International Value Investing
The United States is the richest country in the world. But that won’t last much longer.
The IMF expects that China will overtake the US in about 6 years.
The covid pandemic didn’t change that situation. 2020 was a small economic setback for the US, but growth resumed the next year. China was able to grow their economy even in 2020. China’s GDP is now 45% higher than in 2018, even despite their zero covid policy.
Over the next 30 years, the difference should only get larger. Here’s one forecast for the 2 countries:
Suppose you’re planning to retire in 30 years. Which country would you rather have your retirement money invested in?
The average investor in the US invests only in US stocks. But the US economy is not the world’s fastest growing. Does it make sense to invest some money in China? Are there other countries that are even better bets?
Some countries are growing even faster
Which country will be number 3, in 2050?
At the moment, the top 20 looks like this:
Japan is the third largest economy now, but it has barely grown in the last 30 years:
A few other countries, like Germany, India, and the UK, have been growing to catch up.
Predicting these 4 countries over the next 30 years, there’s no competition. India should take the 3rd spot within the next decade and then grow way above the others:
GDP depends on both economic growth and population growth.
In 2050, the average person in the US will still be richer than the average Chinese person:
But there are a lot more people in China, and the rate at which each one gets richer will be faster.
Actually, the population in China will drop a little. It will slowly rise in the US, mostly due to immigration. But there will still be a lot more people in China:
The average person in India will also be poorer, in 2050:
But India will have 1.7 billion people, many of them will become middle class, and that should create a huge economy:
India’s economy will grow enough that it might eventually surpass the United States, but it probably won’t get there by 2050:
In the next 30 years, the US economy is forecast to grow 70%, China 200%, and India 700%.
Which country would you prefer to be invested in?
Could you do even better investing in some other country?
GDP depends on both population growth and economic growth. So we can look for places where either is high.
Here’s where the population growth is highest:
Here’s where people are getting richer (GDP growth per capita is highest):
Combine those two, and you get this GDP growth rate map:
Based on that forecast, your money should be invested almost anywhere except the United States.
Japan looks like the worst bet in the world, with slow economic growth and negative population growth.
The US and Europe are better but should still have low growth.
India has among the highest growth rate, maybe even the highest in the world. But, if you want to diversify, a number of other countries come close. A few to consider: Indonesia, Malaysia, Vietnam, Pakistan, Egypt.
When it comes to investing, there might still be some important factors we’re missing. One is political risks. You could lose money if there’s some international conflict. You would have lost any money you’d invested in Russia, last year. Another factor is the price stocks sell for — some markets are cheaper than others.
Where stocks are the cheapest:
You typically measure a stock by it’s Price / Earnings ratio.
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Right now, you can buy a share of Apple for about 22 times what the company earns. You could say that you’re making 4.5% annual profit on that investment (1 divided by 22), plus whatever growth the company experiences.
You can buy a share of Verizon for 7 times what the company earns. That’s like earning 14% on your investment. It’s cheaper because investors think Verizon won’t grow as fast as Apple.
You can value countries the same way.
You might expect the same thing for countries — the high growth markets should be expensive, the low growth countries should be cheap. But the actual data is mixed:
Stocks in both India and the US are expensive, with a ratio around 30. But the growth rates are higher in India, so India might be the better value, over the long term.
Stocks in Brazil and China and Europe are all similarly cheap. But the growth rates are higher in Brazil and China.
Can we combine valuations and growth rates to figure out which countries offer the best value to investors?
I found one model, on a site called GuruFocus. They use a somewhat similar approach to make a forecast for how each country will do over the next 8 years:
In their estimation, the US is the 2nd worst place in the world to invest money right now. Only Japan is worse.
The best value in the world is found in Russia, since assets there have sold off so heavily during the war. But, westerners generally can’t invest in Russia because of the sanctions.
Many developing markets look like they’ll beat the US because of high growth rates.
Many European markets look like they’ll outperform the US because the valuations are cheaper.
I don’t think this model is perfect — it forecasts prior economic growth rates into the next 8 years, and compares valuations to historical averages. It does not consider population growth 30 years out.
It’s probably a reasonable guess for the next decade or so, but it might be possible to build a better model that goes 30 years out.
In that model, I suspect that Europe would do worse and the developing world would do even better.
Do any of these ideas work in practice?
It’s hard to recommend international stocks, after the last decade.
Suppose you put $10,000 in a mix of international stocks, 10 years ago. Here’s a vanguard fund (VWO) that invests in many countries, with the most money in China, India, and Taiwan:
Today, you’d have only $12,655. Not a very lucrative investment.
Instead, suppose you put that $10,000 into the US stock market:
Today, you’d have $34,906.
Over the last 10 years, the US stock market has done much better than most other countries.
On the other hand, if you bought world stocks back in 2000, at the peak of the dotcom bubble, you would have done better than the US market.
Outperformance has traded places between US and world markets several times in the past:
Is it possible we’re heading into another cycle of outperformance for global markets?
GuruFocus’ model thinks that emerging markets will outperform. They backtest their models, and sometimes the forecasts do quite well. Here’s a prediction for Brazil, compared to reality:
Sometimes they do less well. Here’s China, where markets have underperformed expectations for a decade:
It’s not possible to predict the future perfectly. Economies can underperform. Investors can also become irrationally optimistic or pessimistic about one country or another.
But you can still make a good guess — when stocks are cheap, they’ll probably head for a decade of outperformance. When they’re expensive, the next decade is probably going to go badly.
In the US, stocks have outperformed expectations since 2010:
But stocks have also done so well that they’re quite expensive. Future expectations are lower. If you bought in 2021, the forecast predicts you won’t make money for the next 7 years. If you buy now, you might make 5% per year.
Part of the reason that the US did so well for the last decade is that big US tech companies exceeded all expectations.
But it’s also because in 2012, US stocks were cheap. The country was still recovering from the 2008–2009 housing crash. In 2000, US stocks were as expensive as they’ve ever been, so US markets lagged for the next 10 years.
2021 looks almost like a repeat of the 2000 tech bubble. That bubble burst in 2022 and took down world markets with it. It’s possible to make money in the stock market again, from where we are now. But US stocks still aren’t historically cheap, some foreign markets might be a better bet.
The biggest cycle of foreign outperformance was in the late 80’s, when Japan took off, temporarily becoming the world’s #2 economy.
Today, we may be looking at a longer period of time where China and India gradually overtake the US to become economic superpowers.
It might help to spread some money around the world, accordingly.
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