New investment index sends confusing message

An newly published investment index by US media group and centrist think tank Foreign Policy, listing 102 countries globally which are supposed to give the highest returns to foreign investors in a five-year period, is surprisingly putting matured East Asian economies together with small African nations on the top of the list in a ranking that is based on a – to put it mildly – questionable methodology.

The inaugural so-called Baseline Profitability Index by Foreign Policy envisions a scenario of a five-year investment by a business or an investor — for example through a private equity fund buying a stake in a local company or foreign direct investors in the stock market or certain industries. The index compares how local policies and conditions would affect the same investment in different countries. It asks how the value of the principal and the return will change depending on where the investment is made. It also assumes that the investor reinvests the asset’s returns during the five-year period, then sells the asset and brings all the money home.

Factors considered are, among others, the International Monetary Fund’s economic forecasts, Standard & Poor’s sovereign debt ratings and the World Bank’s governance indicators for political stability and rule of law. Local factors taken into account are Transparency International’s Corruption Perception Index, the International Property Rights Index by the Property Rights Alliance, the index of investor protection compiled by the World Bank, the index of financial openness and forecasts on exchange rates and purchase power parity, which all makes a wild mix of quantitative and qualitative base factors.

Unsurprisingly, this methodology churns out results that stand in heavy contradiction to well-founded perceptions of global investment opportunities by the worldwide investment community.

The best global investment destination in the world in terms of five-year yields, as per the findings of the Baseline Profitability Index (see below), would be Hong Kong, seen by anyone with basic knowledge of East Asian economies as a destination with a matured stock market, competitive disadvantages as compared to its emerging East Asian peers and an unpredictable regulatory environment under Chinese administration especially for US investors.

Other saturated or even shrinking Asian economies contained in the  index’s top 5 are Taiwan and Singapore, listed alongside Botswana and Rwanda, two African countries which are considered growth candidates on their continent, but still feature a volatile regulatory environment, high corruption and poor labour policies. These two countries topping Qatar as a high-return investment destination does not sound convincing at all, nor does the favourable listing of Panama, which basically has no other investment options than an opaque real estate sector for US pensioners and South American drug lords and a number of secretive offshore funds for the same clientele, but is listed as a better investment destination than Malaysia or Thailand with their broad spectrum of foreign investment programmes cum incentives and tax breaks.

ASEAN countries that made it on the list are, apart from Malaysia and Thailand, only Vietnam, Indonesia and the Philippines, scoring average to badly. It seems highly incomprehensible that, for example, Thailand (GDP growth 2012: 6.4 per cent) with its largely diversified economy is ranked far behind Costa Rica (GDP growth 2012: 4.2 per cent) with its banana, coffee and tourism-based revenue and Benin (GDP growth 2012: 3.5 per cent) with cotton and cocoa comprising 90 per cent of exports, which makes the two latter countries highly vulnerable to global market volatility.

Cambodia, Laos and Myanmar – three countries with current GDP growth rates above 6 per cent and heavy investor interest – have not been considered at all, nor has safe-haven Brunei.

Foreign Policy concludes its findings with the statement that “the time is ripe for investors to shift their focus towards Africa” – this is not exactly a new message but as usual downplays all prevalent obstacles for investment in Africa such as obscure tax laws, widespread bribery, poorest infrastructure, inconsistent government policies, lacking investment safety, imprecise regulatory environments and abusive legal proceedings. At the same time, the Washington Post-owned group openly states that the calculation of the index “is, of course, an imperfect exercise fraught with assumptions.” Furthermore, the calculation completely ignores taxation issues of repatriating capital because “there are so many possible permutations of this.” Yes, obviously there are. But without considering tax obligations for profit takers an investment ranking is close to useless unless it is meant as a manual for tax evaders.

Inside Investor is of the opinion that Foreign Policy, in marked contrast to its other highly sophisticated rankings such as the Failed State Index or the Globalisation Index, with the Baseline Profitability Index has produced a quite fallacious ranking that has the potential of misleading investors by not regarding crucial macro- and micro-economic factors of the economies it has been listing as of below:

Baseline Profitability Index (BPI), courtesy Foreign Policy/Daniel Altman, May 2013