are now well over 20.
Jordan: So with that being said, Tiho, let's move towards momentum. Now US stocks continue to make new record highs. Are there any risks out there? And if so, what are they?
Tiho Brkan: Well, at the moment there are some risks. There are coming up on investors' front view. I would say definitely it's the complacency and the lack of volatility that continues to be a major warning flag for the current stock market rally. But having said that, the earnings continue to grow. Consensus expects the earnings to continue to expand, the earnings' growth to continue to rise. And at the same time, the global economy is in a synchronized boom. So we don't have recession risks on the horizon. So despite the fact that everything is calm and these risks still persist, it's hard to be bearish unless we have a sign that the momentum is turning. Some of the statistics though, United States equities haven't had at least a three percent correction in more than 10 months now, Jordan. Which is quite interesting and also worrying.
And furthermore, the United States equities also haven't had a five percent correction in 310 days. We have to go the back to late '50s, mid-'60s, and the mid-'90s to see something like that. So we're really in a period of very low volatility, very low range in the trading day where prices don't move up a lot. And as result, I think investors are becoming more and more used to using leverage because you really need to use leverage to get some kind of a decent return when the stock market is moving up and down by one-quarter of a percent from week to week. So all of that really signals investor complacency.
Jordan: Right. Now let's talk about the advance of the stock market. Is it healthy or do you see some deterioration happening there despite the overall uptrend?
Tiho Brkan: No. I don't think it's actually very healthy. As of late, despite the fact that we're trading only a couple percent of 52-week highs for the S&P 500, we had about 40% of the stock market in an uptrend. Or in other words, 40% of the stocks within the S&P 500 were trading above their 50-day moving average. So that is something really strange in my opinion. And we've seen this many times before. And what I mean by strange is that the stock market continues to make higher highs and set new records…. and yet there are fewer stocks participating. Fewer and fewer components of the S&P index are actually in an uptrend. And that's definitely another warning signal.
Jordan: Tiho, what's your final verdict on US stocks?
Tiho Brkan: US stocks continue to remain in an uptrend. I am not one to advocate shorting uptrends until they signal that the trend is reversing. As a matter of fact, novice or intermediate traders should never be shorting anything regardless because it's not a very easy way to make money. At the same time for listeners at home, if they're thinking about exposing their capital to fresh ideas and new assets, I would definitely say they should look at foreign equity markets and go foreign, and go abroad. Because US stocks are in the midst of a complacent period and valuations are extremely high. And while the momentum continues to carry them higher, it's only a matter of time until momentum runs out of steam and we see a potential downside risk develop. And when valuations are this high, I already described to you, Jordan, the risk can be quite high.
Jordan: Well, Tiho, that wraps up the first podcast episode. I'd like to thank the listeners for tuning in today. We really appreciate it. Now Tiho, what can we expect in episode number two?
Tiho Brkan: My personal Adventures On the Road take me to Montenegro which is a stunning little country on the Adriatic coastline. That's definitely not the one to miss. And also we'll be discussing and focusing on emerging market equities.
Jordan: Tiho, I'm really looking forward to that. Great work today. Thank you so much as always. And to our listeners, we will speak to you again next week.
Thank you for listening to the Atlas Investor podcast. To be notified of future podcast episodes sign up for our free newsletter. Tiho Brkan offers his clients a wide range of services. Including portfolio construction and wealth management. One on one consultations. Global real estate opportunities. International tax planning. Citizenship and residency planning. And one on one mentoring. For a free consultation, visit the Atlas Investor dot com and contact Tiho Brkan.