Investing in international equities is challenging, but is likely to be very important for the 2020’s decade.
The top seven emerging markets (the E7) were collectively half the size of the top developed markets (the G7) in 1995, approximately the same size in 2015, and are estimated by Pricewatershouse Coopers (PwC) to be double the size in 2040.
And according to the International Monetary Fund, over the past several years over 2/3rds of all new global growth currently comes from emerging markets, while less than 1/3rd comes from developed markets.
It’s no wonder that emerging markets have outperformed the S&P 500 and most other major indices over the past 20 years, even though they have underperformed during the past several years. These things go in cycles.
There are all sorts of risks for international investing:
- Currency swings
- Changing valuation levels
- Sovereign debt instability
- Corruption and sanctions
- Unfamiliar companies
So, I organize data from over 30 developed and emerging markets, and rank them according to a combination of growth, valuation, debt, political stability, and currency strength.
And the culmination of that project is the 2020 Global Opportunities Investment Report:
Most investors have very little exposure to emerging markets, or to some of the developed markets that do still have great forward return potential.
One of the easiest ways for investors to get exposure to markets around the world is to invest in broad international ETFs. However, since they are almost all weighted by market capitalization, they tend to be highly concentrated in specific countries like Japan, the UK, and China.
That’s why, for some investors, holding some single-country ETFs can help diversify your portfolio and help you focus on regions that you are bullish on.
This report analyzes over 30 different countries, shows you their valuations, growth expectations, debt levels, political stability rankings, and currency information, to help you make informed decisions about where to allocate your money. It’s useful as a “big picture” fundamental backdrop for equity investors, bond investors, and currency traders.
Even if you are purely a passive broad index investor, reading this report can give you more knowledge and confidence when it comes to understanding how the international portion of your portfolio works and what the underlying fundamentals are.
Although the report is over 130 pages, there is an executive summary with color-coded charts so that you can get all the key information and see the best investment regions in 10 minutes. Then if you want, you can skim to the sections of the report that focus on countries that interest you right now.
For example, here are the debt levels as a percentage of GDP for 29 of the 32 countries, including government, corporate, and household layers of the market, with the country names removed for demonstration purposes:
There’s Always Opportunity Somewhere
Equity performance tends to be cyclical around the world.
Some regions outperform others over a decade, only for the trend to reverse during the next decade:
Chart Source: iShares
In the 1980’s, developed international markets (mainly Japan) outperformed and became overvalued. In the 1990’s, the United States took the lead, but became overvalued. In the 2000’s, emerging markets totally crushed it and… you can guess… became overvalued. And in the 2010’s, the United States once again was the leader and is now historically expensive.
In the past four decades, none of the three groupings outperformed for two decades in a row. Can the U.S. be the exception and do it again, or will it pass the torch to one of the other two classifications in the 2020’s?
Nobody can answer that for sure, but we can do objective analysis to see where the strengths and weaknesses are around the world in an organized format.
The Importance of Buying at the Right Price
After a period of strong outperformance from 2000 to 2007, emerging markets performed poorly for a over decade from 2007 to 2018. Basically flat:
Source: MSCI Emerging Markets Index
Was that because they weren’t growing? No.
It was because they were overvalued in 2007 and again from 2009-2011, and their valuations declined over the next decade, which offset all of the growth.
For example, here is the stock market capitalization as a percentage of GDP for China, India, and Brazil since the year 2003. These are some of the largest emerging markets:
Data Sources: World Bank & MSCI
Buying in the early 2000’s when valuations were low was smart, and resulted in great returns. Buying in 2007 when valuations were super high was not smart, and resulted in poor returns.
Multiple studies from Professor Robert Shiller, Cambria Investment Management, Star Capital, and other sources show that buying country indices around the world when their valuations are low results in far superior long-term returns than buying when they are high. This is true for the cyclically-adjusted price-to-earnings (CAPE) ratio, price-to-book, dividend yield, market capitalization to GDP, or other valuation metrics.
There’s nothing certain in life, but historically, a diversified collection of cheap out-of-favor countries tends to outperform crowded and consensus areas of investment.
My report provides multiple valuation metrics for each country, and gives an overview on what they mean and how to interpret them. That way, it helps show which countries are at historically low or reasonable valuations. Additionally, it goes beyond valuations by also considering growth, debt, sector concentration, trade balances, and other metrics.
2018-2019 Performance
The first issue of the international report was published in June 2018. The average performance of the top 3 countries that tied for the highest score outperformed the average performance of the 3 countries that tied for being the worst-ranked countries by about 13% (1300 basis points) in dollar terms over the next ten months until the second issue of the report was released with updated rankings.
More specifically, the top 3 all gave positive returns and averaged 9% returns for the ten months, while the bottom 3 all gave negative returns and averaged -4% returns. Very clean.
2019-2020 Performance
The second issue was published in April 2019. Two countries were tied in first place rank, and 3 countries were tied with the worst score. The average performance of those top two from publication until now outperformed the average of the bottom three by about 8% (800 basis points). Due to COVID-19, the returns were quite choppy towards the end of the period. One of the top-rankers did comparatively well, and the other one struggled quite a bit, but their average was better than the bottom three.
I focused heavily on the currency component in the 2019 report. Two countries, Argentina and Turkey, were tied as having the worst currency score in the April 2019 report, and they are both down very significantly (down over -30% and over -15% respectively vs the dollar) since then. Five currencies including the Swiss franc, Thai baht, Singapore dollar, Russian ruble, and dollar-pegged Hong Kong dollar were tied as having the highest currency rating, and four out of those five ended up being quite strong (staying relatively close to the dollar, ranging from -4% to +5%). The worst-performer of those high-ranked currencies (the ruble) held strong all year until the recent oil price crash, but even then it has still outperformed the worst-ranked currencies.
So, while I can’t guarantee any specific performance, the first two reports are off to a good start and I continue to refine the system in each report. Whether you’re looking for long/short opportunities, or a fundamental currency backdrop for currency trading, or a broad overview of the global economy and its areas of strength and weakness, the report has useful content for you.
The data are now updated for 2020.
Download the Report
This PDF is available as an instant download for $19.95.
The report is over 130 pages, and provides an organized overview of the growth, stock valuation, debt, stability, and currency strength of over 30 developed and emerging markets. But color-coded charts and an executive summary make it a concise read. You can quickly see which countries offer a strong investment thesis.
The focus of the report is for long-term fundamental investors, not short-term traders.
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