June 12th, 2012
Written by Elliott Morss
Since May 2009, I have argued your investments should be in countries with high growth rates, little government debt and deficits (stay away from the US and Europe). My recommendations have not done well relative to developed country averages. Why? Because the stock market prices in these countries are largely determined by the ins and outs of Western countries. As I have documented, when fear and panic grip the West, other countries’ stock markets fall by more.
But the flip side of this is that when Western fears, panic, and overall malaise subside, the stock markets of high growth countries outperform Western markets. When will fear and panic subside? Who knows? But one should be prepared. Below, I develop filters for my stock picks.
High Growth Countries
Let’s start with rapidly growing countries that have stock markets. Table 1 provides a list of countries with GDP growth rates expected to average 3.5% or better over the next three years.
As Table 1 indicates, most of these countries emerged from the global recession a couple of years back. And most of them have rapidly growing middle classes, a domestic market growth component lacking in most developed nations.
Government Deficits and Debt
But rapid growth is not the only important element to consider for investments. I worry about countries with large government deficits and/or heavy debt burdens. So Table 2 provides data on projected government deficits and debt as a percent of GDP for the Table 1 countries.
Both Sri Lanka and India have large government deficits. Singapore is considered to be a well-run country, and it has a large government surplus. But look at its government debt. Too high. I also remove it from further consideration.
I also worry about large trade deficits. As the Eurozone crisis has made clear, the capital inflows compensating for trade deficits tend to dry up very quickly whenever concerns about other aspects of a country’s economy emerge. Hence, the trade deficits of the countries surviving the Table 1 and 2 eliminations are presented in Table 3.
I eliminate Vietnam and the Philippines because of high trade deficits. Mexico’s deficit is not as large, but it has other problems, e.g., a drug war and rapidly diminishing oil reserves.
Argentina and Russia do very well on the indicators presented so far. But they are run by people who have little understanding or regard for market mechanisms. And their behavior makes it clear they could care less about foreign investors.
Stock Market Performance
After the country eliminations made above, we are left with 10 countries. The stock market behavior of these countries is presented in Table 4. Peak to trough indicates percent fall in the stock market from the high before the global recession (usually in 2007) to its lowest point in the recession (usually in 2009). The % recovery is the current market price as a percent of the market high before the recession. The Recent Fall is the percent sell-off since the beginning of May.
Source: Yahoo Finance
In Table 4, the countries are ranked by the P/E ratios. I eliminate countries with P/E ratios equal or greater than the S&P’s 14. So we are down to six countries: China, Korea, Brazil, Peru, Thailand, and Indonesia.
As I have indicated in an earlier piece, I am quite pragmatic when it comes to ETFs versus mutual funds. Since I am not a trader, I don’t care about the attractions of ETFs for that purpose. In countries like China where the government uses the stock markets as dumping grounds for large and poorly run state enterprises, I find the mutual funds normally outperform the ETF indices.
In any case, Table 5 gives some investment vehicles for our six remaining countries. For Latin America, I have included regional ETF and mutual fund possibilities.
I titled this article “Investments for Later”. Timing is always problematic. But one thing I am sure of: the Eurozone problems will get much worse before they get better.
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About the Author
Elliott Morss has a broad background in international finance and economics. He holds a Ph.D.in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance.