For all the concerns about slowing US economic growth, there’s consensus that stocks can continue to rise. But for the best returns, strategists and portfolio managers have indicated they’ll look elsewhere.

Neil Dwane, portfolio manager and global strategist at Allianz Global Investors, thinks that the heated run-up to the 2020 election is likely to weigh on prices.“While the United States has offered investors strong returns for many years now, the country will likely spend much of next year grappling with growing political uncertainty,” he wrote in an op-ed for CNN Business. “The real investment opportunities in 2020 may very well be found abroad.”

Our belief is that the very partisan election campaign will not adversely affect the stock market so long as earnings continue. However, the now-certain-to-be-long-term trade war, the ever-increasing US debt, and a generally slowing global economy are likely to affect the U.S. market. No matter why it will happen, the U.S. market is likely to slow down and well-chosen investments elsewhere will flourish.

Where to Invest outside of the USA

In our recent article about safe investments in an uncertain world, we published a map of the world from OECD, color-coded for expected economic growth. The only nation in the Western Hemisphere predicted to experience better than 3% growth is Colombia. In Europe, only Spain, Poland, and Turkey are likely to grow faster than 3%. And all of the 4%, 5%, and better growth rates are expected to occur in South and East Asia. India stands out with a predicted rate of economic growth greater than 6%.

The ABC (anywhere but China) movement is likely to continue and countries like Indonesia, Vietnam, and India are likely to benefit. A good place to look for cues about where the smart money is going is the World Bank’s yearly report on foreign direct investment. Although the world’s two largest economies, The U.S.A. and China receive the greatest cash inflows, the table that the World Bank publishes each year gives you a good idea of where else investment capital is going and if the trend is up or down.

How to Safely Invest Outside of the USA

Since you probably do not speak many foreign languages and do not have someone “on the ground” in Indonesia, India, or anywhere else in South and East Asia (or Colombia, Spain, Poland, and Turkey), you need a safe way to invest your money. And, you need to be able to do the same sort of fundamental analysis that you do when investing in stocks in the USA. The route that many investors take is to purchase American Depositary Receipts. As Investopedia explains.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares or as little as one share investment in a foreign company’s stock. The ADR trades on markets in the U.S. as any stock would trade.

ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American investors and capital without the hassle and expense of listing themselves on U.S. stock exchanges. The certificates also provide access to foreign listed companies that would not be open to U.S. investment otherwise.

The best route is to only purchase level three ADRs. They are subject to full SEC reporting requirements so that you can just as easily analyze them as you would a US stock.

As an example, follow this link to see Indonesian ADRs. It is of note that only one ADR of an Indonesian company trades on the NYSE. As a fixed line Telecom Company this is not an internationally famous company but it is one that will grow as the Indonesian economy expands. You can also check out ADRs for any of the other nations with higher projected growth rates in you are wondering where to invest outside of the USA.

With U.S. stocks trading in overvalued territory after their long rally, investors are likely to reap better returns going forward in places like the eurozone, and in emerging markets like Brazil, and Central and Eastern Europe. These foreign markets now have characteristics that suggest future gains will outpace U.S. returns. Working in their favor? They’re selling at more affordable prices, and are home to economies on the upswing and companies poised to post stronger profit growth.

The United Nations World Investment Report for 2016 shows which countries investment money is flowing into and in what amounts. In 2015 money flowing into Asia and Europe each exceeded that flowing into North America.

This situation is a turnaround from foreign direct investment in the early days of the Great Recession when the USA was far and away the beneficiary of foreign investment.

Follow the money is age old advice for knowing why something is happening. In this case we would like to follow the money that goes into foreign direct investment. Foreign direct investment is done by folks with lots of money and the intention to stay a course and make a profit. If you are looking for offshore investment ideas, take a look at where foreign direct investment goes year after year after year.

The UN study is updated every year and provides a good picture of where the smart money is going.

You Don’t Need to Speak Japanese, German or Chinese

If you have avoided offshore investments because you don’t know how to communicate with stock brokers in Tokyo, Berlin or Shanghai forget that. The way for American investors to buy foreign stocks is via American Depositary Receipts. Investopedia explains.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.

Your best bet is to buy only level 3 ADRs. The companies that sponsor these must adhere to reporting requirements similar to those of American stocks listed on the NASDAQ or NYSE. Thus you can invest offshore with the ability to examine fundamentals and find stocks with high intrinsic value and prospects for long term profits.

Why Aren’t You Investing Offshore? DOC

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Follow the money is age old advice for knowing why something is happening. In this case we would like to follow the money that goes into foreign direct investment. Foreign direct investment is done by folks with lots of money and the intention to stay a course and make a profit. If you are looking for offshore investment ideas, take a look at where foreign direct investment goes year after year after year. There have been changes afoot regarding where foreign direct investment is going. A very useful reference in this regard is the just published United Nations study, World Investment Report 2013.

We published this article in February of 2014. The rankings may have changed but the message remains the same. When the opportunity to earn and protect wealth fades money moves from one country to another. This is now happening as the Chinese economic miracle starts to fade.

The Case So Far

We touched on Chinese investment in America in an article of the same title. We provided an example of a Chinese company setting up a cotton mill in the American South.

Who would have thought? Chinese companies are starting up cotton mills in America. Chinese investment in America makes sense to these businesses because for every dollar required to manufacture in the USA it costs 96 cents to manufacture in China.

Where else will rich Chinese invest? The Street reports that Chinese investors considered the Waldorf-Astoria a safe haven for their money.

American real estate is becoming a refuge for Chinese investors, particularly insurance companies that may amass $3.32 trillion in premiums by 2020, who are seeking reliable returns as the world’s second-largest economy slows and its stock markets decline, according to both advisers and industry executives.

Developers, financial institutions and high net-worth individuals are seeking “safe investments in income-producing commercial and residential investments rather than luxurious real estate purchases for personal use,” said international real estate attorney Edward Mermelstein, who has spent 20 years advising clients on such transactions.

As rich Chinese invest in America experts see this as a flight of capital to a safe market. So long as rich Chinese investors and companies are able to convert their Yuan to US dollars we can expect to see a continued flight of capital out of China. As the Yuan devalues the situation will only get worse.

Where Is the Profit for US Investors in This Scenario?

This requires a little homework. Where is the money going? If you own property that you want to sell this could be way to unload it to a willing buyer. Or, if a Chinese company is setting up to manufacture in the USA what do they need and who sells it to them. A Chinese company, China Railway Rolling Stock Corp. won a contract to build 284 rail cars for the Massachusetts Bay Transport Authority. This company will need to do business in the USA and its new business partners could prosper. Do your homework as to where rich Chinese will invest in the USA and get there first in line for profits.

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The USD COP Exchange Rate

As of early March, 2015 the USD COP exchange rate is just under 2,600 Colombian pesos (COP) to the dollar (USD). As a point of comparison the peso traded 1818 to a dollar two years ago and again around 1820 just 7 months ago. Go to ExchangeRates.org and pick the two year history for the USD COP exchange rate history.

Welcome to the USD COP history summary. This is the US Dollar (USD) to Colombian Peso (COP) exchange rate history summary page, detailing…

The point being that the peso has fallen dramatically over the last several months. Why is that? Colombia is an oil producer and the Colombian peso is closely tied to the price of oil.

The Price of Oil Falls

Take a look at the chart on InvestmentMine.org for a five year crude oil price chart. The page lists the current price and 52 week highs and lows. Our interest is in the chart.

Crude Oil Price 59.24 USD/bbl (54.55 EUR/bbl) 09 Mar 2015 – 52 Week Low 46.18 USD/bbl 52 Week High 114.77 USD/bbl

The point is that oil was selling for around $110 a barrel in July of 2014 at the same time that the Colombian peso was trading 1800 to a dollar. Oversupply and the presence of threat of recession in Europe, China and Japan have reduced demand at the same time that two main producers, Saudi Arabia and the USA are pumping like mad. Colombia has been caught in this dilemma. Until the price of oil goes up the Colombian peso will be hurting. And what does this have to with currency exchange rates and investing offshore?

Investing in Colombia

Colombia is a democracy with a well-managed economy. The half century long civil war may well be drawing to an end as talks between the government and main rebel faction, FARC, continue in Havana. Colombia is a big energy exporter to the USA, has a free trade agreement with the USA as well as the Pacific Alliance of Chile, Colombia, Mexico and Peru. Direct foreign investment in the oil and gas sector peaked at $13 billion in 2013. Take a look at the CIA World Factbook page for Colombia and click the Economy tab.

Colombia’s consistently sound economic policies and aggressive promotion of free trade agreements in recent years have bolstered its ability to weather external shocks. Real GDP has grown more than 4% per year for the past three years, continuing almost a decade of strong economic performance. All three major ratings agencies have upgraded Colombia’s government debt to investment grade. Nevertheless, Colombia depends heavily on energy and mining exports, making it vulnerable to a drop in commodity prices. Colombia is the world’s fourth largest coal exporter and Latin America’s fourth largest oil producer.

The point is that there is a basis for profitable investment in Colombia and now is an ideal time because of the fall in value of the Colombian peso, property in Colombia and business investment in Colombia. There is vacation property in Cartagena on the Caribbean and business investments in the 8 million person city of Bogota. The coffee producing and agricultural region around Manizales, Pereira, Medellin and Cali is an often overlooked area for investment as well. Because the price of oil is cyclical we can expect to it rise from current lows and bring the value of the Colombian peso back up with it. Simply as a Forex play one might convert their dollars to COP and bank them in Colombia while waiting for an investment opportunity. If the opportunity does not occur one could wait for the expected return of the COP to the 1,600 to 1,800 to the dollar range and simply convert back to dollars with a fifty percent profit! That is our point about currency exchange rates and investing offshore.

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The World Bank

The World Bank is a repository of excellent information regarding investing offshore. Whether you are contemplating foreign direct investment or buying stocks via ADRs, the World Bank has very useful information to help evaluate a country for investment. A useful page of results from the World Bank business project is the ease of doing business index page which ranks nations from 1 to 189 for a composite of factors that make doing business easy or difficult.

Ease of doing business ranks economies from 1 to 189, with first place being the best. A high ranking (a low numerical rank) means that the regulatory environment is conducive to business operation. The index averages the country’s percentile rankings on 10 topics covered in the World Bank’s Doing Business. The ranking on each topic is the simple average of the percentile rankings on its component indicators.

Interestingly Singapore ranks number one in this regard and Hong Kong is number two. The USA is number four and our little country of Panama ranks 55. This page takes you via hyperlinks to a great deal of useful info for any given country and breakdowns of the data used for the general ranking, such as ease of hiring and firing, available credit and ease of importing and exporting.

Travel Is a Good Thing

No matter how much you read about another country there is nothing like a trip to Warsaw, Bogotá or Ho Chi Min City to get a feel for a country and help evaluate a country for investment. Language is always an issue which is why we mentioned the little country of Panama where English is the official second language and where there was no recession following the 2008 market crash! Some time back we wrote about investment and the Panama Canal expansion. There are places in the world that are easy to get to, easy to navigate and where the economy holds promise. Fly down to Tocumen Airport in Panama, stay at the Marriott or Hotel Panamá and see the city. The same applies to Bogotá, Warsaw or Ho Chi Min City. You simply need to check out travel arrangements and find accommodations where you can deal with an English speaker.

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The largest gain in foreign direct investment on our chart is in the USA followed closely by Japan (113 billion to 100 billion. As a percentage increase Japan out performs everyone with an increase of more than 400%. Other significant performers are South Korea with a more than 200% increase in foreign direct investment and Hong Kong with a twenty-five percent increase. It is significant that the BRICS nations which were thought to be ready to move up economically lost as a group. China stayed put at $84 Billion. Russia fell from $57 Billion to $52 Billion and South Africa fell from $6 Billion to $4 Billion. Brazil fell off the charts going from $35 Billion in direct foreign investment to a negative $3 Billion because investors are taking money out of the country!

Direct Foreign Investment: What Is It and Why Do It?

In general, foreign direct investment includes mergers and acquisitions, the building of new facilities, reinvestment of profits earned overseas and cross border loans within offshore operations. Basically companies invest offshore because they expect to make a profit over the long term. Because of the long timeline needed to research new projects and develop them, this sort of investment is typically well thought out.  Reasons to invest offshore aside from expected profits include low taxes, tax holidays of the twenty-five year or longer variety, preferential tariffs, investment loan subsidies, free land or land subsidies, R&D support, proximity to profitable markets and more.

Can You Follow the Money and Make a Profit?

There are some useful lessons to be learned from reading the results of the World Investment Report 2013. A lot of the hype about Brazil and the rest of the BRICS nations was largely that, just hype. Brazil is attached at the hip to China and when events in China trigger the next big stock market crash Brazil will suffer. Money is going where there is economic, social and political stability, high end technology, democracy instead of dictatorship and nations that are interested in getting foreign investment instead of driving it away. Hong Kong is preferred over China because of the democratic residual from British colonial days. Japan is in an economic resurgence and Korea is largely keeping pace. The USA remains the most economically open economy and thus benefits the most from direct foreign investment during troubled times. When you decide where to put your money look for growing economies and economic sectors, tax advantages to your investment in a given economy and political stability so that the next government does not decide to confiscate your investment.

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