We wrote “The Illusion of Global Investment Risk” and want to expand that thinking further. So, what is the science behind modern investing?
The amazing thing here is that many investors are missing acres of diamond in the emerging market and some developing economies because of perception which has nothing to do with realities in these economies. Rating agencies have an inertia to overcome that perception and rate the bonds of these economies properly. It is the advanced world that is sucking the juice out of the global economy; the emerging and developing economies did not cause the Great Recession and the European debt meltdown.
For today’s blog, I have this simple Ivy technique for modern investing.
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- Look for markets where the credit quality is good. If it is not good, let it be improving. Brazil is a prime example. I have blogged about this nation that continues to win after wins.
- Look for markets where the government bonds are attractive. This means you must look beyond the rating agencies that will give South African and Greek bonds the same scale, months ago anyway, though the latter is broke
- Look for countries with manageable debt-levels and where the interest rate is declining or staying stable in long term. Sovereign debt crises will remain a major part of the global challenges in coming years and will be problematic than corporate debts. Nations with manageable sovereign debt is a good place to invest. They will remain stable and economically positioned to pass through the next level of economic crises. Brazil, Indonesia and India are good candidates here.
- Look for sovereign debt profile. Along with the PIIGS, Japan and US, there are debt worries here. US can be excluded since they control the dollar and can always get away easily from any currency problem. Big cap US firms will remain attractive since they can easily survive the economic crises that will happen if any of the PIIGS default. It could be time to put money on big cap equities in the US. Japan is looking increasingly not good. South Korea is taking a good shine in Asia now.
- Bet on currency movement. Nations like China, Norway and Australia are expected to have their interest rates to rise. This means that one can make money on currency movements. I expect the value of these currencies to appreciate over the next 6 months and beyond. Especially China, it looks very certain that yuan will appreciate. Indian rupee looks good also. Notice that you must look at the health of the economy. In all these nations, they seem healthy. China and Australia were just scratched through the recession. Norway is solid and India has that brutal pragmatism in the economy.
- Be careful in euro-zone; in currency union, what matters is the weakest link.
Author: Ndubuisi Ekekwe