High risk and high return are generally understood to go together, but are there exceptions? Are there ways to find a higher return with a lower risk? The strategy described here is to select countries based upon a positive current account as a percentage of the countries own GDP.
Those countries with the highest current account are those countries most likely to weather the storm should world economies take a turn for the worst, because these are the countries with the most investment assets under their own control. If there is a market downturn, these will decline along with everything else, but if we start to see soverign defaults, I think these are the countries least likely to fail.
Notice that an investment in these countries over the past few months produced a much higher return than the average world return of +6.0%.
| Country | Symbol | Curr-Acct | GDP | Mkt YTD |
|---|---|---|---|---|
| Singapore | EWS | +14.9 | -10.1 | +28.2 |
| Malaysia | EWM | +12.3 | -6.2 | +18.2 |
| Taiwan | EWT | +9.6 | -10.2 | +38.8 |
| Hong Kong | EWH | +7.7 | -7.8 | +24.4 |
| Switzerland | EWL | +7.6 | -2.4 | -3.4 |
| China | FXI | +7.4 | +6.1 | +33.3 |
| Sweden | EWD | +7.3 | -6.5 | +19.4 |
| Netherlands | EWN | +5.9 | -4.5 | +4.5 |
| Thailand | THD | +5.3 | -7.1 | +31.8 |
| Germany | EWG | +4.4 | -6.9 | +1.5 |
| South Korea | EWY | +2.9 | -4.2 | +19.0 |
| Austria | EWO | +1.7 | -3.5 | +17.6 |
| Japan | EWJ | +1.7 | -8.8 | +2.9 |
| Russia | RSX | +0.9 | -9.5 | +51.8 |
| Indonesia | IDX | +0.9 | +4.4 | +55.1 |
These statistics were all found in the Economist dated June 27th. FXI is not a very good proxy for China, but it is the one that I use.
In the final selection process, I consider a weighted average of current account, GDP and the inverse of CPI. This results in an asset allocation model that includes almost all of these plus India, because it still has a positive GDP, and I own Brazil even though the model doesn't select it.
