Just last
year,emerging markets were predicted to be the driving force
behind a more than 5% annual global growth rate. Yet on March 11, the
Organization for Economic Cooperation and Development reported that emerging
markets are the reason why global growth will slow.
Why?
First,
the U.S.Federal
Reserve’s money-pumping policies have created the mirage of growth at
the expense of future debt obligations.Global marketsnow
boast $100 trillion in debt, with a $30 trillion increase in just five years.
Second,
Chinesecreditconcerns are on the rise. And currency
concerns persist in nations like Argentina, India, Brazil, and Turkey.
Finally,
this year’s problems in Ukraine, one of Europe’s most critical actors in
agriculture, shipping, and energy, highlight geopolitical vulnerabilities.
With so
much uncertainty, how can investors looking beyond the border locate the best
investments?
First,
let’s get to the crux of the problem.
Real Threat to
Emerging Economies
Many of
this year’s troubled nations are poorly run economies reliant on centralized
planning. While economic freedom is globally on the rise, emerging economies
haven’t taken appropriate steps to remove systemic risks tied to economic
development.
These
nations still lag in growth in business development, trade expansion, and
improvements in consumer purchasing. Pumping capital into a country and calling
it “growth” is a fallacy if sustainability isn’t the end goal.
Many of
these countries failed to adjust their economies after the global financial
crisis in 2008 and remain vulnerable to central risks that have long dogged
development.
Further,
the goal of improving short-term conditions for political gains at the expense
of long-term growth will ultimately haunt many of these economies.
For
example, Russia, despite sharp growth in recent decades due to a boom in
commodity prices, relies on 50% of its government revenue from petrochemical
development. Russia’s inability (and unwillingness) to diversify its economy to
services and mature industries hurts long-term growth potential and contributes
to ongoing stagflation.
Nations
like India, the Philippines, and Indonesia rely heavily on foreign cash
inflows, which reduce long-term wealth potential for its own entrepreneurs and
investors.
Retreat
of capital from these nations exposes structural weaknesses, and investors may
wonder how they can find the best global investments during times of
uncertainty.
The
solution lies in the following three metrics that can be used to determine
which nations are safe investments and which are vulnerable.
Three
Metrics for Finding the Best Investments Abroad
Financial
freedom is the true driver of growth and development in a nation, and such
freedom traditionally creates a multi-tiered, diversified economy capable of
capturing growth across multiple sectors. The following three metrics can be
used to measure a nation’s financial freedom.
·
First, gauge economic freedom to understand the
security of a nation’s business climate. One tool to use is the Heritage
Foundation Index of Economic Freedom to measure important figures like
investment opportunity, level of taxation, and government participation in the
nation’s market. The higher the score for each metric, the better. The index
also provides a scaled raw score to rank 185 nations on their economic
freedoms, including property rights, investing rights, and access
to credit. The United States currently ranks 12th overall and has fallen
for several consecutive years in a row. Meanwhile, Australia, New Zealand,
Canada, and Chile offer immense opportunities and reliable income streams from
commodity producers.
·
Second, analyze a nation’s literacy rate. The
Central Intelligence Agency, which tracks global literacy rates, explains that
“low levels of literacy – and education in general – can impede the economic
development of a country in the current rapidly changing, technology-driven
world.” This metric is undervalued and underutilized. Literacy is critical to
social mobility, economic development, and employment. These three measures of
success are vital to the long-term health of an economy, rising incomes, and
greater consumer spending. Literacy rates should be above 98% to instill maximum
confidence. However, some nations can still have significant economic
development just on sheer population size alone. For example, only 62.8% of
India’s population is literate. This indicates a significant gap in
opportunity, consumer spending, and social structure.
·
Third, examine the Transparency International’s
Corruption Perceptions Index. Freedom from corruption and cronyism is vital to
development. Low corruption instills confidence in long-term investment from
international investors, and there is a low likelihood of nationalization of
critical growth industries. Scandinavian nations, Singapore, Australia, and
Canada continue to show the most resilience year in and year out. Meanwhile,
the United States continues to slide.
Using
these three metrics enables an investor to look beyond the United States with
confidence. And applying them is easier than ever.
The
nation with the best outlook, based on the above metrics, is either Norway or
Canada. But based on its increased investment opportunities, Canada stands out.
With a 100% literacy rate, the ninth-least corrupt government, and the
sixth-freest economy in the world, this resource-rich nation provides countless
opportunities, particularly in dividend-rich energy and agriculture companies.
Three of
the best investments in Canada today can be found in its burgeoning tech
industry. According to the Information Technology Association of Canada, its
tech sector comprises some 33,300 companies, which together generate $155
billion in annual sales.
One company
in particular is up more than 30% this past week alone – and has plenty of room
to run. Get the best investments in Canada’s tech sector here.
Disclaimer: This article was posted
with the permission of a third-party contributor and the opinions
contained therein do not necessarily reflect those of Smallcappower.
Smallcappower does not endorse any investment advice provided by
these third-party contributors. Please consult your investment
advisor before making any investment decisions.
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Corporation and its divisions Smallcappower, Ubika Communication and Ubika
Research are not registered with any financial or securities
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