Article by Investment U
To the distraction of friends and family, I do a lot of thinking about why some countries are so much more successful than others and what America needs to do to get back on track and stay on top.
One conclusion I have come to is that prosperity and freedom are highly correlated.
This is not a hunch.
For many years, I have been following the Index of Economic Freedom produced by the Heritage Foundation in partnership with The Wall Street Journal. It ranks countries based on a 100-point grading system that covers four areas of economic freedom: rule of law, limited government, regulatory efficiency and open markets.
Specifically, it ranks countries by benchmarks that are at the heart of my latest book, Red, White and Bold: The New American Century:
- Tax burden
- Government spending
- Property rights
- Corruption
- Freedom to start and run a business
- Monetary freedom
- Free trade and investment
- Private and independent banking system
Here are the top-ranked countries for 2012 and their corresponding country exchange-traded funds. (Mauritius was ranked No. 8 but does not have a country ETF.)
- Hong Kong (NYSE: EWH)
- Singapore (NYSE: EWS)
- Australia (NYSE: EWA)
- New Zealand (NYSE: ENZL)
- Switzerland (NYSE: EWL)
- Canada (NYSE: EWC)
- Chile (NYSE: ECH)
- Ireland (NYSE: IRL)
- United States (NYSE: SPY)
- Denmark (NYSE: EDEN)
Looking through the numbers in this report, five things jumped out at me.
First, as we head down the stretch in a presidential election, it’s telling that America’s ranking has fallen sharply from No. 5 in 2008 to No. 10 this year. The economic freedom agenda might just be the ticket to victory and a chance for the U.S. stock market to equal past recoveries when emerging from recessions. In the nine U.S. recessions since World War II, in four of those recessions the stock market actually soared: 40% in 1954, 22% in 1961, 30% in 1980 and 30% in 1991.
Second, it’s interesting to note that five of the top six slots are countries associated with the British economic and political system (sorry, Jefferson Francophiles, it looks like Anglophile Alexander Hamilton was right on, France is ranked No. 67 down from No. 48 in 2009).
Third, the BRIC countries (Brazil, Russia, India and China) rank surprising low, and with the exception of Brazil have dropped in the rankings over the last three years. Brazil is at No. 99, India at No. 123, China at No. 138 and Russia at an abysmal No. 144. All of these countries are in the basket labeled “mostly unfree.”
No question, these BRIC countries have experienced higher economic growth greater than the top-ranked countries, but what about going forward? My opinion is that it’s very unlikely that China and India can maintain growth rates without addressing these freedom speed bumps as soon as possible. The market may be telling us much the same.
On the other hand, just think of the possibilities for progress if countries in the mostly “unfree” and repressed countries, many of them frontier markets, launched an ambitious freedom reform agenda? The results for their citizens and investors alike would be staggering.
Fourth, I was happy to see that seven of the top 10 investable countries are Pacific Rim countries. They’re well positioned to capture the biggest slice of what I call our “Blue Ocean Century” of wide and deep Pacific Rim prosperity.
Fifth and most importantly, I noticed that the top 20% of countries ranked have per capita incomes twice that of the next 20% and a stunning five times that of the bottom 20%. It’s essential that economic freedom trickle down – and the sooner and faster the better.
Finally, while it’s a tough and tricky time to put new capital to work, why not start with the freest economies in the world? Execute a simple and low-cost economic freedom portfolio today by equally weighting these 10 countries in a freedom portfolio.
You will reap the rewards.
Good Investing,
Carl
Article by Investment U
