Investment: Ten countries to watch

Reading Time: 9 minutes
Stuart Williamson
Stuart Williamson, CEO Montpelier Malaysia

The International Monetary Fund (IMF) recently shaved its 2013 forecast for global growth to 3.1 per cent in August, below the 3.3 per cent projection in April, citing the continued economic recession in Europe.  It also lowered its forecast for 2014 to 3.8 per cent after earlier predicting a 4 per cent expansion. Despite this, we feel there are still countries which have the potential to grow significantly over the next few years. Below is a list of the 10 countries we consider to look attractive:

USA

US markets will likely fall in the short term if the Federal Reserve begins tapering monetary easing which may begin as early as September. However, the US economy has rebounded strongly this year, with unemployment falling to 7.4 per cent in July from 7.6 per cent in June. This is the lowest level in 4 and a half years. Of the 384 companies in the S&P 500 that have reported earnings to date for the second quarter of 2013, 68 per cent have reported earnings above analyst expectations. 46.6 per cent of their sales were from outside of the US in 2012, up from the 46.1 per cent reported in 2011 and 46.3 per cent reported in 2010. We view this as especially positive as US businesses capitalise on foreign investment. US economic growth also increased in the second quarter to 1.7 per cent annualised from 1.1 per cent in the first quarter which makes the US preferable to most European countries, especially with inflation still relatively low at 2 per cent.

Norway

Norway remains one of the richest and most stable of European countries, reporting GDP per capita of $53,000 in 2009 (3rd in the world) with a population of only 5 million. Manufacturing in Norway has rebounded recently to a record high as the oil sector, after struggling with various production issues in the first quarter, is now back in full swing, working through record investments as it races to bring new discoveries on-stream. Norway is part of the European Economic Area but not the European Union and has bilateral trade arrangements with the rest of Europe. This, we feel allows the country to be insulated against many financial and fiscal problems the EU faces. The currency has remained strong and unemployment remained below 4 per cent throughout the financial crisis in 2009. Norwegian government debt to GDP has fallen year on year since 2007 to 28.3 per cent in 2012. Goods consumption expanded for a second straight month in June, increasing by 0.4 per cent from May, while retail sales grew by a bigger-than-expected 3.2 per cent from a year ago. Norway also holds the world’s largest sovereign wealth fund, valued at approximately $750 billion, the fund being financed purely from oil profits. The fund is managed most prudently with investments strictly kept outside of Norway to avoid stoking inflation with the exception of a dividend of up to 4 per cent annually to boost the Norwegian budget. The Norwegian economy appears to be back on track to meet the central bank’s 2.5 per cent growth forecast for this year, outperforming Scandinavian peers Sweden, Finland and Denmark and European countries in general.

Chile

The economy of Chile is ranked as a high-income economy by the World Bank, and is considered one of South America’s most stable and prosperous nations. We believe that Chile represents the most attractive country to invest in South America at the moment. The overall outlook for the region is not good, but despite this, Chile’s economy is expected to grow by 4.5 per cent this year (according to HSBC Bank) and Chile’s annual GDP growth rate has so far averaged 5.51 per cent from 1987 until 2013. The country has a stable currency (peso), and total consumption rose 5.5 per cent in the second quarter of 2013 after a 7.3 per cent rise in the previous quarter. The unemployment level has gradually fallen over the last 5 years to 6.2 per cent, a level not seen since January 2007 and the economy has outperformed South American peers consistently. Chile also has notable natural resources producing more than a third of the world’s copper and so the country will capitalise strongly during global economic expansion. With a stable level of inflation of 2.2 per cent and small debt to GDP ratio of around 10 per cent, Chile looks an attractive area to invest.

Canada

Canada is the world’s third largest oil exporter, and the US purchases 99 per cent of Canada’s oil exports (around 900 million barrels per year). Canada is also a world leader in the production of many natural resources such as gold, nickel, uranium, diamonds and lead which it primarily exports to the US. Therefore, an improvement in the US economy directly benefits Canada as well.  Domestically, Canadian retail sales jumped by 1.9 per cent from April to May, the biggest month-over-month increase since March 2010. Despite large consumer debt levels, these have been reduced significantly this year. Canadian GDP growth has been below 1 per cent in recent years, but the IMF recently predicted 1.7 per cent growth for 2013 and 2.2 per cent growth for 2014. We are also encouraged by unemployment having fallen from over 8.5 per cent during the financial crisis to 7.2 per cent at present, and inflation currently sits at a low 1.2 per cent which should maintain growth. With Canadian producers of goods and services to benefit from the recovery in US demand, and consumer debt being reined in, we see Canada as having significant upside potential.

investing-overseasQatar
As Qatar has vast oil and natural gas reserves, drilling is the main driver of the economy, contributing 58 per cent of GDP. Qatar recently increased forecasts for real gross domestic product growth in 2013 to 5.3 per cent from 4.8 per cent, citing changes to its expected output of oil and gas. Pipeline gas production will rise this year and unscheduled shutdowns, which limited energy output in 2012, are unlikely to be repeated, the government has stated. The economy has low unemployment (below 1 per cent), and Qatar plans to spend some $140 billion on infrastructure in the next decade, partly in preparation to host the 2022 World Cup soccer tournament. Supported by large infrastructure investments and associated population growth, the economy is expected to grow 6.8 per cent in 2014, according to Qatar National Bank. For these reasons alone, Qatar looks an excellent country to invest into.

Singapore

Singapore’s economy is one of the most open in the world, with low tax rates that enable businesses to prosper in difficult economic times. Singapore’s economy grew by 2 per cent during the first half of 2013 and is expected to grow by 2.5-3.5 per cent in the second half according to a recent government announcement. Singapore began its first commercial production of liquefied natural gas recently diversifying its supplies and underscoring the country’s role as a regional energy hub at a time when Asia’s gas demand and trade is booming. Singapore will increase the capacity of its liquefied natural gas reserves significantly, and with 63 per cent of LNG demand coming from Asia, Singapore is likely to directly benefit. Singapore is also a net exporter whose main industries are fuel and electronics. The growth in countries such as Malaysia and Indonesia (5-6 per cent for 2013) will have positive effects as they import many of their goods from Singapore.

Germany

The IMF predicts that Germany will see stronger economic growth next year as the country benefits from low unemployment, solid public and private finances, and a gradual recovery in the rest of Europe. Germany’s unemployment rate has steadily declined to 5.4 per cent and predictions are that GDP steadily increased 0.75 per cent during the second quarter of 2013. German industrial production, factory orders and exports all rose in June, and business confidence improved for a third month in July. There appear to be green shoots of recovery in the Eurozone as it recorded its first quarter of GDP growth of 0.3 per cent, and we would expect Germany to be the main beneficiary of the EU countries. Companies such as BMW and Volkswagen are still trading at relatively low valuation levels despite having stronger balance sheets and increasing earnings due to the ongoing negative sentiment towards Europe.

Israel
Israel is often overlooked as an investment opportunity, yet in many ways, Israel offers the opportunity to invest in a developed market, but with emerging market growth characteristics. Despite the political tension in the region, over the past three decades strength has been reflected in Israel’s entrepreneurial and technological revolution, as well as the performance of its equity markets. For example, Israeli industrial exports increased 6-fold between 1985 and 2009, and exports increased by 19 per cent from 2009 to 2012. Israel’s average annual growth rate in GDP over the past 5 years was 3.58 per cent as compared to .61 per cent for the US. Over the past 10 years, Israel’s average annual growth rate was 4.09 per cent, as compared to 1.67 per cent for the US. Warren Buffet recently invested $4 billion into Israeli company Iscar reflecting the growth potential for the country. Furthermore, Israel is currently negotiating a Free Trade Agreement with India which will considerably add to the momentum of the increasing trade and investment. Trade volume is projected to increase to up to $15 billion per annum from $5 billion currently with good potential seen in areas like healthcare, medical devices, pharmaceuticals, agriculture, irrigation, energy, particularly from renewable sources, aviation, IT and water management.

Investment-Finance-BankingUkraine

Ukraine was greatly affected by the economic crisis and saw a 15.1 per cent decrease in GDP from 2008 to 2009. However, since 2010, GDP has risen by more than 50 per cent while the Ukranian stock market has been depressed for some time and is still at its lowest point in three years.  Ukraine is the largest exporter of sunflower oil in the world and the EU is Ukraine’s largest trading partner, with 27.1 per cent of exports and 33.7 per cent of imports in 2008. Trade with EU has seen strong double-digit growth in recent years.

Foreign investment in Ukraine increased by 76 per cent in the first quarter of 2013, compared to the same period of the last year, according to their Prime Minister Mykola Azarov. Ukraine also signed a shale gas exploitation deal with Royal Dutch Shell in January 2013. The $10 billion deal was the largest foreign direct investment ever for Ukraine. With increasing investment, vast natural resources, cheap equity valuations and a stabilising economy we view Ukraine as having significant potential.

Kuwait

Kuwait holds the 5th largest oil reserves in the world at 102 million barrels of oil equivalent or 6.8 per cent share of world oil reserves and is capable of further boosting its oil production and exports by tapping into its massive reserves. In addition, signs of recovery in the US may likely bolster the global demand for oil and hence, underpin a potential increase in oil production from oil exporters including Kuwait. In fact, OPEC, in its latest monthly oil report, projected global oil demand to increase slightly to 89.7 million barrels per day for 2013 from 88.8 million barrels per day in 2012 on the back of higher demand from China. There have been encouraging steps taken with the $125 billion Kuwait Development Plan, which aims to diversify the economy away from oil and increase the role of the private sector, envisages significant investment in infrastructure, including the Kuwait City metro and railway. GDP growth forecasts of 4.5 per cent for 2013 and 5 per cent for 2014 have been predicted by the IMF, with anticipation of moderate growth of oil production and exports.

foreign-investmentNotable Mentions:

China

Despite growth forecasts being cut by the IMF recently to 7.7 per cent there have also been some encouraging signs from China. Retail sales for June came in above expectations, growing 13.3 per cent year-on-year. Chinese manufacturing has improved with the official purchasing managers’ index rising to 50.3 last month from 50.1 in June. Chinese oil imports are predicted to overtake the US’s as the economy expands its manufacturing sector. Imports overall rose 10.9 per cent recently on the back of increased consumer demand. Increasing urbanisation, which has seen the rural population become a minority for the first time ever and a growing middle class are positive signs for the Chinese economy. We are currently seeing Chinese firms trading on low valuations although we would exercise caution with regard to the housebuilding sector, which looks overheated and the financial sector, which has seem a lending squeeze in June and the Shibor (Shanghai Interbank Offer Rate) rise alarmingly.

UK
The IMF recently lifted its economic growth forecast for the UK this year from 0.7 per cent to 0.9 per cent, the first time it has increased its outlook for the UK in a year. This comes after recent surveys reported a rise in business optimism, growth in the service sector, and confidence in the housing market. The UK service sector grew at its fastest pace for two years in June, and a British Chambers of Commerce survey found UK business confidence at a six-year high. It said the figure meant the economy has recouped more than half the 7.2 per cent of output lost in the 2008-09 recession. Compared with the second quarter of 2012, gross domestic product has now grown by 1.4 per cent. A recent analysis by Goldman Sachs also showed that FTSE 100 companies only have 19 per cent sales exposure to the UK, which means they are less likely to be affected by any reduction in UK sales growth in the near term.

Indonesia and the Philippines
The only reason we have kept these rapidly expanding economies off the list is due to their current expensive valuations. Should companies become more attractively priced we feel that these two countries could represent excellent investment opportunities. For example, the IMF recently revised GDP projected growth for the Philippines to 7 per cent in 2013 and 6 per cent in 2014, reflecting accelerated public spending, buoyant consumer/business confidence and supportive financial conditions.

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Reading Time: 9 minutes

Stuart Williamson, CEO Montpelier Malaysia

The International Monetary Fund (IMF) recently shaved its 2013 forecast for global growth to 3.1 per cent in August, below the 3.3 per cent projection in April, citing the continued economic recession in Europe.  It also lowered its forecast for 2014 to 3.8 per cent after earlier predicting a 4 per cent expansion. Despite this, we feel there are still countries which have the potential to grow significantly over the next few years. Below is a list of the 10 countries we consider to look attractive:

Reading Time: 9 minutes

Stuart Williamson
Stuart Williamson, CEO Montpelier Malaysia

The International Monetary Fund (IMF) recently shaved its 2013 forecast for global growth to 3.1 per cent in August, below the 3.3 per cent projection in April, citing the continued economic recession in Europe.  It also lowered its forecast for 2014 to 3.8 per cent after earlier predicting a 4 per cent expansion. Despite this, we feel there are still countries which have the potential to grow significantly over the next few years. Below is a list of the 10 countries we consider to look attractive:

USA

US markets will likely fall in the short term if the Federal Reserve begins tapering monetary easing which may begin as early as September. However, the US economy has rebounded strongly this year, with unemployment falling to 7.4 per cent in July from 7.6 per cent in June. This is the lowest level in 4 and a half years. Of the 384 companies in the S&P 500 that have reported earnings to date for the second quarter of 2013, 68 per cent have reported earnings above analyst expectations. 46.6 per cent of their sales were from outside of the US in 2012, up from the 46.1 per cent reported in 2011 and 46.3 per cent reported in 2010. We view this as especially positive as US businesses capitalise on foreign investment. US economic growth also increased in the second quarter to 1.7 per cent annualised from 1.1 per cent in the first quarter which makes the US preferable to most European countries, especially with inflation still relatively low at 2 per cent.

Norway

Norway remains one of the richest and most stable of European countries, reporting GDP per capita of $53,000 in 2009 (3rd in the world) with a population of only 5 million. Manufacturing in Norway has rebounded recently to a record high as the oil sector, after struggling with various production issues in the first quarter, is now back in full swing, working through record investments as it races to bring new discoveries on-stream. Norway is part of the European Economic Area but not the European Union and has bilateral trade arrangements with the rest of Europe. This, we feel allows the country to be insulated against many financial and fiscal problems the EU faces. The currency has remained strong and unemployment remained below 4 per cent throughout the financial crisis in 2009. Norwegian government debt to GDP has fallen year on year since 2007 to 28.3 per cent in 2012. Goods consumption expanded for a second straight month in June, increasing by 0.4 per cent from May, while retail sales grew by a bigger-than-expected 3.2 per cent from a year ago. Norway also holds the world’s largest sovereign wealth fund, valued at approximately $750 billion, the fund being financed purely from oil profits. The fund is managed most prudently with investments strictly kept outside of Norway to avoid stoking inflation with the exception of a dividend of up to 4 per cent annually to boost the Norwegian budget. The Norwegian economy appears to be back on track to meet the central bank’s 2.5 per cent growth forecast for this year, outperforming Scandinavian peers Sweden, Finland and Denmark and European countries in general.

Chile

The economy of Chile is ranked as a high-income economy by the World Bank, and is considered one of South America’s most stable and prosperous nations. We believe that Chile represents the most attractive country to invest in South America at the moment. The overall outlook for the region is not good, but despite this, Chile’s economy is expected to grow by 4.5 per cent this year (according to HSBC Bank) and Chile’s annual GDP growth rate has so far averaged 5.51 per cent from 1987 until 2013. The country has a stable currency (peso), and total consumption rose 5.5 per cent in the second quarter of 2013 after a 7.3 per cent rise in the previous quarter. The unemployment level has gradually fallen over the last 5 years to 6.2 per cent, a level not seen since January 2007 and the economy has outperformed South American peers consistently. Chile also has notable natural resources producing more than a third of the world’s copper and so the country will capitalise strongly during global economic expansion. With a stable level of inflation of 2.2 per cent and small debt to GDP ratio of around 10 per cent, Chile looks an attractive area to invest.

Canada

Canada is the world’s third largest oil exporter, and the US purchases 99 per cent of Canada’s oil exports (around 900 million barrels per year). Canada is also a world leader in the production of many natural resources such as gold, nickel, uranium, diamonds and lead which it primarily exports to the US. Therefore, an improvement in the US economy directly benefits Canada as well.  Domestically, Canadian retail sales jumped by 1.9 per cent from April to May, the biggest month-over-month increase since March 2010. Despite large consumer debt levels, these have been reduced significantly this year. Canadian GDP growth has been below 1 per cent in recent years, but the IMF recently predicted 1.7 per cent growth for 2013 and 2.2 per cent growth for 2014. We are also encouraged by unemployment having fallen from over 8.5 per cent during the financial crisis to 7.2 per cent at present, and inflation currently sits at a low 1.2 per cent which should maintain growth. With Canadian producers of goods and services to benefit from the recovery in US demand, and consumer debt being reined in, we see Canada as having significant upside potential.

investing-overseasQatar
As Qatar has vast oil and natural gas reserves, drilling is the main driver of the economy, contributing 58 per cent of GDP. Qatar recently increased forecasts for real gross domestic product growth in 2013 to 5.3 per cent from 4.8 per cent, citing changes to its expected output of oil and gas. Pipeline gas production will rise this year and unscheduled shutdowns, which limited energy output in 2012, are unlikely to be repeated, the government has stated. The economy has low unemployment (below 1 per cent), and Qatar plans to spend some $140 billion on infrastructure in the next decade, partly in preparation to host the 2022 World Cup soccer tournament. Supported by large infrastructure investments and associated population growth, the economy is expected to grow 6.8 per cent in 2014, according to Qatar National Bank. For these reasons alone, Qatar looks an excellent country to invest into.

Singapore

Singapore’s economy is one of the most open in the world, with low tax rates that enable businesses to prosper in difficult economic times. Singapore’s economy grew by 2 per cent during the first half of 2013 and is expected to grow by 2.5-3.5 per cent in the second half according to a recent government announcement. Singapore began its first commercial production of liquefied natural gas recently diversifying its supplies and underscoring the country’s role as a regional energy hub at a time when Asia’s gas demand and trade is booming. Singapore will increase the capacity of its liquefied natural gas reserves significantly, and with 63 per cent of LNG demand coming from Asia, Singapore is likely to directly benefit. Singapore is also a net exporter whose main industries are fuel and electronics. The growth in countries such as Malaysia and Indonesia (5-6 per cent for 2013) will have positive effects as they import many of their goods from Singapore.

Germany

The IMF predicts that Germany will see stronger economic growth next year as the country benefits from low unemployment, solid public and private finances, and a gradual recovery in the rest of Europe. Germany’s unemployment rate has steadily declined to 5.4 per cent and predictions are that GDP steadily increased 0.75 per cent during the second quarter of 2013. German industrial production, factory orders and exports all rose in June, and business confidence improved for a third month in July. There appear to be green shoots of recovery in the Eurozone as it recorded its first quarter of GDP growth of 0.3 per cent, and we would expect Germany to be the main beneficiary of the EU countries. Companies such as BMW and Volkswagen are still trading at relatively low valuation levels despite having stronger balance sheets and increasing earnings due to the ongoing negative sentiment towards Europe.

Israel
Israel is often overlooked as an investment opportunity, yet in many ways, Israel offers the opportunity to invest in a developed market, but with emerging market growth characteristics. Despite the political tension in the region, over the past three decades strength has been reflected in Israel’s entrepreneurial and technological revolution, as well as the performance of its equity markets. For example, Israeli industrial exports increased 6-fold between 1985 and 2009, and exports increased by 19 per cent from 2009 to 2012. Israel’s average annual growth rate in GDP over the past 5 years was 3.58 per cent as compared to .61 per cent for the US. Over the past 10 years, Israel’s average annual growth rate was 4.09 per cent, as compared to 1.67 per cent for the US. Warren Buffet recently invested $4 billion into Israeli company Iscar reflecting the growth potential for the country. Furthermore, Israel is currently negotiating a Free Trade Agreement with India which will considerably add to the momentum of the increasing trade and investment. Trade volume is projected to increase to up to $15 billion per annum from $5 billion currently with good potential seen in areas like healthcare, medical devices, pharmaceuticals, agriculture, irrigation, energy, particularly from renewable sources, aviation, IT and water management.

Investment-Finance-BankingUkraine

Ukraine was greatly affected by the economic crisis and saw a 15.1 per cent decrease in GDP from 2008 to 2009. However, since 2010, GDP has risen by more than 50 per cent while the Ukranian stock market has been depressed for some time and is still at its lowest point in three years.  Ukraine is the largest exporter of sunflower oil in the world and the EU is Ukraine’s largest trading partner, with 27.1 per cent of exports and 33.7 per cent of imports in 2008. Trade with EU has seen strong double-digit growth in recent years.

Foreign investment in Ukraine increased by 76 per cent in the first quarter of 2013, compared to the same period of the last year, according to their Prime Minister Mykola Azarov. Ukraine also signed a shale gas exploitation deal with Royal Dutch Shell in January 2013. The $10 billion deal was the largest foreign direct investment ever for Ukraine. With increasing investment, vast natural resources, cheap equity valuations and a stabilising economy we view Ukraine as having significant potential.

Kuwait

Kuwait holds the 5th largest oil reserves in the world at 102 million barrels of oil equivalent or 6.8 per cent share of world oil reserves and is capable of further boosting its oil production and exports by tapping into its massive reserves. In addition, signs of recovery in the US may likely bolster the global demand for oil and hence, underpin a potential increase in oil production from oil exporters including Kuwait. In fact, OPEC, in its latest monthly oil report, projected global oil demand to increase slightly to 89.7 million barrels per day for 2013 from 88.8 million barrels per day in 2012 on the back of higher demand from China. There have been encouraging steps taken with the $125 billion Kuwait Development Plan, which aims to diversify the economy away from oil and increase the role of the private sector, envisages significant investment in infrastructure, including the Kuwait City metro and railway. GDP growth forecasts of 4.5 per cent for 2013 and 5 per cent for 2014 have been predicted by the IMF, with anticipation of moderate growth of oil production and exports.

foreign-investmentNotable Mentions:

China

Despite growth forecasts being cut by the IMF recently to 7.7 per cent there have also been some encouraging signs from China. Retail sales for June came in above expectations, growing 13.3 per cent year-on-year. Chinese manufacturing has improved with the official purchasing managers’ index rising to 50.3 last month from 50.1 in June. Chinese oil imports are predicted to overtake the US’s as the economy expands its manufacturing sector. Imports overall rose 10.9 per cent recently on the back of increased consumer demand. Increasing urbanisation, which has seen the rural population become a minority for the first time ever and a growing middle class are positive signs for the Chinese economy. We are currently seeing Chinese firms trading on low valuations although we would exercise caution with regard to the housebuilding sector, which looks overheated and the financial sector, which has seem a lending squeeze in June and the Shibor (Shanghai Interbank Offer Rate) rise alarmingly.

UK
The IMF recently lifted its economic growth forecast for the UK this year from 0.7 per cent to 0.9 per cent, the first time it has increased its outlook for the UK in a year. This comes after recent surveys reported a rise in business optimism, growth in the service sector, and confidence in the housing market. The UK service sector grew at its fastest pace for two years in June, and a British Chambers of Commerce survey found UK business confidence at a six-year high. It said the figure meant the economy has recouped more than half the 7.2 per cent of output lost in the 2008-09 recession. Compared with the second quarter of 2012, gross domestic product has now grown by 1.4 per cent. A recent analysis by Goldman Sachs also showed that FTSE 100 companies only have 19 per cent sales exposure to the UK, which means they are less likely to be affected by any reduction in UK sales growth in the near term.

Indonesia and the Philippines
The only reason we have kept these rapidly expanding economies off the list is due to their current expensive valuations. Should companies become more attractively priced we feel that these two countries could represent excellent investment opportunities. For example, the IMF recently revised GDP projected growth for the Philippines to 7 per cent in 2013 and 6 per cent in 2014, reflecting accelerated public spending, buoyant consumer/business confidence and supportive financial conditions.

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