This is Part I in a four-part series outlining the Magni Global Asset Management approach to international investment analysis.
For most investment analysts, international equity analysis involves application of the same traditional tools used in domestic analysis. A company’s future earnings are projected using historical financial statements along with other information that can be converted into financial values. While most investment analysts and investors agree that country-level information impacts financial projections, it is usually not incorporated, or only marginally incorporated, in analysis. If country-level information impacts financial projections and if financial projections are very important to many investment decisions, country-level information should have a more direct impact on investment decisions.
A key questions is: what country-level information should be used in investment analysis?
Economists have written many articles about the role of countries on company valuations. The articles have common themes about an open, honest, efficient, and stable economic system enabling wealth creation for all stakeholders in a country. If understanding the economic infrastructure of countries has investment value and the connection is well-accepted among economists, logically, investment professionals should be incorporating country-level information in their analyses. Unfortunately, the available information about the economic infrastructure of countries is not standardized and is inherently qualitative.
Non-government organizations perform substantial research on countries, including economic statistics (e.g., GDP, GDP per capita, trade balances) and social welfare (e.g., child labor, environmental quality). While such research is important and has many uses, it does not provide what the investment community needs.
Researchers need to place the available facts into frameworks yielding clear overall pictures of the economic infrastructure so that analysts can compare countries on an “apples to apples” basis. This is not easily accomplished; if it were easy, analysts would already have access to such information.
The answer, therefore, to the question of international and domestic equity analysis being the same, is clearly, “No.”
Looking for more perspective on international investing? Download our whitepaper: “Country Selection – A Powerful Technique of International Equity Investing.” Follow Magni Global Asset Management on LinkedIn and Twitter @MagniGlobal, #CountriesMatter.