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Should You Invest During An International Crisis?

Global communication, international messaging and translation concept

In the 18th-century, Baron Rothschild allegedly said “buy when there’s blood in the streets, even if the blood is your own”. Most investors understand the idea of buying low and selling high, yet in reality, most do the opposite.

How many bought the lows of the financial crisis 2008/09, at the time when Lehman Brothers failed and the economic outlook looked really ugly? Or just after the 2020 Covid-19 stock market crash when you could have purchased many stocks at discounts of over 40 percent?

The outlook is generally dark during any crisis. So dark that most traders will refrain from buying, or even worse, start selling. The chart below shows Tesla’s stock (TSLA) since mid-2019. The red highlighted sections indicate more retail traders selling, and the blue sections more retail buying. Evidently, many retail traders sell during pullbacks and buy during highs (we developed a strategy trading against retail sentiment).


Earlier this year, the S&P 500 and other world stock markets reached new all-time highs. When markets hit all-time highs there are arguments in favor (inflation, interest rates stay low enough, TINA) and against (overvalued, possibly a bubble). However, most would agree that it’s not exactly a cheap moment to buy. Even after markets have entered a correction of 5-10% we’re far from having blood in the streets. Or are we?

The Global Perspective

Despite upward pointing stock markets in developed countries, the world seems more fragile than ever. In 2021, we witnessed a riot on the US capitol and the Covid-19 pandemic is ongoing. There is/was a shortage on chips and global supply chains were affected by insufficient production and transport capacities. The container ship Ever Given got stuck in the Suez Canal.

There were protests in Myanmar, the US withdrew its troops from Afghanistan and the Taliban took over followed by a humanitarian catastrophe. The situation seems even worse in Yemen. Syria and Iran have further conflicts ongoing, all while the tone between the superpowers USA, Russia, and China becomes harsher.

China is eyeing on Taiwan, Russia on Eastern Ukraine and Belarus, and the US (besides being involved all around the globe) continues to fight a war on drugs. Military forces are gearing up, see the US weapon sale to Saudi Arabia, China and Russia (and apparently even North Korea) tested hypersonic missiles, and Iran and North Korea seem closer to the nuclear bomb than ever (or are already in the possession of one).

Currently, we hear of Turkey’s economic and political crisis, the West fears an attack of Russia on Ukraine and China on Taiwan, and as a result voices demanding more severe sanctions against the two nations become louder.

The Idea

If you were to follow the advice of contrarian investing, you could consider investing in the world’s trouble spots.

Should you, for example, go long Turkish stocks (i.e. buy the iShares MSCI Turkey ETF, ticker TUR)? After all, since 2020, the MSCI Turkey is down 20 percent while the S&P 500 (SPY) is up over 50 percent.

example tur

How to Invest Internationally?

When it comes to trading stocks, most of our readers focus on the US market. Or, if you’re from another country, then some of your country’s stock market (home bias).

A German might be interested in Siemens, a Brazilian in Petrobras, and a Brit in Unilever etc. In reality, investors often forget about international diversification when it comes to building a diversified portfolio.

With the availability of regional and country-specific ETFs, international investment has been made much simpler. Below you can see a world map that we created with the currently available ETF tickers (our sources were Norgate Data and ETF DB).

world map etf

Of course, the individual ETFs are often biased towards one sector that is most represented in a country’s economy. Some of these ETFs have a great exposure to Energy (e.g. Russia/RSX), to Basic Materials (e.g. South Africa/EZA), or to Financial Services (e.g. Singapore/EWS). One can check the exposures on Yahoo Finance.

Later on, we shall construct a contrarian strategy using a watchlist of these 28 international ETFs:

amibroker international etf

Nation Specific Risks

A moment ago, we asked if it’s currently a smart time to invest in Turkey/TUR. To answer this question, we could look at historical data of similar nation-specific devaluations. Would it have been profitable to invest during a crisis? Let’s start with two examples:

1. Egypt (EGPT) during the Arab Spring and the 2011 Egypt Revolution

etf egpt

The Egypt stock market dived -20% in the course of the February 2011 revolution before a short-lived recovery. Over the course of that year, EGPT lost over -50% of it’s value.

Beginning 2012, we saw some bounce-backs, actual opportunities which could have been highly profitable if one was positioned right. After that, EGPT again showed weakness but went into solid bull mode after President Mursi was overthrown in July 2013.

So there would have been two interesting times for buying over the highlighted four-year period: at the lows in 2012, one year after the revolution, and in 2013 after Mursi had been removed.

So in the case of TUR, maybe it is best to wait until President Erdogan resigns?

2. Hong Kong protests (EWH)


The impact on the Hong Kong stock market (EWH) was a lot less clear after the Hong Kong protest started in 2019. We did observe that the market failed to climb up in parallel to the S&P 500 (SPY) going into 2020, however there was no massive sell-off.

This occurred in March 2020 in the course of the Covid-19 correction. That’s also the only good moment one could have bought to ride the bounce up. In other words, the Hong Kong protests do not seem to have triggered attractive entry opportunities.

A Universal Strategy For Uncertain Times

Instead of searching for political turmoil or conflicts, a more systematic approach shall be taken. We simply look for the country ETF that performed the weakest (relative to the SPY) over the past 6 months and then invest in it. We rebalance quarterly, so at every moment the strategy is holding exactly one ETF.

The chart below shows the cumulative performance. The highlighted colors represent the invested in ETF at any moment, in comparison to the S&P 500 (SPY). Using a watchlist of 28 international ETFs you can see that our holdings switch often throughout the time period:

equity curve

Since October 2000, the simple strategy netted 961% which corresponds to an annualized return of 11.8% (vs. 7.5% for SPY). Of course we also encountered relatively high volatility. Nevertheless, the risk-adjusted return (Sharpe ratio) of 0.39 exceeded the one of the SPY for the same period (0.36).

To go through quickly, EWM (Malaysia) and EZA (South Africa) gave a solid initial return between 2002 and 2007. Both had weak streaks (thus our strategy selected them) followed by strong run ups.

In the 2007/2008 crash, we had exposures first to GXC (China) and then to RSX (Russia), which were both beaten down massively. In 2012 we saw big gains from VNM (Vietnam), before switching to EGPT (Egypt). In the course of the Greece sovereign debt crisis, especially in 2015, GREK (Greece) turned out to be a volatile ride.

In 2020, the strategy cleaned up in TUR (Turkey) and then THD (Thailand).

Final Thoughts

Neglecting international markets means missing opportunities. Not all countries posses the expensive valuations of US markets. Furthermore, stocks generally recover from crashes, so buying at an attractive valuation is what all investors want. Yet let’s be honest, we’ve all missed many opportunities during pull-backs, crashes and international crises.

Investing internationally has become easy since the introduction of country ETFs. This opens up many opportunities for retail investors. Analyzing international markets and buying where it’s cheap can be an interesting (and profitable) strategy.

Notes: Analysis and simulations produced in R, Excel and Amibroker. Data from Norgate and ETFDB.

Comments (12)

It would be interesting to know what the returns would be if at the outset you chose the 2 (or 4) worst performing International ETF’s and invested in them. At rebalance you sold the worst performing fund in your portfolio and replaced it with the current worst performing in your list.

Ok thanks for the idea. Just be careful not to overfit. But having more than one investment at a time will surely also reduce the risk.

Thanks for this article.
Have you tried a market filter like SMA200?

The ETFs selected are almost all below their own SMA. But having a SMA filter on the SPY to decide wether to invest or go cash probably has the potential to reduce the risk.

Hi Joe,

interesting backtest. Did you also try choosing the best performers (either relative to SPY or measured by momentum) instead of the weakest ones? It could be interesting comparison.

I have not yet tried looking at the best performers. Good idea.

Just checked that. Investing in the best performers did well until 2008 due to the continuously high returns in Brazil (EWZ), but flat and with high volatility after 2008

Ooo I like this. Wonder if the volatility could be reduced by looking at relative momentum between SPY and BIL. If BIL then go to cash. Lot’s of options for analysis.

Yes, SPY vs. BIL (or TLT, or GLD) is often a good risk-on/off signal. Might do some analysis on this soon.

there is the issue of LIQUIDITY to be considered in principle. And yes, a pfolio long top X markets and long bottom X markets is a very interesting excercise. You have two parameters: nr of markets to have in pfolio and length of month used for calculation. Dare I add to normalize the rate of change by volatility and then compare with the original model/s,

2nd suggestion. Use this model (buy bottom X markets on a 6 to 12 month ranking basis) only if the MSCI World index is above its 6 to 12 month moving averages.

Both interesting ideas, thanks.

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