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Do Your Homework Before Going Overseas

Would you lend money to someone who is deep in debt, has bad credit, and is frequently between jobs? Of course not.

So why would you think any differently about investing in a foreign country?

There are many factors to consider when assessing the fiscal health of a country's economy. Think of it in terms of your own personal finances and the income you earn and the amount you spend.

If you spend more than you earn, then you have to use credit cards or take out loans to cover the difference and maintain a particular level of spending. If a country's spending exceeds its revenue, it runs a deficit, which means the government will have to borrow from the capital markets to fund the shortfall.

So when you're investing abroad, and particularly when the markets are shaky, the financial stability of the home country of the investment is important to consider.

First, let's look at some of the more affluent countries, such as those that comprise the Group of Seven countries and gauge their financial health.

We use the G7 countries as examples because they are considered to be the world's leading economies.

Fiscal Health of Group of Seven Nations
1-year GDP Growth % Consumer Prices 1 year % Surplus/Deficit % of GDP Current Account GDP Jobless %
Canada 2.00% 2.00% 1.80% 2.30% 6.10%
France 2.20% 1.00% -2.20% -1.60% 8.50%
Germany 3.70% 1.60% -3.00% 4.10% 9.30%
U.K. 3.00% 3.70% -3.20% -2.20% 5.50%
Italy 2.80% 1.80% -3.40% -1.60% 6.50%
U.S. 3.10% 2.40% -3.60% -6.40% 4.50%
Japan 2.30% 0.00% -5.20% 3.60% 4.00%
Averages 2.73% 1.79% -2.69% -0.26% 6.34%
Source: Bloomberg (26th March 2006)

As you can see above, however, the world's leading economies, aside from Canada, are running large deficits. Take a look at the U.S. and you will see a large current account (or external) deficit coupled with a large federal deficit.

A current account is the difference between the dollar value of what a country exports and the dollar value of what a country imports. If imports are greater than exports, then you have a current account deficit, which, like a federal deficit, must be financed by borrowed money.

Countries in America's position are essentially debtor nations and, like a household that has taken on too much debt, the financial health of a particular nation is an important factor to take into consideration.

Since we can't look to our leading G7 nations for fiscal responsibility, then let's look around the globe for other countries whose financial houses are in better order.

The Healthiest European Countries
1-year GDP Growth % Consumer
Prices 1 year %
% of GDP
Account GDP
Jobless %
Finland 5.30% 2.20% 2.90% 5.10% 7.50%
Sweden 4.70% 2.00% 2.20% 6.00% 4.80%
Denmark 2.90% 1.90% 1.70% 3.00% 3.80%
Spain 4.00% 2.40% 1.10% -7.40% 13.00%
Ireland 7.70% 4.80% 1.00% -2.60% 4.30%
Belgium 2.90% 1.80% 0.70% 2.70% 7.70%
Netherlands 2.90% 1.50% -0.30% 6.30% 5.00%
Switzerland 2.20% 0.00% -0.60% 13.80% 3.20%
Austria 3.30% 1.50% -1.40% 1.20% 4.60%
Luxembourg 8.90% 2.30% -1.90% 9.70% 4.60%
Norway 2.70% 0.80% -3.50% 16.80% 2.20%
Averages 4.32% 1.93% 0.17% 4.96% 5.52%
Source: Bloomberg (26th March 2006)

Three countries -- Finland, Sweden and Denmark -- stand out as having surplus internal and external accounts. In other words, these economies are not borrowing money to finance their spending. They are spending, and saving, out of what they earn. One solid fund investors can use to access these markets is the iShares MSCI Sweden (EWD), which has a buy rating of A by Ratings. It has achieved double-digit gains over the past 3-year, 1-year and 6-month periods.

The rest of the economies are showing various strengths and weaknesses. Spain, for example, has solid numbers but a very large current account deficit as a proportion of its GDP, as well as high unemployment. Despite this, the country's stock market has seen significant gains over the past 12 months. Ireland has a high GDP growth rate but also high inflation.

So investors can pick and choose based on what they perceive as acceptable. Below is a list of funds that can get investors into these countries. We have also included Germany as an option because it has very good statistics, with the highest GDP growth rate in the G7. However, it has a sizeable internal deficit and one of the highest unemployment rates in the G7, which no doubt is a cause of some of the internal deficit.

Top-Rated European Funds
Name Ticker 1 Month 3 Month 6 Month 1 Year 3 Year Ratings
iShares MSCI Spain EWP 4.59 6.57 27.81 42.31 25.98 A+
iShares MSCI Germany EWG 6.78 10.94 24.99 31.51 22.33 A+
iShares MSCI Austria EWO 4.62 11.34 24.03 25.82 36.51 A+
iShares MSCI Switzerland EWL 3.52 6.2 17.17 27.73 20.33 A
iShares MSCI Netherlands EWN 4.34 8.2 17.06 27.43 19.76 A
iShares MSCI Belgium EWK 4.71 9.31 19.09 30.43 26.46 A
Swiss Helvetia Fund SWZ 4.07 12.26 24.24 40.39 26.12 A-
The New Ireland Fund IRL 8.45 21.94 36.9 58.73 36.59 A-
Source: Bloomberg (26th March 2006)
Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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EWG $26.38 -0.73%
EWD $30.47 -0.52%
EWO $16.00 -0.38%
EWN $24.82 -0.36%
EWK $17.85 -0.67%


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