U.S. investors have access to foreign stock markets more than ever before. This gives investors the freedom to pick markets based on their own. They are no longer forced to buy a single fund with a global stock or BRIC (Brazil, Russia, India, and China) mandate.
How can investors compare investments in different countries with different currencies and legal protections for property rights? To do this, investors need to assess the risk of investing in a particular foreign market (in terms of property rights, wealth confiscation, etc.) as well as assess the valuations of assets in these foreign markets.
To examine the prospects of different foreign stock markets, different markets were screened for discounts to Purchasing Power Parity (PPP) of their currencies versus the dollar. To assess the risk of investing in nations with the cheapest currencies, Investment Freedom and Property Right scores were collected from The Heritage Foundation's 2011 Index of Economic Freedom. Each metric helps weigh risk or value:
The Investment Freedom score assesses restrictions on foreign and domestic investment, legal recourse available to firms and investors, as well as how burdensome regulations are for investors. Higher scores indicate higher freedom; 100 being the highest score.
The Property Right score assesses how well the government protects private property, how well the government punishes those who unlawfully confiscate private property and corruption in the court system. Higher scores indicate greater property rights, and 100 is the highest score.
Purchasing Power Parity (PPP) is a relative price level that would allow a customer to buy the same amount of a good domestically as they could by exchanging domestic currency for foreign currency and then buying that good in a foreign country. Simply put, if PPP holds I would be able to buy the same amount of gas in the US as I could in Mexico, either by paying X dollars in the US or exchanging X dollars for Y pesos and then buying the gas in Mexico. Since currencies deviate from PPP, investors could convert dollars into a currency with a discount relative valuation and buy more assets in the foreign market than they could with dollars in the domestic market.
A table of discount currencies and risk scores revealed several counties as better value prospects than China or Russia:
Consider these funds which invest in these markets:
Premium / Discount
iShares MSCI South Africa Index
iShares MSCI Poland
Market Vectors Poland ETF
Market Vectors Egypt
iShares MSCI All Peru Capped
*P/E and P/B ratios are forward projections calculated by Morningstar.com.
U.S. investors should seek to invest in these markets at a discount, through either an ETF (exchange-traded fund) or a CEF (closed-end fund) whose holdings are attractively valued. The investments of PLDN are somewhat less concentrated in its top holdings than shares of EPOL, and this difference is sufficient to pay slightly higher fund expenses. Shares of EGPT also afford investors and opportunity to invest in Egypt at reasonable prices. Conversely, shares of EPU and EZA are not trading at low enough price multiples to warrant further research.
The Market Vectors Poland ETF and the Market Vectors Egypt ETF are attractive candidates for further research and small investment allocations. These vehicles are opportunities to gain from a market with better property rights, higher investor freedom, and a cheaper currency than China or Russia.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.