Economies around the world are slowing, many governments are saddled with mounting debt loads, and investors' tolerance for risk is waning. It has increased the level of difficulty immensely for average investors, and for professional money managers alike. In today's article, we'll take a look at a few geographies that you may not have considered before.
If you're like most investors, you're probably wondering where - literally - is the best place to put your money. As PIMCO's Bill Gross likes to say, "The U.S. is the cleanest dirty shirt", but risks here are mounting. Sure, QE3 or another round of Operation Twist is just around the corner, which will certainly provide a short-term boost to the stock market. But, as Fed Chairman Bernanke stated in his testimony to Congress, the positive effects of more monetary stimulus will be more muted this time around. Interest rates are already at historic lows. Furthermore, there is nothing the Fed can do about what the Investment Rate is telling us - that the available amount of new money for investments is falling rapidly. The Investment Rate also tells us that this precipitous decline in new money risks putting the economy into the third major downturn in U.S. history. To learn more about the Investment Rate, click here for a free trial.
The deep issues plaguing Europe are getting deeper, and while there could be short-term rallies there based on bail-outs, elections, and policy announcements, the nature of the problems are of economic growth. This is a discussion for another day, but it could be argued that unless there are major political, structural, and societal reforms, the ever-increasing weight of public debt will burden governments, forcing them to choose between austerity or continuing/worsening the debt problem. So, with the exception of the quick pop following a "positive" headline, Europe as a whole looks un-investable.
The so-called BRICs (Brazil, Russia, India, and China) have lost their luster as well. Brazil's economy is rapidly slowing down. In fact, in Q1, its economy expanded by a paltry 0.2% from the prior quarter. The slowdown has now become a trend, as that marked the third straight quarter of weakness. Consequently, the iShares MSCI Brazil Index (NYSE: EWZ) has been hammered, losing 26% of its value since early April.
India's woes have also been in the spotlight more of late. This morning (6/14), an analyst at Moody's commented that India's economy is in a state of stagflation, while also cautioning that their Reserve Bank cannot be too aggressive with interest rate cuts because inflation is ramping higher.
And, the slowdown in China is well-document as well. Nearly a quarter of China's exports go to Europe, with the U.S. accounting for another 20%. The PBoC did cut interest rates last week by 25 basis points, the first time it cut rates since the financial crisis in 2008. However, few believe that this will be enough to reignite China's growth, and the country also needs to be vigilant about inflation. Opinions regarding the health of China's economy vary among economists, with some suggesting that although its growth has slowed, it remains a bright spot in the global economy. Others worry that the country has been over-zealous with its infrastructure build-out, setting the stage for an eventual "bubble burst" and hard landing. At this point, it's difficult to say exactly where China is heading, but with nearly half its exports going to Europe and the slowing U.S., it's fair to say that the risk/reward has become far less appealing in China.
Clearly, it has become extremely difficult finding safer havens for investment dollars. Virtually no country or economy can be 100% insulated from the risks we are facing, but here are a few to consider.
Singing Its Praises
Singapore is a country that is very light on natural resources, and it is highly dependent upon China and other nearby countries, but it has learned to excel in one key area - human capital. It is a leader in technology, financial services, and pharmaceuticals, and it is also one of Asia's wealthiest countries. Singapore has an enviable unemployment rate of just 2.1%, although its debt-to-GDP is very high at about 100%. Its recent economic numbers, unlike most other developed countries, looked pretty good. Non-domestic oil exports were up 8.3% in April and the economy grew a robust 10% in the January to March period. To gain exposure to Singapore, investors can purchase the iShares MSCI Singapore Index (NYSE: EWS).
Warming Up to Chile
If your goal is to avoid countries that are suffocating from debt, then Chile is one to consider. Its debt-to-GDP is a miniscule 9.4%, and its unemployment rate is pretty solid at 6.8%. Although its economy grew slower than expected in Q1, it still expanded by a healthy 5.6%. Another positive in Chile's corner is that it is rich in agriculture, which should be an area of stability in the years ahead due to population growth and declining farming acreage. There are some risks, though. For instance, Chile's economy is very reliant on the export of minerals and copper. Copper prices have dropped due to slowing global demand, and could continue to fall. Still, Chile has some attractive qualities and the iShares MSCI Chile Index (NYSE: ECH) may be a good way to add some diversification.
Upbeat About Down Under
Australia's economy, the 13th largest in the world, is very basic material/commodity driven and China, of course, is its most significant customer. Oil and iron ore are two of its chief exports, and these commodity prices have been falling due to slowing demand. This is a notable risk to its economy, and is a primary reason why the iShares MSCI Australia Index (NYSE: EWA) has come under pressure recently. But, there was good news on June 5, when it was reported that its economy grew more than expected. Specifically, it expanded by 1.3% compared to the 0.5% expectation. There are other reasons to be bullish on the land down under. The country has a low unemployment rate of 5.1% and its debt to GDP is a reasonable 22.9%.
Australia's main trading partner, New Zealand, also looks solid with an unemployment rate under 7% and debt-to-GDP of 34%. The thinly traded iShares MSCI New Zealand Index (NYSE: ENZL) is the easiest way to gain exposure to that economy