To read the article, apparently the thing here is excess hydroelectric power that they can sell to its neighbors in South East Asia. For now there are only two stocks on the exchange, a bank and a hydroelectric company. Presumably there will be more companies, I mean look at that building, there's got to be room for a few more stocks in all that office space--a little humor.
There are other countries that are also in the earliest stages of capital market formation. As another example Mongolia is a resource rich nation that is drawing a lot of FDI and there are a couple of Mongolian stocks listed elsewhere, mostly Hong Kong I believe, but the actual market is only open one hour a day.While a Laotian stock may never list on the NYSE it could list in Hong Kong and for all we know exporting hydroelectricity could turn out to be a gold mine for any related companies and should they list in Hong Kong they would be accessible.
The other day a reader at Seeking Alpha left a comment saying that country selection is a crap shoot. If you believe that then these sorts of posts are not for you obviously but I think the numbers are compelling and the mindset of what is being sought needs to be correct.
In terms of managing an investment portfolio with a longer time horizon foreign exposure is intended to offer diversification. My premise here has been that better diversification comes by selecting countries with as little in common with the US as possible; different economic cycles leading to different stock market cycles.
Isolating what countries are least like the US is a matter of simple research; Wikipedia can work here along with a visit to the central bank of web site of the country. From there I would look under the hood of any ETF that might exist and learn a little about some of the bigger companies in the market. Here I am not necessarily talking about analysis to buy the stock just some basics like how many customers a phone company has or how many manufacturing facilities a company have, number of stores for a retailer; that sort of thing. The above also needs to include some understanding of the politics in the country as well.
From that point there needs to be some way of keeping tabs on the country presumably with the intention of getting in at some point.
Looking back at the last decade, I've referenced data from Bespoke Investment Group countless times on this point, there were plenty of countries that had normal or better than normal results and isolating some of them was far from a crap shoot. If a country has a manageable debt situation, prospects for growth, prospects for social improvements or has something the world needs (doesn't just have to be commodities, it could be labor, innovation or other demographic attributes) then at the very least you have a tailwind to the country.
What this will not do is offer shelter during a worldwide panic. As I said before the crisis, some countries can go down at different times or by different amounts thus smoothing out the ride. Of the countries I write about most frequently the best examples here were Norway, Brazil and Chile. To be clear country selection is no substitute for defensive action taken objectively.
From where I sit country selection contributed mightily to whether people had anything close to a normal decade and I believe will do so again in this decade and this means being willing to learn a little about countries you've never thought about before, maybe even Laos.
5 comments:
And to think that the NYSE started under a buttonwood tree...
Roger, regarding the diversification of a portfolio using country selection: isn't the concept basically to choose ETFs that have a low beta and high alpha when compared to the S&P 500? I know that's not a common way to examine ETFs, but I believe technically there should be no difference between comparing a single stock to it's index based on alpha and beta and comparing a country ETF to the most important index.
I'm not sure if by beta you mean volatility or correlation (correlation as in buying SPY is a simple way to add beta.
If you mean volatility then clearly at the portfolio level less beta with more alpha is the holy grail. If you mean correlation then this is what it is all about with the goal either being alpha or a better risk adjusted result.
Roger, I never really did a lot of research regarding stocks (I'm rather the ETF kind of person), but it is my understanding that in stocks beta is the volatility of the part that has a correlation with the total market (systematic risk), whereas the alpha is the part of the price fluctuations that cannot be attributed to the total market. But I have to admit that probably alpha is the excess return and not the uncorrelated volatility.
What I'm trying to say is that I imagine the "normal" way of calculating alpha and beta could be useful for ETFs as well. Because before I move my allocation from developed markets to Chile, Malaysia, Egypt, Poland or any other country it's good to know if their stock market has a low correlation to the S&P 500 (that's what I'd call "alpha", but I guess I'm wrong), and how their volatility compares to the S&P 500 (which I'd call "beta").
If one believes in a major correction ahead, one probably will aim to move towards countries that primarily have a low correlation to the broad market, and because these days most countries have a higher correlation than 10 or 20 years ago, the next thing to do is to check if the volatility is higher or lower than in developed markets. And to then choose markets that hopefully won't drop 50% when the SPY goes down 30%.
Roger, besides finding countries with great stories ahead, which fundamental or technical indicators do you use when trying to figure out if a country is an interesting portfolio addition or not? My concept of using the alpha and beta calculation for a bunch of country ETFs was an idea for quickly screening which of the dozens of countries might be interesting to investigate further, and which of them are basically a leveraged clone of the SPY with a correlation of 0.9...
If you want to invest in South East Asia, I would look into Indonesia - the fourth largest democracy in the World.
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