Investment Strategies VI – Bet on Countries, Not Stocks

Introduction

On May 9, I urged you to bet against the dollar – http://www.morssglobalfinance.com/investment-strategies-iii-specific-suggestions/.

Since then, the dollar has lost 10% against both the EUR and Japanese Yen. On June 11, I said buy commodities – http://www.morssglobalfinance.com/investment-strategies-iv/, and the IMF’s overall commodity price index has increased 5%.

On June 11, I also made the specific suggestions shown in Table 1.

Table 1. – Morss Recommendations June 11, 2009

Emerging Markets Overall

3 Yr. Return

Ticker

Vehicle*

June 11- Dec. 4 Return

BLDRS Emerg Mkts 50 ADR

31.28

ADRE

ETF

17.5%

iShares MSCI Emerging Mkts

29.96

EEM

ETF

21.0%

Bernstein Emerging Markets

35.82

SNEMX

M

28.0%

Latin America

T. Rowe Price Latin America

49.61

PRLAX

M

41.0%

iShares SP Latin 40

45.1

ILF

ETF

32.0%

South Africa
iShares MSCI South Africa

29.5

EZA

ETF

17.8%

Asia
iShares MSCI ex-Japan

24.68

EPP

ETF

26.5%

Matthews  Pacific Tiger

19.51

MAPTX

M

22.2%

Guinness Atkinson Asia

26.45

IASMX

M

19.5%

* ETF =exchange traded fund; M = mutual fund.

Now, I could crow about these results. After all, on an annualized basis, they are double the returns presented in this table. But this was a good period for all stock markets – even the S&P 500 was up 16.2%. And I would be the first to admit I am not a good predictor of stock market performance. After all, I completely missed last year’s global stock market collapse that caused a $36 trillion asset loss! And I, like better known investment gurus, personally found “my own inventive ways to lose money on a colossal scale during these last 15 months.” (Ben Stein, NYT, December 26, 2008). And finally, I am a firm believer in the random walk theory that says all information is immediately reflected in stock market prices so the results of stock market picks are pretty random (see Burton G. Malkiel, “A Random Walk Down Main Street”: W.W. Norton).

However, I remain resolute in trying to apply economic logic to stock markets, so consider the following.

Shouldn’t stock markets in countries growing rapidly increase more than markets in slower growing countries? If a country’s GDP is growing rapidly, the primary components of GDP – Consumption and Investment – also have to be growing rapidly. It should follow that the earnings/profits of companies publicly traded in the rapidly growing countries should also grow faster than companies listed in slower growing countries. And if earnings grow more rapidly, stock market prices should go up more rapidly.

I think there is logic in this line of thinking, so let us explore it further.

Table 2 presents the World Bank GDP growth projections for selected regions and countries. Look at China and India – a global recession in these countries means the growth rate falls from 10%+ to 5%+! And the country of South Africa outperforms Latin America and the Caribbean as a region. Now look at Euro, Japan, and the US – large downturns this year followed by meager growth next year, and that growth might be wishful thinking.

Table 2. – World Bank GDP Growth Projections

Area

2007

2008

2009

2010

2011

Asia/Pacific

11.4

8.0

5.0

6.6

7.8

China

13.0

9.0

6.5

7.5

8.5

India

9.0

6.1

5.1

8.0

8.5

South Korea

5.1

2.2

-5.0

2.5

5.0

South Africa

5.1

3.1

-1.5

2.6

4.1

Latin America/Carib.

5.8

4.2

-2.2

2.0

3.3

Argentina

8.7

6.8

-1.5

1.9

2.1

Brazil

5.7

5.1

-1.1

2.5

4.1

Chile

4.7

3.2

-0.4

2.7

3.6

Colombia

7.5

2.5

-0.7

1.8

4.0

Mexico

3.3

1.4

-5.8

1.7

3.0

Peru

9.0

9.8

3.0

4.3

6.0

Euro Region

2.7

0.6

-4.5

0.5

1.9

Japan

2.3

-0.7

-6.8

1.0

2.0

US

2.0

1.1

-3.0

1.8

2.5

These figures alone should raise questions about investing in the US, EURO, and Japan stock markets.
But maybe the stock markets of certain countries are overpriced. The price/earnings ratio (P/E) is often used to gauge whether a stock is overpriced. So let us check on P/E ratios of countries. And if stock prices accurately discount country growth rates, should not the P/E ratios of countries with higher growth rates be higher that those with lower growth rates?

Table 2. – Region/Country Projected Growth Rates and P/E Ratios

Growth Rates

2009

Region/Country

2009

2010

P/E Ratio

Asia/Pacific

5.0

6.6

21.71

China

6.5

7.5

24.63

India

5.1

8.0

20.52

South Korea

-5.0

2.5

13.79

Latin America/Carib.

-2.2

2.0

21.07

Peru

3.0

4.3

28.03

Chile

-0.4

2.7

18.15

Colombia

-0.7

1.8

24.32

Brazil

-1.1

2.5

19.38

Argentina

-1.5

1.9

7.38

Mexico

-5.8

1.7

17.53

South Africa

-1.5

2.6

16.61

Canada

-2.7

1.5

24.35

US

-3.0

1.8

17.55

Euro

-4.5

0.5

21.26

Japan

-6.8

1.0

28.68

Source: Data compiled by Bloomberg

Table 2 lists countries by region by projected 2009 growth rates. And as can be seen, countries project to grow more rapidly (or decline by smaller amounts) do, for the most part, have higher P/E ratios than those with lesser growth prospects.

Peter Lynch is considered one of the greatest investment gurus of all time (for more on gurus and how to invest using their strategies, see John Reese’s Validea.com). Lynch ran Fidelity’s Magellan Fund from 1977 to 1990. Its asset value grew from $20 million when he started was $13 billion when he left. Lynch liked to adjust the P/E ratio for the expected growth rate. His reasoning was that companies expected to grow should have higher P/E ratios. So he divided the P/E ratio by the projected growth rate (P/E/G). Projected growth rates and P/E/Gs are presented in Table 3.

Table 3. – Growth Rates and P/E/G Ratios for Selected Regions/Countries

Growth Rates

Region/Country

2009

2010

P/E/G

India

5.1

8.0

2.57

China

6.5

7.5

3.28

Argentina

-1.5

1.9

3.88

South Korea

-5.0

2.5

5.52

South Africa

-1.5

2.6

6.39

Peru

3.0

4.3

6.52

Chile

-0.4

2.7

6.72

Brazil

-1.1

2.5

7.75

US

-3.0

1.8

9.75

Mexico

-5.8

1.7

10.31

Colombia

-0.7

1.8

13.51

Canada

-2.7

1.5

16.23

Japan

-6.8

1.0

28.68

Euro

-4.5

0.5

42.52

I think the P/E/G ratios in Table 3 give a great frame of reference for thinking about country investments. I like India and China. Argentina has great prospects but some governance problems to work out – see http://www.morssglobalfinance.com/argentina-effects-of-global-recession-and-future-prospects/. I like South Korea and South Africa for investments. Peru has had tremendous growth in recent years, but it is small…. Chile is well managed but in essence is a one export country (copper) see http://www.morssglobalfinance.com/chile-effects-of-global-recession-and-future-prospects/. Brazil’s prospects are better than any other Latin American country. And unlike China and India with high population densities and as a consequence are resource poor, Brazil is natural resource rich – http://www.morssglobalfinance.com/brazil-effects-of-global-recession-and-future-prospects/.

Am I worried about the recent run up in stock markets and commodity prices? Yes, and I have written about it – see http://www.morssglobalfinance.com/prices-unemployment-and-the-global-economy/. But you will never get the timing just right. And it is too late in the recession to stay on the sidelines with any investment funds.

Specific Investment Suggestions

How do you “bet on countries” while at the same time bet against the dollar?

1. To “bet on countries” use either ETFs or mutual funds. Do not use mutual funds unless the 3-5 year performance is significantly better than the appropriate ETF index fund. ETF fees are lower and they are easier to buy or sell than mutual funds. For more on ETFs, see Don Dion’s ETF Report – http://www.fidelityadviser.com/readme_etfr.html.

2.   To bet against the dollar, make sure that the ETF or mutual fund you choose does not hedge against currency fluctuations. A few do – for example see Longleaf shorting the Yen (and losing money) – http://www.longleafpartners.com/pdfs/09_q2.pdf. Just check – ask if the mutual fund or ETF hedges against currency fluctuations.

Table 4 provides some specific investments suggestions.

Table 4. – Investment Suggestions

Emerging Markets Overall

Ticker

Vehicle*

Bernstein Emerging Markets

SNEMX

M

BLDRS Emerg Mkts 50 ADR

ADRE

ETF

Latin America

T. Rowe Price Latin America

PRLAX

M

iShares MSCI Brazil

EWZ

ETF

South Africa
iShares MSCI South Africa

EZA

ETF

Asia
Matthews India

MINDX

M

Matthews Korea

MAKOX

M

iShares FTSE/Xinhua China 25

FXI

ETF

Powershares India

PIN

ETF

iShares MSCI South Korea

EWY

ETF

iShares MSCI ex-Japan

EPP

ETF

* ETF =exchange traded fund; M = mutual fund

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
This entry was posted in Global Economics, Global Finance, Investing. Bookmark the permalink.