Part III: Country Adherence to Economic Principles Impacts International Equity Value

October 2014

This is Part III 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?

Read Part II: How Economic Principles Sustain Economic Vitality in Countries

To help understand the importance of the country where a company’s stock is listed, let’s compare two well-established, successful companies in the same industry, but listed on different exchanges. Deutsche Telekom (DTE.F) is listed on the DAX (Germany), while Hellenic Telecom (HTO.AT) is listed on the Hellenic exchange (Greece). They are in the same business and each has a large market capitalization on its exchange. Between 2004 and 2013, Hellenic Telecom generated more total profits and delivered more consistent profits than Deutsche Telekom. Based solely on company profitability, Hellenic Telecom would appear to be the better investment. However, despite its lower and more inconsistent profitability, Deutsche Telekom was actually the better investment during that same period.

Understanding the performance of each country’s equity market helps put the performance in perspective. The DAX rose significantly, while the Hellenic exchange fell significantly during this same period. In other words, Hellenic Telecom’s strong financial performance helped it significantly outperform the overall Greek exchange. Conversely, Deutsche Telekom’s much weaker financial performance resulted in the company significantly underperforming the overall German exchange.

In this example, weak financial performance in a strong country produced better investment results than strong financial performance in a weak country.

Not only was the equity performance of both companies strongly influenced by the exchange where they are listed, an ETF representing the German exchange had higher performance than either company. Understanding a country and its investment prospects is important. Investing in a country’s equity market can be a better choice than investing in specific companies.

Because economic systems vary over time, they need to be continuously monitored to gain timely insights when making investment decisions. Countries with strong adherence to well-accepted economic principles have traditionally outperformed their counterparts.

Read Part IV to see how Magni constructs international equity portfolios that take these factors into consideration.

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.