The best deals in stocks today are not in the USA but in foreign markets. Why aren’t you investing offshore?

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.

In the years immediately after the 2008 market crash and onset of the Great Recession foreign direct investment came into the USA.

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.

Smart money follows opportunity and flees from excessive risk. Which gets back to our initial question, which offshore investments are risky today?

Which Offshore Investments Are Risky: A list of countries to avoid

Market Watch looks at the issue of which offshore investments are risky and lists 7 market traps to avoid.

The countries where they see excessive investment risk are these.

• Argentina
• Brazil
• China
• Philippines
• Poland
• South Africa
• Turkey

Here are snapshots of what they say about each offshore “investment trap” on their list.

Argentina

Argentina has been on the blacklist for some investors for a while, given its history of sovereign debt problems. And it’s looking grim on that front once again.
The current challenges, including debt tensions and rising inflation, are quite

Argentina has been an economic basket case for years. The country will need to carry out serious and permanent economic reforms to make it a non-risky place to put your money.

Brazil

Brazil was a bright shining star of the BRICS nations. Then China cut back of commodity imports and Brazil tanked.

Corruption, labor problems, and inflation are all issues that make investment in Brazil risky.

China

ETF’s that track the Chinese markets are all off this year.

The common claim is that it’s simply the fallout of trade-war posturing. But remember, there have long been structural challenges to China investments that include massive debts in both the private and public sector. In fact, a leaked report from a government-backed think tank warned of a “financial panic” that could be caused by cascading defaults and a liquidity crisis.

We have been concerned about Chinese capital flight for a couple of years. And perhaps the most dangerous issue for China is its huge debt burden. China needs to do what Taiwan, Japan, and South Korea did years ago. They need to transition from an economy heavily managed the state to one driven by the market. These are the issues that make offshore investments risky in China.

Philippines

While the Philippines has been one of the fastest-growing economies in Asia, with annual GDP growth rates just shy of 7% for the last few years, it now faces the very real challenge of runaway inflation thanks to that brisk growth rate.

Then add in the uncertainties caused by the country’s dictatorial president and you have good reasons to avoid investments in the Philippines.

Poland

Poland is considered a bright spot among the nations formerly in the Communist Block. But there are problems.

Unfortunately, Poland’s growth has been built largely on consumption fueled by government entitlements, which is something many investors think is unsustainable despite the impressive headline numbers.

If you have made money in an ETF tied to this economy it may be time to take little of that profit off the table.

South Africa

What was once Africa’s strongest economy has, like Brazil, seen the effects of lower commodity sales.

As growth and optimism has evaporated, so has lending. And worse, at the end of 2017 S&P downgraded South Africa’s debt to junk status as the economic outlook appeared increasingly grim.

South Africa is another risky country for offshore investments.

Turkey

ETFs that track investments in Turkey are down 30% this year. The county just re-elected a dictatorial president who due a constitutional change will have more power than ever. Inflation is on the rise and interest rates are up. This is an unstable situation and a risky country for investment.

Which Offshore Investments are Risky? PPT

Growth Leads to Profitable Investments

Some time back our offshore investment advice was that one consider investing in middle class growth in Latin America. Strong economies commonly develop strong middle classes and the purchasing power of the middle class further drives the economy. Latin America has been growing and so has its middle class. The middle class has grown by a forth in the last ten years. Per capita income south in Latin America has gone up from $7,000 a year range to just under $12,000 a year. Things have slowed since the 2008 market crash and recession but the middle class has not lost ground. Investing in growing foreign economies is not limited to Latin America. Economic growth is slowing in China and around Asia but there are still lots of opportunities.

Taking Cues from the American Experience

Great stocks to invest in during the early twentieth century in the USA included the likes of General Electric, AT&T, Coca Cola, and virtually any public utility. As infrastructure was developed, those doing the work were rewarded. As people earned money they spent it and companies like Coca Cola learned to cater to the American taste for soft beverages. Our basic offshore investment advice is to take a look at developing economies in Asia and Latin America and find out who is likely to profit as infrastructure is improved and made more widely available.

They Do Not Make Any More Land

One of the basic tenets of investing in property is that there is a limited supply. Good farmland in northern Iowa used to sell for one hundred dollars an acre, and then a thousand, and now commonly $10,000 an acre. Land in downtown Tokyo is exorbitantly expensive but was not always so. Land used to be cheap in the banking district of Panama City, Panama and now goes for thousands of dollars a square meter. Good offshore investment advice is to look where the action is and is likely to be and buy property before the prices go into the stratosphere. But, what do you do when the price goes up? Do you sell?

Offshore Investment Advice about Taxes

US tax on foreign source investment income can be significant but as a rule income must be realized in order to be taxed. If you are lucky enough to buy downtown property in a place like Panama City, Panama, Rio de Janeiro, Brazil or even Manizales, Colombia before prices go up you do not need to cash in and take your profits. A reasonable way to benefit from your good fortune is to set up a long term lease with a local business, collect and pay taxes on the rent checks, and let the property increase in value over the years.

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Wholesale Funding Sources

Banks that cannot attract enough deposits look for Federal funds, state and municipal funds, advances from the Federal Home Loan Bank, primary credit advances from the U.S. Federal Reserve, deposits from foreign sources, brokered deposits, or money from CD listing services or via the internet. The hazards of wholesale funding are that if this backup system of bank reserves does not work a banking system collapse may be in the works. Fundamental analysis of this way of doing business may lead investors to seek more secure ways to protect their assets.

Federal Deposit Insurance

The most recent increase passed by congress insures bank deposits up to $250,000 per depositor. However, the reserves of the Federal Deposit Insurance Corporation may not be sufficient in the case of a major collapse. Although the FDIC says that deposits are backed by the full fair and credit of the government, a few billion in cash plus the ability to borrow $500 billion might not be enough in the situation gets really bad. And, it is not clear to what degree the government would step in if FDIC resources are breached.

Concerns Voiced by the FED Chairman

In a recent speak Fed chairman Bernanke noted that important risks remain in the short-term wholesale funding markets. His concern is how the system at large would respond to the failure of a single broker-dealer or borrower. The sense of this and the hazards of wholesale funding are that credit is to a large degree maintained by accessing other credit. The Federal Reserve is doing continual stress testing to see how the financial system would respond to various stresses. And, according to the Fed chairman, more work is needed to better prepare investors and other market participants to deal with the potential consequences of a default by a large participant in the repo market. He said this in the context of a possible run on money market funds.

Where Else Can You Invest or Save Your Money?

We wrote some time ago about three good offshore investment ideas. Although it may not be time yet to pack up and leave the good old USA, it may be time to look at investing in foreign stocks, or looking for real estate in growing markets like Panama, Colombia, and Brazil where the hazards of wholesale funding are something that you read about in the international edition of the Miami Herald but do not affect your every day or financial life.

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NAFTA

According to the NaftaNow web site:

The North American Free Trade Agreement (NAFTA) is a comprehensive trade agreement that sets the rules of trade and investment between Canada, the United States, and Mexico. Since the agreement entered into force on January 1, 1994, NAFTA has systematically eliminated most tariff and non-tariff barriers to free trade and investment between the three NAFTA countries. It is a formal agreement that establishes clear rules for commercial activity between Canada, the United States, and Mexico. NAFTA is overseen by a number of institutions that ensure the proper interpretation and smooth implementation of the Agreement’s provisions.

US exports at the beginning of the decade were $248.2 billion to Canada and $163.3 billion to Mexico. These nations have been the top two purchasers of US exports. At the beginning of the decade exports within NAFTA amounted to a third of all US exports. Top exports include machinery, vehicle parts, electrical machinery, mineral fuel and oil, and plastics coming to well over $200 billion a year. The USA exports over $30 billion in agricultural products to its NAFTA partners every year.

The European Union

The European Union (EU) is both a political and economic union comprised of 27 member states. Unlike North America the EU nations give up a degree of sovereignty in return for membership in the trade zone.

EU and North America

The GDP of North American nations is around $18 trillion. That of the EU is just under $13 trillion in US dollars. The $31 trillion combined economies of North America and the EU amount to 43% of the world economy (world GDP is just under $71 trillion). The rationale for a combined North American European free trade agreement is clear. Create a free trade zone that includes nearly half of the world economy and stimulate business and economic growth on both sides of the Atlantic. If such a treaty comes to pass it could change international investment strategies for many investors.

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Where Will Fiscal Cliff Investment Losses Occur?

The stock market will likely suffer if Congress and the White House cannot come to an agreement limiting US spending and agreeing to pay necessary debts. Last time around the perfect US government credit rating took a hit. To the extent that those in charge cannot get a handle on spending, the dollar will continue to fall over time and everyone with money in the bank or a paycheck will see the value of their holdings and earnings decrease with inflation. The dollar may not fall versus the Euro but it may suffer when traded against the currencies of the BRICS nations or even countries like Colombia whose currency did the best of all against the dollar in 2012. When Americans start investing in foreign stocks or engage in foreign real estate investments as a result of the politicking in Washington, it means fiscal cliff fight investment losses at home.

Can We All Just Learn to Agree?

The United States is badly in need of consensus. Better put, the nation is badly in need of leaders who govern by consensus. This gets back to our assertion that fiscal cliff fight investment losses will come from uncertainty instead of from a specific set of policies that may be enacted. The nation has come through a large number of economic and political scrapes, global wars and a civil war. It all works out over time if individuals, families, and investors have a sense of a fair playing field and a sense that what the rules are today will be the rules tomorrow. In the meantime, look at consumer stocks as an anchor during tough times, dividend stocks like power companies for steady return, and do not let fiscal cliff stock worries give you and ulcer as it may just work out in the end. And, always do your own fundamental analysis.

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Because of the return of Mr. Putin and because the world economy is ever so slowly improving after the worst recession in three quarters of a century let’s say that it is time to invest in Russia. What does Mr. Putin’s call for a new economy mean? Revamping old state run industries may make things run more efficiently but this has little to do with private investors.

Russia is the second biggest producer of oil in the world at just over 10 million barrels a day as of 2010. The nation’s economy consumes 2.2 million barrels a day and exports 5 million barrels a day. Its proven reserves are around 69 billion barrels. It is the world’s second greatest natural gas producer as well at 588 billion cubic meters a year. It uses 414 billion cubic meters of gas a year and exports 200 billion cubic meters making it the world’s leading natural gas exporter. Its reserves are estimated at 45 trillion cubic meters as of 2011 giving it first place in the world. But, if it is time to invest in Russia is it time to invest in oil companies in Russia? Mr. Putin, in fact, is trying to decrease the dependence of Russia on oil and gas exports. On a profitable investment timeline it may be time to get out of Russian oil stocks and not in as European threatens to fall into recession again and drive oil prices down.

The goal is to improve the business climate in order to attract more investment. This includes decreasing the still heavy hand of the state. Mr. Putin’s orders are to produce 25 million high paying jobs by 2020. Sounds like more of the commissars Mr. P. However, the goal of producing more high tech products is not just a pipe dream. Russia has skilled scientists and technicians. They, after all, are the link to the International Space Station now that the fleet of Space Shuttles have been retired.

The complete range of Russian industry according to the CIA Factbook looks like this:

• Mining and extractive industries producing coal, oil, gas, chemicals, and metals
• All forms of machine building from rolling mills to high-performance aircraft and space vehicles
• Defense industries including radar, missile production, and advanced electronic components, shipbuilding
• Road and rail transportation equipment
• Communications equipment
• Agricultural machinery, tractors, and construction equipment
• Electric power generating and transmitting equipment
• Medical and scientific instruments
• Consumer durables, textiles, foodstuffs, handicrafts

The World Bank has a Doing Business Index in which Russia currently ranks #120 in the world (#1 is best). Mr. Putin wants the country up to at least #20 by 2018. If you think that this wish makes it time to invest in Russia please remember that Russia produces as many bureaucrats as the Ukraine produces potatoes. Unlike potatoes bureaucrats are not consumed. They multiply. While good fundamental analysis is essential to profitable investing it can be difficult to factor in the costs in Russia of a bloated and recalcitrant bureaucracy. A place for possible investment in Russia will be the group of companies that may be privatized in the coming years. These will not be in defense or natural resources.

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