Once again , we are starting to see economic stories that can be misleading to many–including your Financial Advisor. Americans tend not to be very knowledgeable about Foreign Markets, and especially Developing Markets–or worse yet, the Undeveloped Markets. Likewise, many are used to short Twitter reports, sound bites, merely skimming scholarly reports or perhaps just reading the Headlines. I KID YOU NOT!
The linked article, from the Washington Post, immediately caught my eye, http://www.washingtonpost.com/blogs/worldviews/wp/2014/01/09/these-10-countries-are-set-to-be-the-fastest-growing-economies-in-2014//?print=1. All you have to do is read the fourth paragraph, just below the ranking of the countries, to realize my concern with the article–and how it can be perceived by some readers
That paragraph points out three vital facts in realizing that these projections should not be incorporated into your Investment Plan–even a long-term one: all of the countries, except for Libya, are very poor; for most of them, economic growth is driven by natural resources; and perhaps the most important point is, that those same natural resources are sold mainly to developing countries–often to one single country. HMMM?
For instance, poor countries tend not to have good educational systems, if any at all. Russia’s boom-and-bust economy has certainly been influenced by a 70% dependence on World prices for Oil and Gas. Also, one country’s high dependence on selling its exports to one or a few countries–let alone developing ones–makes it reliant on that or those other countries’ economies. But, what does all this mean?
Approximately ten years ago, the Financial Markets started touting the prospects of the “BRIC” Countries: Brazil, Russia; India and China, as the ones having the highest growth potential for economic growth. All have large populations, very large land masses, and two have significant amounts of natural resources. It was widely believed that these four economies would move into a higher level of Development.
But, here are a few facts to consider. While Brazil consumes roughly 65% of its production domestically, China has only a 35% domestic consumption rate. Russia, at least to me, appears to be moving more and more back into the Soviet mold. China’s and Russia’s economies are Managed Economies, rather than ones based on free markets. The Indian economy, although not centrally managed, per se, has structural problems–some of them are caused by the government, and some are more traditional. Also, the populations of China and Russia (to a lesser extent) are aging. So, if the BRIC’s are the best-of-the-best, what does that say for the very poorest countries?
Lastly, the ten countries that are listed in the article are mostly dysfunctional, in the first place. It is easy for a country to grow its GDP from a base of just above 0.0%. Also, there is cause for concern for the level of those respective countries management: providing basic infrastructure; health care; fiscal and monetary policy; stability of their currency; its accounting procedures and the efficiency of their markets.
I have always suggested to investors that they maintain a much closer vigilance of more at-risk investments, invest smaller amounts in each and keep the overall at-risk component of your portfolio small–and especially in keeping with your personal risk-tolerance. There are three important points to keep in mind if you are considering such investments: if it sounds too good to be true, it probably is; ask lots of questions of your FA, do your homework and insist on a consistent and thorough explanation; and lastly, don’t act on impulse, pressure to invest NOW or on “hot securities tips”.
NOTE: In reference to a country’s growing its GDP from a very small base, consider that Mongolia has a $8.5 Billion GDP, while Turkey is $773 Billion. Even Haiti, the poorest country in the Western Hemisphere, has a GDP of $7.35 Billion.