Part II: How Economic Principles Sustain Economic Vitality in Countries

September 2014

This is Part II in a four-part series outlining the Magni Global Asset Management approach to international investment analysis.

Read Part I: Is International Equity Investing Analysis the Same as Domestic Analysis?

Following the Great Recession of the last decade and its extended aftermath there were questions about the preferred economic infrastructure to deliver sustained economic vitality in international equity investing. Was the Chinese model better? Would the countries defined as emerging markets be positioned to displace developed economies? What were the new “best practices”? The last few years have begun to show that the previously well-accepted accepted principles for sustained vitality still hold true.

The well-accepted principles involve many areas:

  • Government fiscal and monetary policies, along with publishing of economic information about the country, that are open, stable, and clearly communicated so that citizens and business can make good decisions;
  • A legal and regulatory environment that is honest, equitable to all participants, and stable so that citizens and business feel their rights and property are protected;
  • Financial and related systems that allow money and goods to be exchanged openly, honestly, and efficiently; and
  • Accounting and auditing requirements so that financial statements from businesses accurately reflect the actual performance.

Generally, countries defined as developed markets tend to adhere to many of these principles. Some of the most durable successes in the emerging markets are in countries who also adhere to many of these principles. It’s in these countries that we find that their economies not only grow, they also grow in ways that benefits citizens and businesses. Such growth is more durable and sustainable.

When otherwise successful countries have economic issues, frequently they can be traced to variance from these principles. Many of the problems that drove the Great Recession and even the slow recovery stem from varying away from these principles.

When countries do not adhere to these principles, their growth is not as sustainable. Asset bubbles and other problems are much more likely. Such countries tend to experience greater crony capitalism intended to reward a privileged few, while also having barriers – both visible and invisible – which serve to keep an elite group in their positions at the exclusion of the many and at a much lower level of economic vitality for the country as a whole.

It’s clear that adherence to the principles outlined above, cause economies to experience sustainable growth. Varying from or not following the principles will leave economies with uncertain results. The next step then is how to factor these principles into international equity analysis.

Read Part III for a clear example of how adherence to principles impacts equity value.

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.