In 2022, the path to wealth is covered in soot and runs to Vladimir Putin’s front door.
As unlikely as it may seem, some of the best performing stock and bond markets share a dirty secret. They doubled their economic ties with Russia and injected increasing amounts of coal into their energy networks.
Louis-Vincent Gave, co-founder of the financial research firm Gavekal, was the first to make the observation on the Macro Voices podcast.
“So the transition is already happening,” Gave told Macro Voices. “And that’s happening to countries that are either ready to trade with Russia or ready to burn coal.”
The news could be sickening for people who cherish the planet and are working to reverse the effects of man-made climate change. It can also be discouraging to those who fear encouraging an authoritarian state that invaded neighboring Ukraine without provocation and allegedly committed unspeakable war crimes there. Yet when it comes to a game based solely on money, without thinking about morality or the future, Gave is onto something, according to data collected by Forbes.
“I see the thought process,” said Charlie Wilson, portfolio manager of Thornburg Investment Management’s Developing World Fund. Forbes. “Unpacking the logic behind that statement, if you had the ability to avoid expensive energy, then it’s definitely been a tailwind this year.”
Consider the cases of Brazil and India, two of the Gave countries designated as having markets that have outperformed the United States this year.
In January, Brazil, under President Jair Bolsonaro, passed a law to subsidize its coal industry until at least 2040, reversing a policy that would have phased out fossil fuel subsidies by 2027. Coal consumption jumped 10% last year from 2019, according to BP data.
Imports from Russia grew even faster. Without factoring in the rising cost of oil and gas, Russia’s top exports, Brazil is poised to buy about $8.3 billion from the pariah state this year, according to FactSet. This would be a 46% increase over 2021 and equal to the total cost of Russian imports for 2020 and 2021 combined.
Going against the grain had little impact on Brazilian markets. The Bovespa stock index is up 11% this year through Monday. Measured in local currency, a gauge of the country’s bonds did even better. They are up 12% so far.
But Wilson of Thornburg said Brazil’s success could be deceiving.
“Parts of the Brazilian market are doing well, especially areas that benefit from higher interest rates like the banking sector,” Wilson said. Forbes. “Other parts of Brazil, such as small and medium-sized businesses, are down sharply. A lot of recent IPOs are way behind schedule. Overall, Brazil seems to be doing well, but that’s the a result of the outperformance of large index weights such as banks and commodities companies, I don’t think it has much to do with their ties to Russia.
It’s a similar story in India under Prime Minister Narendra Modi. Coal consumption increased by 8% in 2021 compared to 2019. Trade with Russia, including imports and exports, totaled $11 billion in the first half of 2022, according to Denis Alipov, Russian Ambassador to India . In 2021, the two countries traded just $13.6 billion. If all goes as planned, it won’t end there. The two countries aim to achieve $30 billion in revenue annually by 2025.
Indian stocks have gained around 4% this year, although its bond market has crashed, losing 10%.
Compared to the United States, however, India has been a winner. The S&P 500 index has plunged 19% this year, while the tech-heavy Nasdaq has lost nearly a third of its value. Meanwhile, the Bloomberg US Aggregate Index, a broad measure of public and private bonds, is having its worst year on record. It fell 15%.
Of course, there are other factors at play. For example, Brazil is a commodity exporter and has reaped windfall profits from soaring soybean and oil prices.
As for India, Wilson of Thornburg said access to cheap Russian crude is only part of the country’s success story.
“India has benefited from buying cheap crude, but there are also a lot of positive things going on there,” Wilson said. Forbes. “The retail investor has become a larger component of the market as a result of Modi’s reform program.”
Trading goods with Russia and lighting the chimneys is not a surefire ticket to prosperity. China has increased its coal consumption and trade with Russia as its stocks have been stretched. Of course, this is partly due to China’s own tensions with Western governments.
“I know why nobody talks about it,” Gave told MacroVoices. “Because it’s the most politically incorrect thing you can talk about, you know, say, hey, I’m going to invest in guys who are friends with Russia and burn coal. It’s a surefire way to not not be invited to dinner next week.