The world’s economies were in turmoil in 2020. Or were they?
With a lot of us focused on our local situations, we didn’t even notice that certain countries actually grew real GDP in 2020.
While Canada was down an estimated 7% in 2020, China grew approximately 2%. Take a look at Egypt, another up-and-comer in the world economy. It is one of the few countries to see real GDP gains of >3% this year. Impressive. Or take a look at Guyana, which grew as the rest of the Americas contracted.
This presents the wide-eyed investor with opportunities. We are no longer restricted to investing in Canada. In fact, investing in different countries is entirely possible. You don’t even have to exchange currency. Here are some key reasons why you might want to geographically diversify.
Why Geographical Diversification
Different Countries have different Economies
One of the most important aspects of investing is choosing a good macroeconomic environment to invest in. You want to invest when you think that the entire economy is on an upward trajectory. When you’ve established that this is a good macro environment, then you can dig down into the specifics of the company which you are considering investing in. It is true that the economy is not the same as the stock market, but they are related to each other. Real GDP is a key driver of stock markets world over.
These three conditions can shift the odds in your favor. Companies which exist in a thriving economy & industry will report better earnings and will eventually get noticed by investors.
You may think you have little control over macroeconomic conditions. That’s not entirely the case. We choose different countries when we believe they will experience better macroeconomic conditions. This brings me to a related point.
Countries Grow at (very) Different Rates
Canada is what’s known as a “mature” economy. It has been an affluent country for a long time. The rate of change is steady, but slow and predictable. There are countries with very different situations.
Examples of “emerging markets” are countries such as India, Egypt, Thailand, and China. In fact, India is widely cited to be the next contender for number two economy in the world in the coming decades, eventually overtaking the United States.
Now is a good time to say that, historically, the emerging markets as a whole have underperformed the USA and North American equity markets over the pat few decades. However, countries such as China have offered absolutely massive opportunities to those willing to look outside the box. It is important to pick your stocks and countries wisely.
The intelligent investor doesn’t buy into a stock because it is number one, they buy into it because they know it will become number one. Likewise, they get into countries while they are on the come-up, not because they are already up. We put money in now because our investment will produce more and grow more valuable in the future.
Jean-Baptiste Say, an 1800s era French economist once said:
“The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.”
This is incredibly smart. It takes genius to be so succinct. Jean was right. We want to shift our resources into where they will produce the most. In many cases, this is quite literally these countries which have the highest growth rates.
But enough with the theoretical. What about the actionable. What can you do right now?
How to do Geographical Diversification
Canadian Exchanges
This map shows all of countries on the TSX/TSXv which you can invest in right now without even exchanging currencies. There are 228 international companies in all.
We can see that both the TSX & TSXv are dominated by mining companies. However, there is still a good choice of industries.
Okay that’s great. But where do I get started?
Below I have ordered a select group of TSX/TSXv stocks by their Price/Book and Price/Earnings Ratios. As you can see, stocks like CFY (CF Energy), CNU (CNOOC), and DR (Medical Facilities Corp) rate very favorably on these popular fundamental indicators.
The Price/Earnings and Price/Book indicators, while not perfect, are a favorite for determining a companies value. They are a good place to get started. As always, I recommend that you thoroughly check out any company before you invest in it.
ETFs for Geographical Diversification
ETF stands for Exchange Traded Fund. They are a great way to invest in the world economy. These funds are a portfolio in themselves, and consist of many assets.
These funds are traded on exchanges and you can buy them just like you would buy a common stock on the exchange.
Fortunately, there are many options for investing in the world through Canadian ETFS. Not only can you invest in international equities, but also international government bonds. Watch out though! Because not all countries are as stable as Canada, and if a government were to default, this would lower the value of your ETF investment. As always, this is a risk/reward scenario.
Issuers of Canadian ETFS include Mackenzie, iShares, CI, and the big banks such as TD & BMO. It is always wise to check out the underlying holdings and the investment strategy of an ETF before investing in them.
Risks of Geographical Diversification
As always there are risks. The risk can be assumed to be higher if the potential reward is higher. At least, the perceived risk by the rest of the market.
Some risks of investing in international investments are currency risk, political risk, and risk of corruption.
One risk made material in recent times is the delisting of certain Chinese stocks in the USA because of alleged Chinese military ties. This cost many people in the USA a lot of money and headaches.
Keep an eye on all risks.
In Conclusion:
If you keep your head about you, the international market is rife with opportunity. Keep in mind the risks and benefits and make a move when you feel the wind is at your back.
Possibly the very best reason to be an international investor is flexibility. Don’t be limited to good opportunities in Canada. If done right, investing in the world can be very lucrative.
As always,
Happy Investing.
