These are questions I attempted to address five years ago (Bearbull, 17 December 2010) when I concluded that Australia was the best country for equity investment capital. True, the sample was small - see table below - but the 10 countries under consideration covered the range of developed and developing, big and small, free and authoritarian and so on. Nor was I making a firm forecast. Rather, I was discussing what characteristics the ideal country should have, quantifying those characteristics using the global league tables about country performance that proliferate nowadays and seeing who fared best.
Who came good?
| Country | 2010 ranking | Mkt Index | Stock market performance 2010-15 (%) | Exchange-adjusted performance (%) |
|---|---|---|---|---|
| US | 4 | S&P 500 | 77.0 | 83.8 |
| Germany | 6 | Dax 30 | 69.3 | 42.5 |
| China | 9 | SSE Composite index | 28.9 | 39.6 |
| UK | 7 | FTSE All-Share | 22.1 | 22.1 |
| Norway | 2 | OSEAX | 51.7 | 11.8 |
| Singapore | 3 | FTSE Straits Times | -9.1 | -11.9 |
| Australia | 1 | S&P ASX All Ord's | 11.6 | -13.1 |
| Canada | 5 | S&P TSX | 3.2 | -17.8 |
| Brazil | 8 | Ibovespa | -30.4 | -67.8 |
| Russia | 10 | RTS Index | -46.4 | -73.6 |
Five years on, it's time for an interim assessment. In the table, the nations are ranked in descending order according to returns posted by each one's major stock market index since end-November 2010 adjusted by movements in the domestic currency against sterling; that gives an approximate measure of their returns to a UK-based investor. The second column shows the 2010 ranking. So, for instance, the US, whose sterling-adjusted market gain of 84 per cent over the past five years was the best of the 10, appeared to be the fourth best home for long-term capital in 2010. (More detailed tables are available
and .).What's most striking is that 2010's top three - Australia, Norway and Singapore - have all disappointed. They are clustered in mid table - fifth to seventh. It would be easy to isolate Australia and Norway and attribute their poor investment returns to the downturn in the commodity cycle. However, their status as commodity producers had no influence on their ranking in 2010. Rather, that was all to do with a combination of high per-capita output (ie, they are already wealthy), high levels of 'human development' (meaning that they use their human capital well) and low levels of corruption, which is basically a tax on enterprise.
It may simply be that these characteristics have little traction when faced with the brute force of a downturn in the commodities cycle; especially as Australia's ASX All-ordinaries index is dominated by mining companies. Yet Singapore shared the same characteristics as Australia and Norway in 2010 so that explanation offers no insight into the poor performance of its stocks - after all, the city state grows nothing bar a few orchids and mines even less. True, one can always say of Singapore that it is exceptional, but that gets us nowhere. It is also true that it carries the sort of demographic challenge that burdens much of the developed world; so does Germany, whose stock market returns in the past five years make it a pronounced outperformer against 2010's assessment.
Much of the decline in Singapore's share prices has happened since the summer, implying that China's slowdown is having a disproportionate effect. Then there is the underlying worry that Singapore's economy may be reaching the limits of what benevolent autocracy can achieve, in which case the performance of the Straits Times index is likely to be restrained. Yet writing off Singapore may be like writing off the US or Germany - often done, but rarely successful.
Meanwhile, the fit between 2010's assessment and ensuing returns 2010-15 has been closest in the miserable performance of Russia and Brazil. Yes, both countries have been badly hit by the commodity downturn. Even so, this has chiefly exposed chronic faults that were never resolved; nor is there good reason to expect they will be.
Admittedly, Russian and Brazilian stocks are capable of bouncing in the coming years. Even so, long-term global investors should treat them with caution. Of the developing-world countries in this 10, China remains the one with the plan and the commitment to foster sustained growth and has the advantage of still being poor compared with Brazil and Russia. True, China's fastest growth is behind it and its demographic dividend is running out. But the existential threats that might wreck it are still in the middle distance. Meanwhile, its burgeoning middle class has much to look forward to as the engine of growth shifts away from exporting and capital spending and towards consumption and welfare. Let's see what happens in the next five years.
