Changes need to be made. Invest in democracies


I have rebuilt some of my screens for international investing. Essentially, it is too easy to get whacked if one invests in emerging markets. While they are potentially profitable, the volatility in these markets can be too much for a typical investor to endure. Here is some data, based on 12-month rolling returns starting 1/1/2017:

I screened for the top 20 actively traded stocks on the US exchanges for foreign securities based on their classification. Returns are based on arithmetic averages. Note, Developed Markets and Emerging Markets are generally well defined. In the meantime, I used The Economist to develop my lists based on levels of democracy.

  • Developed Markets Stocks: 21.14% (+/- 40.46%)
  • Full Democracies: 24.16% (+/- 38.90%)
  • Emerging Markets: 27.09% (+/- 94.78%)
  • Flawed Democracies: 21.07% (+/- 58.01%)

As one can see, Emerging Markets do have the potential for better returns, that is until they don't. That 94.78% standard deviation can throw one off an investment plan very quickly.

I have recalibrated my developed market screens to only include fully developed markets. Generally, this is what I look for:

  • No OTC Stocks
  • No Mining Stocks
  • No MLPs
  • No REITs
  • Positive Operating Cash Flow
  • Positive Net Income
  • Current Ratio > 1.5
  • Debt-to-Equity < 0.4
  • Average Daily Volume > $1,000,000
  • For Growth Stocks:
    • ROE > 15% or ROI > 12%
    • Cash Flow Analysis based on historical sales growth
  • For International Income Stocks:
    • Yield > 2%
    • Persistent Dividend Growth

I like what I see when I look back to the beginning of 2017. I would say this

  • Full Democracy Growth: 35.76% (+/- 29.41%)
    • Developed Markets Growth: 28.61% (+/- 35.45%)
  • Full Democracy Income: 25.08% (+/- 22.44%)
    • Developed Markets Income: 22.58% (+/- 19.14%)
  • Flawed Democracy Growth: 28.80% (+/- 24.15%)
    • Emerging Markets Growth: 18.90% (+/- 27.08%)
  • Flawed Democracy Income: 28.60% (+/- 17.32%)
    • Emerging Markets Income: 32.57% (+/-24.17%)

When I pick the best from each category based on present values based on sales growth or dividend growth, the four-pack of stocks averages 30.03% (+/- 30.54%). When I can generally improve my outcomes with lower volatility, sign me up.

As it stands now, these are the best I can recommend that provide growth and income. I hope they work for you.

  • Ituran Location and Control Ltd ($ITRN)
  • Dr Reddy's Laboratories Ltd ($RDY)
  • Wipro Ltd ($WIT)
  • United Microelectronics Corp ($UMC)


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