Many investors believe that all developed markets are stuck in a slow-growth purgatory characterized by high unemployment and excessive debt.
But truth is, while Europe, Japan and the United States are certainly slogging along in this slow-growth environment, certain smaller developed countries are doing much better than their larger counterparts.
Specifically, Canada, Australia, Singapore, Switzerland and Hong Kong — what I’m calling the CASSH countries — appear fundamentally stronger than most of the large, developed countries. Here’s why:
1.) Stronger Growth: These five countries are expected to grow by an average of 3.5% next year, roughly double the expected growth rate for the United States, Europe and Japan.
2.) Better Fiscal Situations: Beyond enjoying better growth prospects, these countries are less burdened by debt and structural deficits. They don’t suffer from the same fiscal imbalances as the United States, Europe and Japan.
3.) Profitable Corporate Sectors: These countries also have profitable corporate sectors that are at least as competitive as those in larger developed market countries. In fact, these five markets have an average return on equity of about 24%, higher than the similar measure for Japan and Europe.
But currently, equity prices of these five markets don’t reflect these better fundamentals. Investors can pay approximately the same price for a dollar of earnings in the CASSH countries as they would for the same cash flow in the United Sates, Europe and Japan. This potentially represents a long-term investment opportunity.
If you’re an investor who looks at a timeframe of a year or less, however, you should keep in mind that my near-term outlook for these countries isn’t overweight across the board. Due to country-specific factors, I currently hold overweight near-term views of Singapore and Hong Kong, and neutral near-term views of Canada, Australia and Switzerland.
Even more importantly, keep in mind that if there’s another recession, it’s going to impact all markets. It could hit the CASSH countries as hard, if not harder, than countries like the United States that continue to enjoy perceived safe-haven status.
Still, if the global economy continues to muddle along, as I expect it will, these five countries are likely to hold up much better in the long term than their larger neighbors.