BY DANIEL ALTMAN
JUNE 25, 2015
It’s a great time to be an international investor. Most countries crippled by the global financial crisis now have their banking systems and fiscal balances under control, and demand for goods and services is returning almost everywhere. And with more economies than ever integrated into global markets, investors have their pick of destinations. So where exactly should they put their money? The Baseline Profitability Index (BPI) is back for its third year with some answers, and Narendra Modi’s India is the place to start.
Once again, I’ve brought together the effects of eight factors on a generic equity investment, the equivalent of buying a composite chunk of a country’s economy and holding it for five years. As I explained last year and in thelaunch of the BPI, economic growth alone doesn’t determine the returns to investing abroad; you have to worry about things like financial stability, physical security, corruption, expropriation by government, exploitation by local partners, capital controls, and exchange rates as well. Putting all of these factors together gives a better idea of how big the return will be when it finally reaches your pocket.
Overall, the change in the global economy’s fortunes is clear to see. Last year, the average BPI rating across all countries was 0.99; this year it’s 1.03. That may not seem like a lot, but it represents a big increase in expected returns over the next five years — about three-quarters of a percent higher per year, which is roughly a third of the return on a safe asset like a 10-year U.S. Treasury note.
Data availability is always an issue in exercises like this, thanks to the many sources used to compile the index. Cambodia, Serbia, and Taiwan dropped out of the BPI this year because of incomplete data, and Ukraine came back after a year’s absence. I was left with 110 countries and territories, covering most of the places global investors would consider today.
This year’s BPI also incorporates changes made by the World Bank in its measurement of GDP. Since May 2014, the World Bank has used a new set of purchasing-power-parity figures, which are essentially a way of comparing living standards across countries. A country’s GDP measured in terms of purchasing power parity is the value in the United States of all its output, whether sold locally or abroad. For example, if the fictional country of Fredonia’s entire production were 10 watches that would sell locally for the equivalent of $10 each, its GDP would be $100. But if the same watches would sell for $30 in the United States, then Fredonia’s GDP at purchasing power parity would be $300. That’s because the standard of living — judged by watches — that might cost $30 in the United States would only set a Fredonian back $10 in local currency.
Several countries vaulted up the BPI rankings because of this change, since it implied that their currencies might soon appreciate in real terms. In other words, there was a strong chance that cashing in a five-year investment would yield a return not just from the underlying assets but also from gains in the local value of goods. Among these countries were Indonesia, Jordan, Kuwait, and Zambia, which all jumped at least 40 spots in the ranking for repatriation of capital.
The other big improvement was in the expectations for economic growth and financial security, which form the base of the return in the BPI.
The forecast brightened across much of Europe and also for East Africa’s two biggest economies.The forecast brightened across much of Europe and also for East Africa’s two biggest economies. On average, there was little change in the erosion of potential investments from corruption and lax protection for investors. But two bright spots were Switzerland, which the World Bank considered a safer bet thanks to greater transparency for public companies, and Senegal, where shareholders received a variety of new legal rights.
At the other end of the scale, the outlook dimmed considerably for Burkina Faso because of a combination of lower growth andincreasing questions about the country’s ability to pay its debts during its political transition. The political situation and the rule of law also deteriorated in Mozambique last year, though a pact signed between rival factions in September has helped quell investors’ worries. Meanwhile, the cost of living simultaneously rose in the World Bank’s updated figures. The bank’s adjustments also hurt South Korea’s position in the rankings, pushing it out of the top third.
Two other countries that fell out of the BPI’s upper tier were Peru and the United States, with both receiving lower ratings across the board. In Peru, forecasts for growth were cut substantially as a result of lower output anddelays in mining operations. And the United States fell behind in part because so many more countries presented some chance of real currency appreciation versus the dollar; by definition, the United States provided none.
But the big story in the BPI this year is India coming out on top, with growth forecasts up, perceptions of corruption down, and investors better protectedfollowing the election of a government led by Prime Minister Narendra Modi. The advances in India offer some hope for faraway Argentina, which once again languishes near the bottom of the index. Its election of a new president this October after 12 years of the Kirchners could well make a difference in next year’s BPI. The job won’t be easy, but there’s nowhere to go but up.
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