The Global X FTSE Nordic 30 ETF (NYSE: GXF) has outperformed the S&P 500 SPDR (NYSE: SPY) by 3.27% since the beginning of the year, despite the fact that the Nordic region tends to be more socialist whereas the U.S. tends to lean more capitalist. These trends also held true over the past 52 weeks with GXF posting 25.26% gains versus just 20.55% for SPY over the same timeframe.
Socialist economies like Venezuela and Argentina should probably be avoided - even though Venezuela was a top performer in 2013 - but investors shouldn't ignore more responsible socialist countries like the Nordic countries or certain European countries like France that have historically been stigmatized.
Economic sanctions have proven pretty reliable in the past when dealing with countries like Iran and North Korea. In these cases, economic sanctions have at least prompted the regimes to reconsider their plans in exchange for public funding from the International Monetary Fund (IMF) or World Bank.
Russia differs in a few ways. Unlike Iran and North Korea, Russia doesn't have an explicit benefactor willing to pay its bills. The country is also significantly more intertwined in the global economy, which makes it difficult to go too far without disrupting the flow of investment dollars.
The latter has been proving especially true over the past few days. Capital is flooding out of Russia, the local stock market is in a tailspin, and the country's currency is weakening. Even if a diplomatic solution is achieved, some economists say it won't be enough to avoid a recession in 1H 2014.
Economic sanctions could further enhance these painful events, but it turns out they may not be entirely necessary after all. The global financial markets may be putting enough pressure on the country alone to push for change.
Investor appetite was high for emerging markets in last month, but they have recently experienced another sell-off. Rising tensions with Russia were to blame for the most recent declines, with the iShares MSCI Emerging Markets Index ETF (NYSE: EEM) trading down 0.19% over the past week compared to a 3.04% gain in the S&P SPDR ETF (NYSE: SPY) over the same timeframe.
Despite the modest setback, emerging markets have outperformed the U.S. markets by quite a bit over the past month, with EEM trading 7.11% higher compared to SPY's modest 0.45% gains. Investors looking at price-earnings ratios may find that emerging markets aren't all that cheap anymore.
EEM trades with an average P/E ratio of 19.38x and a P/B ratio of 3.08x, compared to SPY's more modest 18.68x P/E ratio and 2.61x P/B ratio. Of course, emerging markets are normally expected to grow more quickly and justify a higher multiple, but the added macroeconomic risk means they may not be worth the price now.
Quantitative value investors may want to take note and adjust accordingly.
The Cambria Global Value ETF (NYSE: GVAL) was recently launched in March of 2014 to bring value investing worldwide. The international ETF will screen for opportunities using criteria based on Benjamin Graham and David Dodd's work in value investing and securities analysis, selecting the most attractively valued markets across 45 developed and emerging market countries.
With an expense ratio of just 0.69%, the international ETF doesn't charge quite as much as many international funds, but the newness may warrant conservative investors to spend a bit of time on the sidelines to see how the strategy plays out.
RenAsset Management Chief Investment Officer Plamen Monovski recently told Investment Week Senate Conference delegates that the entire value of the U.S. technology sector is more than equal to the value of emerging markets. In particular, the entire Turkish market value right now is roughly equivalent to Starbucks, while Facebook's valuation could purchase all of Malaysia's public market.
These comparisons are not only surprising on a fundamental level, but highlight just how cheaply valued many emerging markets are relative to the U.S. Certain emerging markets could present a compelling opportunity given their dividend growth, increasing competitiveness, and ongoing improvement in currency volatilities and fiscal policies in some cases.
Shares of the iShares MSCI Emerging Markets Index ETF (EEM) is trading up more than 8.4% over the past month.
China's exports fell 6.6% year over year to $170.1 billion in March, while imports fell an even worse 11.3%. These figures took many economists by surprise and quenched hopes that the downturn was only temporary. Meanwhile, the country could have a tough time reaching his 7.5% GDP growth for 2014.
"We believe that China's trade growth in the first half would be distorted as the export over-invoicing activities last year have inflated the base for comparison," said Zhou Hao, Chinese economist at ANZ in Shanghai, in a Reuters story. "Our field study also shows that the exports are more resilient than what the headline data suggests."
Shares of the SPDR S&P China ETF (NYSE: GXC) fell 2.74% over the past three months compared to a 1.43% fall in the U.S. SPDR S&P 500 ETF (NYSE: SPY).
Relative valuations can provide investors with some insights into which countries may be overvalued and which may be undervalued. Using the U.S. S&P 500 as a benchmark, Japan's Nikkei 225 appears to be slightly overvalued after its recent move higher.
The Nikkei 225 trades with a price-earnings ratio of 30.16x relative to its median of 40.35 compared to the S&P 500's current 18.55x relative to its 14.53x median. While the U.S. trades above its historic multiples and Japan trades below its historic multiples, Japan's averages include two extraordinary periods.
International investors may want to consider these valuations when choosing opportunities within the two countries.
Middle income countries account for the majority of the world's population, and unfortunately, few of them transition to high income countries.
In 2011, the World Bank found that of 101 middle income countries in 1960, only 13 had become high income countries by 2008. Most economies in Latin America and the Middle East in particular failed to jump to a higher economic level.
Making the jump to a high income country can be difficult, but most economist seem to agree that it stems from healthy infrastructure and an open economy. International investors should keep a close eye on countries embracing these reforms as they could become attractive investment opportunities.
Most mainstream economists use purchasing power parity ("PPP") to compare relative currency valuations using what are known as international dollars. The theory is that exchange rates alone may not be entirely accurate since there are other potential factors at play like trade barriers.
Purchasing power parity compares the ratio of all prices, in say the U.S., to all prices in a different country, say Europe. The assertion is that the PPP-adjusted exchange rate is where prices should be based on the economy's fundamentals. Deviations from these levels are seen as overvalued or undervalued currencies.
The problem some economists see with PPP is that it doesn't apply to all goods - particularly those that can't be traded. After all, a steak in New York and a steak in Paris aren't exactly completely interchangeable since other factors like convenience or environment may play a larger role in price than the product itself.
As a result, investors should take the idea of PPP and international dollars with a grain of salt - only commodities like oil barrels or gold may fit the mold completely.
Most financial advisors recommend having somewhere between 15% and 25% of a portfolio dedicated to international stocks, with the number increasing over time as global investments become more stable and liquid. In fact, some experts now think that total international exposure should be closer to 50% with a focus on developed markets in Europe or Asia.
Unfortunately, many U.S. investors have very little exposure to international stocks - maybe even less than they think. Some investors purchase global funds in hopes of diversifying abroad, but in reality, these funds typically hold at least 50% of their portfolio in the U.S. Instead, investors should look towards international funds that hold exclusively international stocks.
If you're curious about the difference between global and international funds, check out an article called What's the Difference Between Global & International Funds? to make sure you're on the right side of the fence.