So you’re trying to decide whether to invest in a nation based on its political and economic climate. Whether it’s stormy or sunny, you may want to heed this puckish bit of wisdom from Laurence Brahm.
“Don’t listen to CNN or Fox News,” says Brahm, author of “Fusion Economics: How Pragmatism Is Changing the World.” “When you hear the major media networks introduce a nation’s political situation, think in a counterintuitive way. Try to find out what’s really happening on the ground. It may surprise you and offer a great investment opportunity.”
Brahm knows a thing or two about international politics and investing: He cut the very first deals for multinational corporations such as Kodak, Exxon Mobil, Bayer and Ericsson to enter China. And he’s not alone in his against-the-grain thinking.
“A challenging situation like Greece’s or Russia’s shouldn’t preclude an investor from deciding to invest,” says Michael Driscoll, a visiting professor and senior executive-in-residence at Adelphi University’s Robert B. Willumstad School of Business in Garden City, New York. “They have to be aware of the risks. But keep in mind that high risk often translates to high reward if the investment pans out.”
We surveyed the world (of investment pundits, that is) to bring you nine more principles and pointers as you weigh foreign investment and consider how international politics could impact your strategies abroad.
As abroad, so at home: Diversity tempers risk. That’s the view of Ned Gandevani, Master of Science in Finance program coordinator and professor for the Master of Business Administration and Master of Science in Finance programs at New England College of Business in Boston. “To reduce exposure, investors should allocate a small portion of their funds to international markets,” he says. “More important, they should diversify by investing in international mutual funds and exchange-traded funds.”
Watch relations between nations. Politics for foreign nations aren’t merely internal. They’re also external, as Greece’s ongoing struggles with the European Union demonstrate. “For the past five years, differences of opinion on how to resolve the financial crisis in Greece have led to a battle of wills, with the Greeks generally losing out to the much more powerful economies,” says Patrick Morris, CEO of HAGIN Investment Management in New York. If Greece gives up on the euro, “the reissue of the drachma would have wide-ranging implications for inflation, the real estate market, bond holders and equity investors.”
View corruption with extreme caution. Is corruption merely a fact of political life? Certainly, it’s nothing to sneeze at where your portfolio is concerned. “Widespread corruption among government officials may not affect the returns to investment in the short term,” says Edinaldo Tebaldi, assistant professor of economics at Bryant University in Smithfield, Rhode Island. “But it reduces overall efficiency, increases transaction costs and has the potential to be the catalyst of severe political and economic crises.” And if the scandal goes public, it can’t possibly bode well for investors.
Gridlock equals good luck. Nations locked in an internal stalemate present a counterintuitive investment opportunity. “The more time politicians spend squabbling with each other, the less time they have to meddle with economic affairs,” says Paul Jacobs, chief investment officer with Palisades Hudson Financial Group and based in Atlanta. “What concerns us most is when politicians all agree on policies that are doomed to fail.” This can happen when private assets become nationalized, for example.
Strong democracies hold important keys. Chances are you’ve never considered investing in Botswana. But Michael Brady, founder and president of Generosity Wealth Management in Boulder, Colorado, spotlights Botswana’s democratic track record as part of its appeal. “It has a long-standing tradition of representative democracy since independence in 1966, with uninterrupted democratic elections,” he says. That’s helped put it in a favorable position today. Botswana also has the highest sovereign credit rating in Africa and a gross national income that has more than doubled since 2005, according to the World Bank.
Is Mexico the way to go? Some experts say yes, including Michael Reynal, a portfolio manager with RS Investments and based in Des Moines, Iowa. “We believe Mexico’s refocus on reforms to expand energy, communications and transportation will provide strong support for the Mexican market,” Reynal says. That could be especially true given the better economic backdrop in the U.S. He adds, “Mexico’s stock market holds large weights in telecommunications and materials, which doesn’t reflect the country’s growing manufacturing base.”
There’s money in strong central banks. A robust central bank helps investors on several levels. “We’ve favored investing in a country’s sovereign debt market where the central banks are decidedly independent and able to withstand pushback from the political branch of governments,” says Jack McIntyre, portfolio manager and senior research analyst for Brandywine Global Investment Management in Philadelphia. “These are also the kind of government bond markets where inflation expectations are well-contained.”
Know the nation’s character. U.S. investors often make the mistake of projecting American values on other countries. “Japan is a case in point,” says Albert Brenner, director of asset allocation strategy for People’s United Wealth Management in Bridgeport, Connecticut. Though highly developed and modern, “Japan is hamstrung by certain cultural legacies. These include a largely homogeneous society that doesn’t appear to welcome immigration or the full participation of women in the workforce. Unless these characteristics change, the labor force won’t be able to support economic growth to the extent that would otherwise be possible.”
A rule of thumb is the rule of law. Many countries have a spotty or nonexistent history with the rule of law, says Don Shelly, a professor of practice in finance at Southern Methodist University’s Cox School of Business in Dallas. This can be especially true with property rights. “Nationalization of foreign company assets has occurred often, and most recently in Russia and Venezuela,” he says. “Governments can impose fines, force divestitures, and pass legislation that favors domestic producers and punishes foreign ones.”
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