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The five safest countries for your money (in four graphs)

February 16, 2015 by 1 Comment

US stock markets have bounced back from a series of mini-corrections during the start of the year. It seems like there’s nowhere to go but up. But it might be time to start worrying about valuations. I’ve made the case in previous articles that low interest rates = higher stock prices as a matter of course.

  • Are American stocks overvalued?
  • How the Fed makes or breaks stocks

And the excellent blog Philosophical Economics makes the case that CAPE is missing some key points over the last 10 years, but also that stocks may still be overvalued.

  • Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau
  • Why is the Shiller CAPE So High?

But take solace. Just because stock prices are high in the United States doesn’t mean they are high everywhere. According to this global valuation data from Star Capital, there are cheap, safe places to invest our money.  But instead of relying on their graphs, I’ve created some of my own. First, let’s take dividend yield.

1_map_div

According to this map, dividends are high in lots of Europe, Russia, Brazil & Australia. In fact, by most valuation metrics Brazil and Russia come out really cheap. But there’s good reason for this: Brazil and Russia are facing crises in confidence in their governments (Putin’s incursions into Ukraine, Rousseff’s statism and corruption). Because of these crises, inflation expectations in both countries are very high. So we should adjust our potential dividend yields by government bond yields (a decent indicator of future inflation expectations).

2_map_div_adj

Adjusted, the picture changes significantly. All the top-10 adjusted dividend yielding countries are in the Eurozone. But while these countries stock valuations look cheap, are they safe? The European Central Bank has foolishly allowed inflation expectations to sink far too low and is only now pumping up European economies with quantitative easing (too little, too late?). Let’s look at a different map: monetary risk.

3_map_risk

There are different kinds of monetary risk: inflation like we will probably see in Brazil and Russia. Or deflation that we may see in Europe. Where government yields are higher than 6%, I see a risk of devaluation (in which case your dividends won’t help you much). There are a few southern European countries where government bond yields are lower than 6%, but still high mainly because of Eurozone deflation risks. I’ve bucketed them in group d, also risky. Where government yields are between 2.5%-6% (and not in the Eurozone), central banks have a lot of leeway to loosen policy in case of deflation (groups a & b). But too low, and deflation may rear its ugly head (group c).

By combining our adjusted dividend rate with this grouping by macroeconomic stability, a few countries stand out with good dividend returns and a stable macroeconomic environment: the United Kingdom, Poland, Taiwan, Hong Kong and Australia. How do these markets do on other measures of valuation? Below is a scatter plot looking at CAPE vs. Price/Book ratio. Shape is the stability of central bank policy (solid shapes like circles & squares = good). Color is the adjusted dividend yield. The shape size is the weight of the market (smaller, more illiquid markets are less attractive).

4_scatter_CAPEPB

Of course some countries with more unstable macro environments are dirt cheap (Brazil & Russia). Germany and France markets look well-valued for large, liquid markets. But the threat of deflation is a sword hanging over their heads. Again, United Kingdom EWU), Poland (EPOL), Australia (EWA), Hong Kong (EWH) and Taiwan (EWT) stand out with much better valuations than the United States, yields that are positive with respect to government bonds, and stable macroeconomic environments. You could do worse than to shift money into their respective ETFs.

Filed Under: Investing

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