By: Random Roger
January 13, 2011 at 08:03 AM EST
The other day the Wall Street Journal had a writeup on the new stock exchange in Laos. Laos as an investment destination? While I'm sure it will be a while before Laos Telecom lists and ADR on the NYSE the opening of an exchange is a start.
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.
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