By the same token, the understanding that fund managers cannot ignore the economic outlook for the countries in which the companies they invest in operate and derive their earnings has always been the norm.
Economic outlooks do matter
As a result, even though Portfolio Adviser is unashamedly an investment strategy publication focussed on asset allocation, portfolio construction and fund selection an examination of economic growth – or otherwise – today gives a good indication of those continents, regions and countries that may become the investment markets of the future.
An analysis of the latest World Economic Forum’s Global Competitiveness Index brings up some interesting pointers as to the potential productivity and prosperity of various countries that in turn could give further food for thought for research into potential investment areas.
The overall rankings have Switzerland at the top of the table of 144 countries for the fourth straight year, followed by Singapore, Finland and Sweden. The rest of the top ten includes the UK in 8th spot, along with the US, Hong Kong, Japan, Holland and Germany.
To read the full report, click here.
A summary of the report emphasises, perhaps unsurprisingly, that there are “persisting competitiveness divides across and within regions, as short-termism and political deadlock continue to hold back the economic performance of many countries and regions.”
The positive for investors is that it goes on to say the key to improving global economies will be productivity improvements and private sector investment given the current levels of uncertainty over the global economic outlook.
The unknown for investors is when these productivity improvements will kick in and show signs of sustainability rather than produce a one-off positive sentiment number every now and then.
Further analysis by Caroline Shaw, fund manager at Courtiers, looks at the potential for GDP per capita growth, with the top five:
- Rwanda
- Liberia
- Cambodia
- Zambia
- The Gambia
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The numbers in brackets represent their absolute position, according to The World Bank, out of 247 countries.
The eagle-eyed will see four of these five are in Africa but this is certainly not an indication that the continent is the next big investment theme.
Shaw explains:“Within Africa there is huge disparity. Seven African countries have negative potential GDP per capita, 18 have potential GDP less than actual GDP indicating limited growth prospects based on the analysis.
Story within the story
“However, eight of the top 15 countries in our analysis are from the African continent, indicating there is huge potential, albeit from a low base level and, in the case of Rwanda, Liberia, The Gambia and Benin, with very small populations.”
Looking specifically at Africa, the World Bank is positive about the prospects for Sub-Saharan Africa, predicting that growth will rise to 5.3% in 2012 and 5.6% in 2013, over the pre-crisis average level of five percent.
Foreign direct investment in 2011 rose by 25% after falls in the previous two years; the business climate is “improving”; “favourable” economic prospects are attracting inflows into the telecoms, real estate and retail sectors.
The continent has already seen a decade high growth, with – as per China and India – greater numbers of middle-income earners though there are still more than half of the 48 countries with less than $1,000 per capita as income.
Shaw concludes her outlook for Africa as one of high potential for improvement but this does not necessarily make them investment targets at present.
And so to conclude, therefore…
To round off a summary of the WEF Global Competitive Index, geographically, there is good and bad economic news: Asia Pacific has the highest potential for GDP growth per capita; there is limited scope for improvement in the Middle East and Central Eastern Europe; the US and Western Europe show signs of growth but below-trend growth.
Of the emerging markets, BRIC still looks strong though interestingly the outlook for BRIC is improved if Russia is taken out of it.
All in all, the investment outlook follows a similar pattern: Asia Pacific maybe even including Japan still takes the majority of investor interest, along with a home bias to UK equity and fixed income fund; widening the emerging market allocation to include BRIC and the Brazil/India/China allocation far outweighs that to Russia; representing frontier markets, MENA funds are still a niche play and European equity funds only allocate to stocks in peripheral countries tactically; Africa is on many ‘watch’ lists but that’s about it as far as global funds are concerned.
A global and/or multi-asset approach are the over-riding winners as far as today’s portfolio construction is concerned and, looking at potential GDP per capita as a guide, this is a long-term investment trend that is likely to continue.
