International investors are facing increasing challenges in finding stable countries with the resilience to withstand a potential global recession. The United States is struggling with weak growth, high government debt, and the looming "fiscal cliff". Japan has accumulated government debt of over 200% of annual GDP and is faced with the demographics of an aging populace. Europe's troubles with high debt and high unemployment are well publicized. Market gains in the developed countries seem to be driven more by central bank actions and government policies than by solid returns from their representative companies.
Investments in developing economies have been heavily focused on the BRIC countries of Brazil, Russia, India and China for the past decade. The BRIC nations may still provide good opportunities for the future as these burgeoning nations continue their march toward industrialization. In the short term, China is struggling to coordinate a "soft" landing for their slowing economy and India is dealing with high inflation and the costs of transforming their infrastructure for this new century. A possible world-wide recession will have a major impact on all of the economies in our increasingly inter-linked global markets. Countries with strong balance sheets, friendly business environments, and stable governments will be more capable of withstanding the impacts of a global recession than their less responsible neighbors and will have the ability to more quickly bounce back from a global downturn.
So where do investors turn for stability in an unstable world? Do any countries still exist with solid governments, a friendly business environment, growing economies and reasonable debt levels? An examination of data from the International Monetary Fund and The World Bank indicates that a handful of these countries still exist. The IMF maintains a database of economic outlook data for 184 countries that is freely available online.
I began my search for stable economies by downloading the latest IMF data from April and filtering out the smallest and poorest nations by limiting my search to countries with at least 1 million people and a current per-capita GDP of at least $2,000. I then looked for countries with growing economies and reasonable debt levels by filtering the data based on average GDP growth forecasts of greater than 4% for the 2012-2017 periods and by limiting total government debt to less than 50% of GDP over the same period.
Now that we have a good forecast of economic conditions, we need a useful metric for gauging the business environment. The World Bank Group ranks countries according to the ease of doing business by looking at a number of factors including ease of starting a business, obtaining construction permits, contract enforcement, and investor rights. I further filtered the list of stable countries by limiting the list to countries in the top 50 of the ease of doing business rank. Just seven countries met all of the criteria.
|GDP per Capita|
|GDP Growth Estimate|
|Govt. Gross Debt|
|Ease of Doing Business Rank|
Raw statistics alone rarely provide all of the information necessary to make an intelligent investment. Tunisia was a surprise entry to this list with expected average growth of 5%. I manually eliminated Tunisia since the IMF data does not account for the recent turmoil related to the "Arab Spring" revolution. Thailand is faced with internal turmoil and a recent government crackdown and Colombia is recovering from years of crime that have plagued the country. Both of these countries were removed from the list of stable countries also. One country that just missed the list that warrants further attention is South Korea with an expected GDP growth from 2012 to 2017 of 3.91% and an ease of doing business rank of 8.
Exchange traded funds provide the common investor the chance to benefit from the economies of these stable countries while maintaining a level of diversification not found with individual stocks. The iShares MSCI Chile Investable Index (ECH) has provided a 3 year average return of 12.08% with a yield of 1.6%. The iShares MSCI Hong Kong Index (EWH) and the iShares Taiwan Index (EWT) provide yields of over 3% to help offset the lower 3 year average return of just over 8% for these funds. The iShares All Peru Capped Index (EPU) has provided a strong 3 year return of 15.81% and yields 2.75%. The iShares MSCI South Korea Index (EWY) and the First Trust South Korea AlphaDEX (FKO) has attractive P/E valuations of 9 and 8, respectively.
|Country||Fund||ETF||P/E (TTM)||Yield||3y Avg Return|
|Chile||iShares MSCI Chile Investable Idx||ECH||16||1.6||12.08|
|Hong Kong||iShares MSCI Hong Kong Idx||EWH||15||3.21||8.76|
|Peru||iShares MSCI All Peru Capped Idx||EPU||11||2.75||15.81|
|Taiwan||iShares MSCI Taiwan Idx||EWT||15||3.76||8.05|
|Korea||iShares MSCI South Korea Idx||EWY||9||0.67||11.48|
|Korea||First Trust South Korea AlphaDEX||FKO||8||3.48||n/a|