Investing in Non-U.S. Stock Markets

There are 67 countries between the United States, Canada, EAFE, emerging market and frontier market countries. It may be helpful to you if you visualize the geographic relationship between those countries when you think about making country, region or development stage country investments.

The pie chart shows the relative market cap size of the U.S., Canada, the 21 EAFE (Europe, Australasia, Far East) countries, and the 25 emerging market countries. The stock market capitalization of the 19 frontier market countries is essentially negligible in comparison to the other market categories.

The map color-codes the location of Canada, EAFE countries, and the emerging and frontier market countries. The U.S. in not color-coded.

It is interesting to note that the square area of the emerging markets is quite large in comparison to the U.S., or the EAFE developed non-U.S. markets. That is the opposite of the relative market cap sizes.

China and India, which are within the emerging markets, also hold more than a third of the world’s six billion population. The U.S., Canada, and EAFE combined have about one-sixth of the world’s population.

You can see from the map that most of the frontier market countries are adjacent to emerging countries. It will probably be just a matter of time before they emerge as well.

Some experts say that the frontier markets are today where the emerging markets were 15 years ago. If that is true, then there is a quite volatile, but wealth producing opportunity ahead in those markets — seat belts and air bags are recommended for that trip.

Most of Africa has not yet developed tradable stock markets, as you can see by the large area without color coding.

There are no frontier market ETFs or CEFs currently available in the U.S. on a major exchange. That is likely to change, but for now there are limited opportunities, such as the T. Rowe Price Africa and Middle East Mutual Fund [TRAMX].

Because there will be frontier investment products coming along, we think it is a good idea for investors to begin to familiarize themselves with those markets. Toward that end, we have previously published articles about them — two of which we mention here on the topics of Country Risks and Macroeconomics.

The tables list the countries in the MSCI indices and identify an ETF (or CEF, if no ETF available) for each country for which one of those investment fund types is available.

Comments

[Football Geek]

Interesting note to this is that Canada is close to the US, but their
economy is different in many ways. Canada has the second most oil
reserves in the world, jobless rate is at a twenty five year low, currently enjoys a government surplus, exports more goods than it
imports, stable government in power, and has a skilled workforce.
Has some great companies like POT, RIM, MFC, TD, CN, etc.
Because we are so close to the US, sometimes we are forgotten.
With the price of oil looking to stay high, and the demand to continue Canada could do very well in the next decade

[ikkyu]

Greetings. I always enjoy your posts.

The world map appears to have an incorrect key. It seems the emerging and developed non-U.S. markets are switched.

Cheers from Osaka,
john

[Aly-Khan Satchu]

Dear Richard,

What is your definition of tradeable stock markets in relation to Africa and particularly in SSA?

There is a whole lot going on which appears not to be captured by your map?

Aly-Khan Satchu
rich.co.ke

[Richard Shaw]

John from Osaka,

Thank you for the complement and also for the note of our proofing error. It has been corrected on my blog and SA will be making an image substitution shortly.

Richard

[Richard Shaw]

Aly-Khan Satchu:

Good question.

I used the term "tradable" and perhaps should have used the word "investable", which is the term used by MSCI in constructing their indices.

Your home country of Kenya is included in the MSCI "investable" frontier markets index (and South Africa is in the emerging category), but most of the non-Gulf region Africa countries are not. MSCI has criteria which they broadly describe this way:

"The MSCI Frontier Markets Indices are designed to track the performance of a range of equity markets that are now more accessible to global investors. The MSCI Frontier Markets Indices Methodology follows similar principles to the methodology of the MSCI Global Investable Market Indices (GIMI), but takes into account the specific market capitalization structure and liquidity constraints that characterize these markets."

A good place to start looking at how MSCI defines investable is on their December 2007 release about their Frontier Indices found at:

mscibarra.com/products/indices/fm/MSCI_F...

We are not making any determination as to investablity in this article, but are following the lead of MSCI in stating what is and is not investable. Their determination is similar to, but not exactly the same as, that of Standard and Poor's.

I chose the word "tradable" versus "investable" partially to avoid confusion between direct investment opportunities which cannot be "traded" (such as a company building a factory or setting up a distribution system) and buying and selling stocks or bonds on a exchange with certain characteristics which is the "investability" idea MSCI is referencing.

By the way, you have a handsome website.

Thanks for commenting

Richard

[Richard Shaw]

Football Geek,

Yes, Canada is important.

Not only is it energy rich, but the energy reserves and energy production and distribution are not subject to the geopolitical risks of so much of the oil in the rest of the world, which is subject to nationalization, effective nationalization by huge increases in royalties, war, sabotage, terrorism, political manipulation of supply, and in worst cases end user need to defend maritime transport of oil.

Canada was about 3% of world market cap as of mid-2007.

[Mr. T]

Hello Mr. Shaw

I have been following your recommendation of TRAMX and it seems its growing at a reasonable click ($1 since your last piece) my question is why is this fund focused heavily in the financial sector and industrial materials sector and not much else, could this be a future problem for the fund if the financials are in a situation similar to the one US is experiencing. Also do you think there will be more funds launching for the middle east area?

Thanks

P.S. Sorry if I was rude in my last post to your "Leaving in the Dust" article

[Aly-Khan Satchu]

Dear Richard,

Thanks for the compliment. It made my morning.

I came home three years ago, having been in London for many years. What has really struck me in Kenya is the scale of the domestic shareholder base. It is widely expected to be 2m at the end of our current and biggest IPO Safaricom. This is an extraordinary outcome and actually a phenomenon. Today, Nigeria has 6 banks in the top 100 in the world. I really expect the African landscape to be something completely different in a very short space of time. Extraordinary things are happening and its all being compressed into a very few years.

Ex South Africa, I feel SSA is the last frontier. It was a previously very fragmented Continent with small pocket sized markets. The Mobile phone was the catalyst that triggered the aggregation of these small units into scale.

Lot of folk talk of Commodities etc but the next sharp trigger is coming from the Continent being plugged in to the global superhighway.

There might very well be a great arbitrage in identifying those markets that are set to get into these various new indices.



Take care
Aly-Khan Satchu
rich.co.ke

[Ed Morgan]

How about GAF and VTOPF? The author should be aware of all entry mechanisms if for no other reason than to refute their validity.

[Richard Shaw]

Ed Morgan,

I am aware of GAF and VTOPF and chose not to mention them for good reasons.

I will humor you with the refutation you request, with the understanding that I find your approach unnecessarily harsh. There is no reason to suggest that the author of an article lacks competency or subject matter knowledge, because some question you have was not answered by an article. You could have asked the question in helpful way without suggesting that you are informed and the author is uninformed. Seeking Alpha is not a contest, it is a community sharing ideas, not insults.

To your comment/question:

VTOPF (Vietnam Opportunity Fund) is not available on an exchange in the US. That was one of the criteria I mentioned in the article. It is a Pink Sheets company, and I never recommend or comment on Pink Sheets stocks. I never will recommend a Pink Sheets stock. They are OK for those who want to play in that arena. I do not.

The fund is available in London in a more liquid form, but that is not reasonably available to US retail investors. The management fee is 2% + 20% of return over 8% per year.

You can read more about the Vietnam Opportunity Fund at:
www.vinacapital.com /

Vietnam is an exciting opportunity, but for general publication purposes, VTOPF is outside of the bounds I would chose for general consumption articles such as this one, because it is a Pink Sheets fund.

TRAMX is not on an exchange either, but mutual funds have liquidity. It is a frontier markets fund, although regionally limited.

GAF is not a frontier market fund as you suggest. It is an emerging markets fund, as SSGA says in the product description. Frontier markets and emerging markets are not the same thing. It is 56% South Africa and 22% Israel (78% total). Both are emerging, not frontier market countries. The balance of 22% that is in frontier markets, is far too little to commend the fund as an frontier markets play.

If you want South Africa exposure you can buy EZA. If you want Israel exposure, you can buy ISL. To learn more about GAF, you can read the fund information and fact sheet at:

www.ssgafunds.com/etf/fund/etf_detail_GAF.jsp

I repeat my assertion that TRAMX is the only good current frontier markets option, not on Pink Sheet or minimally exposed frontier markets within some other category of countries.

So their is the refutation of your criticism. I hope you find that satisfactory for the inadequacies you find in the article. Next time, try a little sugar to get more information before using vinegar.

Richard

[theidiotsperspective]

India now have 3 ETF not in your list. EPI, PIN and i think another one almost out!

[Richard Shaw]

"theidiotperspective" (your handle, not my opinion)

You are right. Those are emerging market ETFs for India. I just listed one for each country generally, but those are options available to investors.