Your Money in 2014: Here are the countries where you should invest


Do you work at a company that does business in more than one country? Or maybe you’re an investor hoping to buy a chunk of the growth in emerging markets? Either way, you’re probably wondering where the right places are to invest for the next five years. It’s an especially tough question today, given the geopolitical and financial risks plaguing the global economy. But a detailed consideration of all the things that can happen between earning a return abroad and bringing it home can offer a useful place to start.

Last May, I presented the first edition of the Baseline Profitability Index (BPI), which brought together eight factors to predict the total pretax return investors might expect in countries around the world:

1- Economic growth

2- Financial stability

3- Physical security

4- Corruption

5- Expropriation by government

6- Exploitation by local partners

7- Capital controls

8- Exchange rates

In each case, I estimated how likely a given factor was to affect an investment, and then how costly the effect might be.

The idea of the BPI is to see how all of these factors might affect a foreign direct investment — the kind a private equity firm might make — over five years.

To my knowledge, it’s the first publicly available tool that explicitly takes a holistic approach to forecasting investment returns. It’s not perfect, because it doesn’t account for the interactions between all of these factors; just looking at them individually already involves many layers of complexity. But it’s a start.

Baseline Profitability Index 2014(Darker countries indicate a higher score on Daniel Altman’s Baseline Profitability Index for 2014, meaning they are a better bet for foreign investment. The index considers asset growth, preservation of value, and repatriation of capital. Botswana ranks the highest in 2014 with a BPI value of 1.31; Venezuela ranks the lowest at 112, with a score of 0.63.)

 

In just the past 12 months, quite a lot has changed in the global investing environment. Some struggling economies have found their feet, notably in Europe, while others around the world have fallen victim to conflict. A few have improved their economic institutions, too; neighbors Greece, Macedonia, and Turkey all bolstered legal protections for investors, and nearby Azerbaijan strengthened its property rights.

Thanks to the availability of new data, four countries joined the BPI this year: Cyprus, Ethiopia, the Democratic Republic of Congo, and the Republic of Congo. It also lost a few: Benin and Tunisia (whose sovereign debts are no longer rated by Standard and Poor’s); and Ukraine (whose economic forecast from the International Monetary Fund is currently in flux).

Before I get to the results, I have three notes: In the 2013 edition, I used the International Property Rights Index as a gauge of the likelihood of government expropriation. The index is valuable, but covers fewer countries and does so more idiosyncratically than other sources. This year, I decided to use the property rights component of the Heritage Foundation’s Index of Economic Freedom. In the rankings below, I have recalculated the 2013 numbers using last year’s edition of the Heritage index. Also, the World Bank changed its methodology slightly for measuring protection of investors and then revised all previous years of data; these changes are reflected in the 2013 rankings as well.

Finally, the Chinn-Ito index I used to evaluate capital controls has not been updated, so I’m using the same values as last year. Some countries did indeed change the ease with which money could be moved across their borders; Cyprus, Ghana, and notably Ukraine made it more difficult, while Argentina and Venezuela made it easier. Hopefully a future update will include the effects of these new policies.

With all of these considerations in mind, here are the rankings:

BPI Rank 2014 Country BPI Rank 2013 Change in Rank BPI Value 2014 BPI Value 2013 Asset Growth Rank 2014 Asset Growth Rank 2013 Value Rank 2014 Value Rank 2013 Repatriation of Capital Rank 2014 Repatriation of Capital Rank 2013
1 Botswana 1 0 1.31 1.24 11 12 25 23 3 11
2 Hong Kong 2 0 1.22 1.23 4 4 3 3 35 38
3 Taiwan 3 0 1.20 1.20 7 10 23 22 34 36
4 Qatar 8 -4 1.20 1.16 1 2 50 49 85 83
5 Singapore 5 0 1.18 1.18 3 3 2 2 77 77
6 India 6 0 1.18 1.17 53 48 47 43 4 6
7 Rwanda 9 -2 1.16 1.16 16 19 51 50 13 17
8 Ghana 7 1 1.15 1.16 18 23 40 40 27 26
9 Cambodia 13 -4 1.14 1.13 38 49 84 84 2 2
10 Mongolia 4 6 1.13 1.20 2 1 62 63 39 40
11 Malaysia 14 -3 1.13 1.13 23 17 10 14 50 58
12 Chile 10 2 1.12 1.15 10 5 16 17 72 75
13 Uganda 16 -3 1.12 1.11 50 64 87 86 1 1
14 Poland 19 -5 1.12 1.10 22 37 32 31 44 41
15 Sri Lanka 12 3 1.11 1.13 43 36 58 58 15 12
16 Lithuania 17 -1 1.10 1.11 26 33 37 37 46 37
17 Mozambique 18 -1 1.10 1.10 6 7 74 74 37 43
18 Estonia 15 3 1.09 1.11 27 25 24 25 60 47
19 Korea 22 -3 1.08 1.09 33 31 30 29 61 56
20 Panama 11 9 1.08 1.14 20 9 79 72 26 29
21 Czech Republic 23 -2 1.08 1.08 40 41 49 48 32 34
22 Latvia 25 -3 1.07 1.07 25 30 46 46 53 52
23 Burkina Faso 20 3 1.07 1.09 47 40 98 100 20 13
24 Peru 24 0 1.06 1.07 68 57 42 42 17 23
25 Slovakia 30 -5 1.06 1.05 36 38 66 66 49 51
26 United States 29 -3 1.05 1.06 19 21 6 5 83 85
27 Ethiopia N/A N/A 1.05 N/A 71 N/A 101 N/A 7 N/A
28 Bulgaria 28 0 1.05 1.06 75 73 69 68 5 4
29 Macedonia 34 -5 1.05 1.05 84 90 45 54 9 9
30 Costa Rica 27 3 1.04 1.07 31 29 82 81 54 53
31 New Zealand 38 -7 1.04 1.03 5 8 1 1 105 102
32 Georgia 32 0 1.04 1.05 66 54 33 34 40 48
33 Gabon 42 -9 1.04 1.02 29 15 91 91 63 80
34 Malta 31 3 1.03 1.05 45 42 34 33 59 54
35 Vietnam 36 -1 1.03 1.04 39 45 108 110 14 7
36 Barbados 33 3 1.03 1.05 64 52 65 65 56 62
37 Bahamas 40 -3 1.03 1.03 41 43 41 41 86 86
38 Hungary 41 -3 1.03 1.03 69 75 59 57 30 31
39 Oman 39 0 1.02 1.03 37 32 63 61 66 63
40 Senegal 49 -9 1.02 1.01 61 72 93 101 38 35
41 United Kingdom 59 -18 1.02 0.98 34 50 7 7 88 87
42 Morocco 37 5 1.02 1.03 59 58 75 75 47 49
43 Zambia 35 8 1.02 1.04 9 6 76 77 69 65
44 Canada 52 -8 1.01 1.01 17 20 4 4 99 98
45 Uruguay 26 19 1.01 1.07 42 18 36 35 82 76
46 South Africa 54 -8 1.01 1.00 73 67 21 21 48 68
47 Ireland 46 1 1.01 1.02 21 22 5 6 96 91
48 Romania 53 -5 1.00 1.00 74 82 53 52 29 25
49 Bangladesh 45 4 1.00 1.02 77 78 80 80 12 8
50 Iceland 68 -18 1.00 0.98 13 28 17 15 108 107
51 Netherlands 58 -7 1.00 0.99 30 39 31 30 93 90
52 Sweden 57 -5 1.00 0.99 8 16 14 13 107 105
53 Albania 71 -18 0.99 0.97 88 100 52 44 16 16
54 Dominican Republic 63 -9 0.99 0.98 72 80 83 83 18 24
55 Serbia 44 11 0.99 1.02 100 99 67 67 8 3
56 Austria 62 -6 0.99 0.98 24 34 35 32 95 93
57 Thailand 47 10 0.99 1.02 89 77 29 27 45 45
58 Saudi Arabia 55 3 0.99 0.99 58 59 43 38 70 72
59 Philippines 80 -21 0.99 0.95 67 83 88 89 51 55
60 China 43 17 0.98 1.02 32 13 90 92 74 69
61 Kenya 66 -5 0.98 0.98 78 89 85 85 22 21
62 El Salvador 69 -7 0.98 0.97 101 104 96 98 10 10
63 Jordan 60 3 0.98 0.98 65 66 81 82 64 59
64 Portugal 81 -17 0.98 0.95 63 79 26 24 73 66
65 Indonesia 74 -9 0.97 0.96 60 60 73 73 58 70
66 Cape Verde 48 18 0.97 1.01 44 24 60 62 97 97
67 Germany 67 0 0.97 0.98 46 46 27 26 91 89
68 Bahrain 56 12 0.97 0.99 82 68 64 60 52 60
69 Finland 65 4 0.96 0.98 28 26 15 16 104 100
70 Japan 92 -22 0.96 0.92 56 53 13 12 87 103
71 Mexico 73 -2 0.96 0.96 93 94 55 55 43 44
72 Egypt 51 21 0.96 1.01 107 95 92 93 6 5
73 Australia 79 -6 0.96 0.95 12 11 19 19 110 110
74 Slovenia 76 -2 0.96 0.96 62 65 18 18 90 88
75 Cameroon 64 11 0.95 0.98 87 81 94 94 33 32
76 Israel 70 6 0.95 0.97 70 70 8 8 89 82
77 Suriname 72 5 0.95 0.97 57 47 106 107 81 84
78 Jamaica 100 -22 0.95 0.91 99 108 70 69 23 33
79 Turkey 61 18 0.95 0.98 97 76 38 46 65 64
80 Colombia 78 2 0.95 0.95 92 88 20 20 71 71
81 Belgium 82 -1 0.94 0.94 51 56 12 10 100 95
82 Bosnia and Herzegovina 94 -12 0.94 0.92 95 106 97 99 21 20
83 France 84 -1 0.94 0.94 52 61 28 28 101 96
84 Bolivia 86 -2 0.93 0.93 79 87 109 109 19 19
85 Paraguay 75 10 0.93 0.96 96 71 78 78 36 46
86 Papua New Guinea 99 -13 0.92 0.91 49 55 89 90 68 73
87 Denmark 87 0 0.92 0.93 35 35 11 11 109 108
88 Honduras 85 3 0.92 0.93 106 101 107 108 24 30
89 Spain 90 -1 0.92 0.92 81 85 44 39 79 81
90 Croatia 83 7 0.92 0.94 90 86 86 87 62 57
91 Switzerland 102 -11 0.92 0.90 14 27 54 53 111 109
92 Nigeria 89 3 0.92 0.92 98 96 77 76 42 50
93 Kazakhstan 77 16 0.91 0.95 54 44 61 51 98 94
94 Guatemala 88 6 0.91 0.93 103 102 103 105 28 28
95 Norway 93 2 0.91 0.92 15 14 9 9 112 111
96 Belarus 91 5 0.90 0.92 104 107 99 102 25 14
97 Pakistan 106 -9 0.90 0.87 111 111 71 71 11 18
98 Brazil 95 3 0.90 0.92 76 62 57 59 92 99
99 Cyprus N/A N/A 0.90 N/A 86 N/A 22 N/A 80 N/A
100 Kuwait 97 3 0.89 0.91 55 51 56 64 106 101
101 Greece 105 -4 0.89 0.87 83 97 68 70 75 74
102 Azerbaijan 103 -1 0.89 0.89 94 91 72 79 67 67
103 Ecuador 98 5 0.88 0.91 105 105 105 106 31 22
104 Trinidad and Tobago 96 8 0.88 0.91 91 84 39 36 84 79
105 Congo N/A N/A 0.88 N/A 48 N/A 111 N/A 76 N/A
106 Italy 109 -3 0.86 0.86 85 92 48 45 94 92
107 Lebanon 107 0 0.82 0.86 110 109 100 88 41 39
108 Russia 108 0 0.82 0.86 108 98 95 96 78 78
109 Argentina 104 5 0.81 0.88 109 93 102 97 55 61
110 Congo DR N/A N/A 0.81 N/A 102 N/A 110 N/A 57 N/A
111 Angola 110 1 0.79 0.83 80 69 104 103 103 104
112 Venezuela 111 1 0.63 0.65 112 110 112 111 102 106

 

Comparisons across the first two years of the BPI tell plenty of interesting stories. Botswana originally ranked second last year, but using the Index of Economic Freedom puts it in first place for two years in a row. Four other countries in sub-Saharan Africa join it in the top 20, with strong prospects for growth and, in Ghana and Rwanda at least, friendly business climates. East Asia performs even better, locking down seven of the top 20 places. India maintains its sixth position in large part because of the potential for real appreciation in the rupee; this may now be more likely than ever, thanks to Narendra Modi’s supposedly reform-minded government and the strong hand of Raghuram Rajan at the central bank.

China’s case is one where the switch to the Index of Economic Freedom is noticeable. It ranked 21 in the original 2013 BPI and slipped to 43 after the change. The index takes a dim view of Chinese property rights, perhaps because of the country’s nominally communist system. China’s expectations for growth dimmed significantly as well, pushing it still further down the rankings to 60th place in 2014.

Several countries made even wider jumps between the two years of uniform data. The biggest movers in the right direction were Jamaica, Japan, and the Philippines. Forecasts for faster growth, a better credit rating, and an increase in political stability helped the Philippines. In Japan, the 2013 BPI foresaw a real depreciation in the exchange rate, which indeed came to pass thanks to the huge expansion of the money supply encouraged by Shinzo Abe’s government; with this risk somewhat lessened going forward, Japan became more attractive for investment. Jamaica had a bit of both: a slight increase in its growth forecast and a suggestion that its currency was ripe for appreciation.

The deepest drops in the BPI were by Cape Verde, Egypt, Turkey, and Uruguay. Cape Verde suffered downgrades in both its economic forecast and its credit rating; Standard and Poor’s cited the country’s rising budget deficit — in part a consequence of lower growth and tax revenues — in cutting the rating. In Egypt, expectations for the economy worsened markedly as the army’s coup heightened the general level of uncertainty, while the likelihood of being shortchanged by a local partner rose. Turkey actually improved some protections for investors, but its security situation and its growth forecast both became gloomier. The political tribulations these economies have suffered in the past year did them no favors in terms of attracting investment. Meanwhile, peaceful, pot-smoking Uruguay also saw some erosion in the rule of law and a decrease in expected growth. I’ll let you draw your own conclusions.

Once again, the BPI suggests that not every fast-growing country is a perfect target for foreign investment. Many other factors determine just how much of that growth will be transformed into a cash return back home. Plenty of them are not included in the BPI, but it still contains much more information than a simple economic growth forecast.

We won’t know how predictive the BPI has been of investment returns until a few more years have passed. Even then, it might be tough to compare its forecasts to the profits earned by multinational corporations and private equity funds. But at the very least, the BPI synthesizes the many factors that can affect an investment; as a first approximation, it should at least help investors to ask the right questions.

By Daniel Altman

If you have any question concerning any aspect of the above text, please, feel free to contact the author.

Daniel Altman teaches economics at New York University’s Stern School of Business and is chief economist of Big Think.



Categories: Economy

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