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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 markets now boast $100 trillion in debt, with a $30 trillion increase in just five years.
Second, Chinese credit concerns 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.
The 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.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.
SHINING CITY ON THE HILL ?
" Pumping capital into a country and calling it "growth" is a fallacy if sustainability isn't the end goal."
This really sums-up the policies of the FED ( QE's) and the Federal Government (Stimulus, deficit spending of $ 3.0 Trillion/year).
"low levels of literacy – and education in general – can impede the economic development of a country in the current rapidly changing, ": This seems to describe the measured educational achievement of a growing number of young Americans trying to enter the workforce.
NORWAY IS A SAFER AND BETTER INVESTMENT
Norway's Banking and Government are in a much stronger financial condition overall compared to Canada, America, England. If another global financial crisis strikes, Norway's banks will weather the storm, but Canadian Banks are questionable at best. Overall, Norway's economic strength is far less debt on the books of both its banks and government, a small national population, and stable and reliable income from its domestic oil reserves.
You say Canada's banks are questionable – at best. (?) What? Either you don't know anything about Canada's banks, or you have an ulterior motive for making such a false claim. Norway's banks are good banks, but they are too reliant only on high oil prices and Norway's internal economy. Canada has a much broader industry base than just oil (we have gold, food crops, lumber, potash, nickel, copper, zinc, iron, rare earth metals, coal, nat gas, beef and pork, car manufacturing, airplane and train manufacturing, major video game, software, and movie industries, etc). And Canadian banks have branches in… Read more »
I agree with you Robert. In addition, Canada's budget will be balanced in fiscal 2015, and the government is very business friendly. Canada has taken care of its pension and other long term liabilities, which are well funded. So a balanced budget is truly a balanced budget. I cannot believe that someone could make the statement that Canada's banks are questionable. Canada's banks are the strongest in the world. I recently read somewhere that the Canadian Imperial Bank of Commerce was the top rated bank in the world. Canada's banking laws restrict them from participating in the risky trading that… Read more »