It's true -- India is no China. And Brazil's no Russia.
They've never been all that similar, really. In fact, Standard & Poor's recently questioned "whether the BRIC [Brazil, Russia, India, China] countries ever shared much in common, other than scale and high portfolio inflows."
Well, of course they didn't. In other news, S&P 500 components Apple (Nasdaq: AAPL ) and Johnson & Johnson (NYSE: JNJ ) don't share much in common, except that they're both large U.S.-based companies.
You wouldn't think that Apple and Johnson & Johnson are interchangeable -- so don't fall for the idea that countries are interchangeable. If you do, you'll get burned.
First, the status quo
As investors (heck, as humans), we like to group things together. It simplifies complex information and gives us a way to make complicated decisions.
And when it comes to international investing, it's convention to lump countries into one of two categories: developed markets and emerging markets.
The exact distinction is hazy. Former Secretary-General of the U.N. Kofi Annan defines a developed market as "one that allows all its citizens to enjoy a free and healthy life in a safe environment." Political scientist Ian Bremmer defines an emerging market as "a country where politics matters at least as much as economics to the markets."
Basically, to be considered developed, a country needs a high standard of living that isn't continually threatened by political crisis. Besides the United States, think of countries such as Japan, France, and Australia.
The emerging markets are then split into the BRIC countries -- a term coined less than a decade ago by Goldman Sachs, because it was sexy to bundle together the four emerging-market countries that combined size with tremendous growth prospects -- and everyone else (countries such as Peru, Turkey, Egypt, and Thailand).
These groups are dangerous!
All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.
Even basic country data demonstrates just how large this fallacy is:
|
Country
|
GDP per Person (in U.S. dollars)*
|
|
United States
|
47,000
|
|
Russia
|
16,000
|
|
Brazil
|
10,300
|
|
China
|
6,000
|
|
India
|
2,800
|
*Calculated using GDP as purchasing power parity and population per CIA World Factbook.
Gross domestic product (GDP) per person is one way to gauge the standard of living and productivity of a country -- and this demonstrates just how different these countries really are.
Yes, the emerging markets are quite different from the developed market -- the U.S.'s GDP per person is almost 17 times greater than India's -- but the chart also shows the great disparity among the BRIC countries. Russia is more than five times as prosperous as India, and even China is roughly two times so.
And this is just the economic disparity.
You also have to factor in the country's political situation (e.g., India practices democracy while China practices communism), overall economic stability, market conditions, cultural differences, and still more economic data such as national debt, balance of trade, inflation, savings rates, etc.
In other words, in international investing, country differences are at least as important as company differences -- because any potential a company has depends on the context of its location.
For example, it could be argued that Suntech Power's (NYSE: STP ) fortunes are more closely linked to its fellow Chinese company China Mobile (NYSE: CHL ) than to its American industry mate, First Solar (Nasdaq: FSLR ) .
Why? Because country-specific considerations frequently outweigh industry-specific considerations. Ask any company that has been subject to onerous regulation, excessive taxation, a devalued currency, or nationalization by its home country.
Or ask any company that has opened up shop outside its home country. Imagine McDonald’s (NYSE: MCD ) dilemma when it opened its first restaurant in India -- a country where cows are sacred. The answer, of course, was to modify its menu significantly. Wal-Mart (NYSE: WMT ) recently opened its first store in India as well, incorporating Bollywood music and local cuisine as well as making concessions to mom-and-pop shops that wouldn’t even be considered in the U.S.
What does this mean for investors?
The substantial differences between countries -- not to mention between developed and emerging economies -- lead to three takeaways:
- Because of the addition of tricky country-specific dynamics, diversification may be even more important in international investing than it is in domestic investing.
- Emerging markets demand a greater risk premium than their developed brethren. In other words, you should demand a larger margin of safety (and lower earnings multiples) for companies in emerging markets.
- It isn't enough just to pore over the financial statements of a company and its competitors. Knowledge of a company's country is just as important as knowledge of the company itself.
Those are some of the things our Motley Fool Global Gains investment team keeps in mind as they scour the globe looking for the best investments there are. The analysts not only make frequent international scouting trips, but they also meet with the management of companies they're interested in, and report back to their members. To see all these prior reports, as well as their full list of recommendations, click here. A 30-day trial is free.
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This article was originally published on April 13, 2009. It has since been updated.
Anand Chokkavelu owns shares of Apple and McDonald’s. Suntech Power is a Motley Fool Rule Breakers pick. Apple is a Stock Advisor pick. Wal-Mart is an Inside Value selection. Johnson & Johnson is an Income Investor recommendation. The Fool has a disclosure policy.
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