In late 2011, I introduced the concept of investing in the CASSH countries – Canada, Australia, Switzerland, Singapore and Hong Kong. These smaller, developed countries exited the financial crisis with less debt and healthier labor markets than their larger developed counterparts, and looked relatively cheap, trading at or below the average valuation of other developed markets.
The theme did well in 2012. Last year, on average, an equally weighted basket of these countries outperformed a broad global equity benchmark by roughly 5% in dollar terms.
But while the theme worked well last year, I’m no longer advocating it considering the uneven performance among the countries in 2013. Some of the countries are looking expensive and or experiencing changing fundamentals.
Valuations: Australian equities, for instance, look expensive compared to those of other developed markets, a valuation that seems unjustified considering not only Australia’s cooling growth but also the declining profitability of Australian firms. This is why I downgraded my tactical view of Australia to underweight from neutral in early April. Similarly, last September, I downgraded Swiss equities to underweight given that their equity valuations also seemed rich for a slowing economy.
Fundamentals: While my downgrades of Australia and Switzerland were primarily based on valuations, I recently lowered my outlook on Canada to underweight mostly due to changing fundamentals. As I point out in my latest Investment Directions commentary, though the Canadian market is not particularly expensive, there are growing risks to Canadian equities including skyrocketing consumer debt and a slowing economy. Faltering exports, in particular, thanks to weakening US demand are concerning as the export sector accounts for about a third of the Canadian economy.
That all said, the long-term fundamentals of the theme are still in place for certain countries, particularly for Hong Kong and Singapore (accessible through the iShares MSCI Hong Kong Index Fund (EWH) and the iShares MSCI Singapore Index Fund (EWS)). Still, to advocate the overall CASSH concept again, I would need to see lower valuations in Australia and Switzerland and stabilization in Canada’s level of consumer debt.