Which are the undervalued countries these days?

With the eurozone falling apart, and growth in China, India, and Brazil slowing down, which countries remain undervalued?  I have a few — and I stress that word few — selections:

1. Philippines.  Their rate of growth has been picking up as of late, they have plenty of “low hanging fruit,” they don’t rely too heavily on durable goods exports to the wealthier countries (that’s the bad news too, of course), and sooner or later they are due for a burst of investor attention.  I don’t wish to oversell this one, but we are talking “undervalued” here, not “the next Singapore.”  One danger is 14.9% of their exports going to China, another is bad institutions.  Still, articles about this country use the phrase “bucking global trends.”

2. Pakistan.  Most of all, the bad news here is already on the table.  As far as the economic data, here is a quick review of where they are at.  I’m not claiming it is impressive.  Still, all they need is a bit of peace and order to prosper more, and while I am not predicting that in an absolute sense, it is mostly uncorrelated with the economic performances of the wealthier countries.  Think of the country as a kind of risk-free asset, in the covariance sense that is.  Keep in mind that until the late 1980s they usually had higher rates of economic growth than India did.  They stand a good chance of playing catch-up, especially if they are willing to accept a subordinate place in India’s economic orbit.  Which right now they are not, but arguably that is the future trend, and indeed Bangladesh has made exactly that leap in terms of economic self-image.

3. Mexico.  I’ll be writing on this more elsewhere, so I’ll save up my arguments for now.  One point is that China’s slowdown, and the relative economic stability of the U.S., both augur well for the Mexican economy.

4. Gujarat.  Just pretend it is a country, after all it has more than fifty million people.  They have averaged more than 10 percent growth for the last seven years.

You can make a case for Ghana and Rwanda as well, mostly because of their satisfactory record in agricultural productivity.  Most other places are due for a fall.

Addendum: Via Michael Clemens, here is a related article.  I view Turkey and Poland as “capitalized,” however.


Hey TC, the Gujrat link needs fixing.

Thanks, http://www.bbc.co.uk/news/world-asia-india-17919364


Iraq is still ruled by gangsters and kids who randomly shoot people at "checkpoints". The only possibly-undervalued Arab country is Morocco.

as opposed to Pakistan?

Pakistan is not an Arab country though.

4. India's Chongqing

Are there not also the questions of whether the "values" can be "realized," at what effort and subject to what constraints?

After the BRIC's the consistently strongest GDP growth is in Panama. An entire economy fueled by Colombian cocaine money laundering. Talk about a sure bet for a continuing bright future.

As far as I can tell, there are three global risk factors in play right now.

First, the slowdown in Chinese fixed investment. This is not a risk factor so much for China, as they will also benefit from stopping the nonsensical digging of holes and filling them with concrete and steel. However, countries and companies selling raw materials to China will be in a world of hurt if the debt financed building bubble in China stops inflating.

Second, the euro zone trouble. I don't bore anyone by talking about this. Suffices to say that if it all blows up then low leverage, non-cyclical, non-financial companies exporting their output outside the euro zone should do better than high leverage, cyclical, financial companies serving the EZ.

Third, the US economic recovery. This is basically all systems go, with strong (relative to other countries) banks, reserve currency status extended for a couple more decades, unemployment helping the corporate profit margins, etc. The only risk is disruptive, large, and sudden changes in taxes and government spending. The US may double dip with the rest of the world because of these.

If one can find stocks or countries that are isolated from these three risk factors, then I think one can find exceptional value relative to funding cost in EUR and JPY.

"The only risk is disruptive, large, and sudden changes in taxes and government spending. The US may double dip with the rest of the world because of these."

Regulatory mandates may well have more negative effects on the US economy than taxes in the near future. Pending EPA regulations would impose substantial costs on the power and transportation sectors.

#4: Many bureaucrats working for the Gujarat government are full of praise for the current political party; they are given close to complete freedom to work, and guaranteed 5 years in a position of their choice with minimal political interruption. This sort of stuff is unheard of in India.

I am not surprised to see that good governance leads to sustained growth. 10% for seven years = almost doubling. I am however surprised to see good governance.

I'll trot out again my favorite story illustrating social capital in the Philippines, told to me a year or so ago by a South African friend of a friend who worked there for a few years. I’ll call him Alfred, mostly because I think that was his name.

His first week in the country, he’s driving in the apocalyptically awful Manila traffic, and he’s stopped by the cops, who demand a bribe (the country is rife with this sort of thing and nearly everyone just goes along). Now, Alfred is rather tall and imposing, well-traveled, not easily intimidated. He says “No.” The cops are taken aback. Other Filipino cops arrive. They tell Alfred they will take him to jail. He says fine, take me to jail, I’m not paying you anything. More cops arrive. They tell him how horrible the jail is, that terrible things may happen to him there. He says he doesn’t care, he is not going to pay. Finally, they decide they can't actually arrest him for anything, so they give up and let him go.

The Philippines desperately needs the culture of Alfred. But it’s very hard to get there. My wife, who lived there until about 2005 or so, has an attitude of futile exasperation toward their problems. Their biggest problem may be that their high-productivity workers tend to leave the country, iirc they have one of the largest remittances in the world. The pay differential is large even on L-1 visas, and once here, they can triple their income with a green card, so there's a lot of incentive to stay.

But as Neal Stephenson put it in Cryptonomicon, a lot of people think they should be the next country to finally get their shit together. We own some property there and may buy more, and we have friends and family who have successful business ventures in the country. Probably we should hope Manny Pacquiao is getting good advice on institutions, he is a national hero and has become inolved in politics, it would be hard to overstate his potential influence.

I have a hard time imagining "one of the largest remittances in the world" as a "problem"; that probably is the silver lining here.

Brain drain is an over-hyped issue; a large part of the high productivity of the emigres arises simply because they leave the nation.; there is no simple way to trap this leaking productivity by knee-jerk border-control solutions that are often proposed.

Well, imagine you live in a country that desperately needs better institutions, but a large proportion of the people capable of leading the change are instead going to other countries that already have better institutions.

Money alone often solves surprisingly few problems.

As Acemoglu points out, you will not develop better institutions if people aren't free to leave, because then the at the margin government has an incentive to squeeze mor economic rents from people.

That's a good point, and I should be clear I don't favor any sort of coercion aimed at restricting movement. My comment was merely observational.

In fact, I wonder if the United States and other Western countries actually benefit from a sort of first-mover advantage here -- since we got to good institutions first, we're now sucking people who appreciate good institutions away from countries that don't have them yet, making their development more difficult.

(a problem that we never experienced when we were at their PPP GDP per capita level, is this a significant counterbalance to catch-up growth?)

As far as brain drain and the impetus for change is concerned, middle class Filipinos flooded the streets demanding change in 1986, were successful in doing so, and served as an inspiration to other freedom movements around the world in the next few years.

That's not a bad record for a country where supposedly all the people capable of implementing change have left. Is corruption still a problem? Definitely, but it is a more complex problem than anecdotes like TallDave's let on. For instance, out-right extortion is extremely rare and a recent survey showed that 90% of Filipinos never pay bribes to government officials. In other words, bribery is something engaged in by a small percentage of people who are breaking the law and just don't want to face legal consequences. Certainly, these people who pay bribes have higher than normal incomes and one would guess they are comparatively well-educated. So there really is something culturally that needs to change and it's not clear that "brain drain" has much to do with it one way or the other.

The removal of Marcos was definitely a positive. OTOH, corruption remains endemic, rule of law is still elusive, and the country's economic situation did not improve much either.

Most Filipinos mostly deal with their local barangay, who have little power, and can't afford to bribe anyone anyway. Even so, that 10% statistic seems laughable to most Filipinos I've met. I'm not whether that excludes police or if people were just less than totally willing to admit to it.

Cultures change because motivated people change them. For Filipinos who want better institutions, it's a lot easier to go somewhere that has them already. It's not so much a "brain drain" as a culture drain. Not saying they can't get there or that there aren't lots Filipinos who are committed to improving things, just that the incentives are often not aligned to help them in the effort.

Survey data is flawed but personal anecdotes aren't always better. Consider how many Americans will insist crime is rising, who think they are better than average drivers or (I think) who systematically overestimate how many sex partners other people have. Bribe-paying is one of those things "everyone else does" and it is only when you sit down and try to systematically measure it that perhaps fewer people are paying bribes than widely believed.

As an empiricist, I can't say I see much hard evidence that emigration is part of the problem. I believe Michael Clemens has looked into this.

It's hard to take Alfred's advise when you have weed in the car.

Also, when in a developing nation, you can be sure you have broken more than one law at any given time; just depends on how deep and wide the cop is willing to dig.

The same is true pretty much anywhere in the U.S.

Hey TallDave--I'm pretty familiar with the Philippines, though I don't stay in Manila. I too cannot figure out why they have not been discovered as the next Big Thing, since they have a lot of young people (only Guatemala and African nations beat them) and they speak English (along with their three other main languages and half dozen minor languages). I've not really been asked for bribes in the small city I'm in, mainly because I'm about the only foreigner in town, but I do know that if you try and build something, aside from the fact you need a proxy (foreigners are not allowed to own real estate, except for a few limited condos, so they use a front man proxy), there are brides involved in the building process. Also given that their climate is similar to the rest of southeast Asia it's ironic that in many years the Philippines import rice, do not have enough coconuts to export (unlike Thailand), and still live with a GDP per capita of about USD 3500. I think England and the USA were at that level (in today's money) in the 1850s. So indeed the Filipinos have nowhere to go but up--if they get their act together.

Closer to 1900s, but yes, that's pretty much my understanding too.

It's actually fairly difficult to grow things in the Philippines -- in most places you plant to maximize yields, but the pinoy tendency is to strategize to minimize losses due to the various recurrent natural calamities.

What a pessimistic blog post!

However, I think South Africa is undervalued. They just got through the administration of a polygamist with lots of corruption charges hanging over him. If the ANC era can survive that, its probably a pretty durable regime. The country has an incredible assortment of mineral and agricultural resources, which should be of increasing importance.

If only they can figure out how to get the blacks, whites and browns to agree on a definition of just allocation?

If the ANC isn't removed and replaced by another party (or coalition) after that, SA is effectively a one-party state, and a corrupt one, and one should evaluate its future potential based on that remaining true for the mid-term future.

The Mugabe regime is also "durable". How's that working out for Zimbabwe?

With sky high gold prices they are still in a structural trade deficit, if gold ever tumbles down below 1,000 an ounce they are just done.

One-party state worked for Japan for many years. Of course, then it didn't.

Singapore, too. But it worked much less well for most states where it's been tried.

Low lying fruit or countries as penny stocks? They can only go up as the logic dictates. How would one invest in such ventures since there is no S&P 500 for those countries so ignore the geopolitical volatility and go with the entrenched oligarchical companies owned by former bureaucrats?

If it were easy for liquid money to invest in such ventures, they wouldn't be undervalued.

Penny stocks, like countries, *can* go to zero.

You missed out Tunisia. Im here now. Opportunity is everywhere and although it's tough right now, all the ingredients are here for this place to really kick off within a year or two. Low input costs, strategic location, security, political stability, willingness for political and economic reform, a highly educated population and a welcoming attitude to foreign business. It's all here.

Salam willie--Professor Cowen did not miss Tunisia. I'm afraid that, like Greece, they are too small and too old. Check out these stats: 10M people, and here is the critical demographic fact: "0-14 years: 23.2% (male 1,274,348/female 1,193,131)" Sorry, that's too old. You need to be at least like Mexico at around 30% or higher in this bracket to have a bright future. What you are asking is like for a football player who is over 30 years old to make the team in the Premier League. It's possible, just not very likely. Best of luck.

Don't underestimate foreign investment. Tunisia is ripe for solar power investment

"Don’t underestimate foreign investment. Tunisia is ripe for solar power investment"

Currently Solar power is not cost effective for electrical grid production. (Nor is it particularly close to cost effective.) So it only appears where the local government heavily subsidizes it. The Tunisia government probably can't afford significant subsidies. So 'ripe for solar investment' translates to looking for foreign money. How likely is that to happen with Europe in its current economic state? When a government is busy cutting subsidies to it's own population, the likelihood of it initiating heavy subsidies to a foreign populace seems vanishingly small.

re: 2
Doesn't optimism regarding Pakistan overlook the looming triumph of the Taliban in Afghanistan, which will blowback and destabilize Pakistan?

I will make the case for Ghana. We are reforming the main university curriculum here substantially now. It definitely needs it. But, there is certainly potential here.

Gujarat seems to have outpaced the rest of India for the last twenty years but . . how come its top cities are not even global as Hyderabad, Bangalore or even Pune? There is nothign comparable to a Gurgaon or NOIDA yet either. Its social statistics, like fertility rate, malnutrition rates, are not much better than Indian averages either. Also, the Gujarati disapora is easily the strongest and most successful diaspora of India? When will Gujarat finally emerge from the pack and set itself apart from the rest of India? After the construction of GIFT? Is Mumbai really the capital of Gujarat, not Maharastra? Will the infrastructure development pay off when companies move their headquarters there, or factories?

Because Gujrat is a dry state. In a weather that is routinely 90 degrees and above. Who the hell would want to stay and bake in Gujrat when they could go have a good time in other states? Gujrat is anti-fun. No drinking, no dancing, no western music, no bars, no clubs, no nothing. I am from Gujrat. It makes Kansas look like Las Vegas. Boring, boring, boring. The reason the Gujrati diaspora is successful is because they fight each other to get the hell out of that place.

I often wonder whether the reason Gujarat is industrially so successful is because it really has nothing else much going for it. Very little minerals, perpetual water shortages, hardly any agriculture or forestry, zero tourism potential, crappy climate etc. And they've been dry for decades.

It's the perfect antithesis of a resource curse.

OTOH, take Bihar which is probably one of the most resource-rich areas of the sub-continent.

Some of the links *might* help you gain some knowledge in regard with your lack of knowledge regarding Gujarat's agriculture, minerals and rest! I recommend to google abut Gujarat tourism fresh data. I would also like to point the fact that due to your *water shortage* allegations, Gujarat has avoided drought in the state in last 10 years and for the same allegation, has achieved 10% average (approx) agriculture growth. http://www.gujaratindia.com/business/mineral-policy2003.htm
http://www.gujaratindia.com/initiatives/initiatives.htm Wish you can collect the courage to explore further.

Have fun, guys!

Can't be a reason. If people leave, who does the work?

And, umm, I have friends who went to study in that famous management school. Dry? Ha ha ha

An asset that yields -2% every year consistently is a zero beta asset. It is, however, no good. Talking favourably about a zero covariance asset makes sense only if you assume a simple world CAPM. No reason why we should.

All Pakistan needs is "a little peace and order," ahem! Right. That is all Gaza needs too. As it is right now, peace and order in Pakistan seem to be unpleasantly on the decline.

Maybe in the long run when we are all dead.

Egypt looks good here (all in the price, massive foreign aid on the way), as do Nigeria (banks trading on 2-3x earnings with clean books) and Qatar (safe as you can get, 10% earnings growth, no valuation premium despite stabilty)

How about Panama?
It is consistently hitting the +5% GDP growth since 2004 (it hit +10% in 2007 and 2008 and it is doing very good lately, but I am limiting myself to published figures of the World Bank http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/pa-XJ?display=graph ).

I'm a little late to this party, but the talk about the Phillipines makes me wonder why the US, which has some of the best institutions in the world, was never able to successfully transplant those institutions to its colonies. The Phillipines, Cuba, Panama, Liberia -- all either US colonies or de facto US colonies, all disasters. I guess the success story would be Hawaii.

The difference may be that in the first four, the US didn't care about instilling a rule of law and democratic values, it cared about propping up a reliable autocrat who would support the US no matter what (S Vietnam being another good example). In Hawaii, by contrast, the US went out of its way to topple the existing autocratic society.

Comments for this post are closed