Developed Markets Equity Positioning
When pursuing investments on a global basis, it is vitally important to consider how countries are organized and run.
In relation to POLICIES we include eight factors. We have examined the effectiveness a government provides to its country via the World Bank’s Governance Indicators, as well as the degree of support an economy receives from its monetary and fiscal authorities. We also look at real GDP growth over a 10-year period, government spending and debt levels as a percentage of GDP, as well as its position in the global economy by examining its current account balance and debt held by foreigners. We have reviewed the data and ranked each country versus this cohort, adding together the relative positioning to arrive at a total unweighted score. Under our approach, a lower score is better.
As illustrated below, the U.S. is a leader in our overall ranking, with a score of 16—ahead of Germany at 17, Japan at 21 and Europe ex-UK at 26. We separate Germany from Europe ex-UK as we believe Germany is the strongest economy within the EU and to provide a relative frame of reference for Japan, which is comparable in size.
When pursuing investments on a global basis, it is vitally important to consider how countries are organized and run. The World Bank has an index based on its worldwide governance indicators, which include political stability, rule of law and regulatory quality, among others. In the most recent survey, Germany was ranked the leader—ahead of the U.S. and Japan, and well ahead of its other European counterparts.
We believe the structure of the EU is suboptimal, as it is a confederation of countries instead of a true union of states with coordinated fiscal and monetary policy actions at the federal level (such as the U.S.). The member states of the EU are guided by a focus on austerity and are beholden to budget deficit restrictions that inhibit proactive policies to accelerate growth on a country-by-country basis. The EU also has a more restrictive lending environment. Its banking system is much stronger than it was during the financial crisis, but capital reserve ratios are still being increased to comply with Basel banking guidelines, thereby limiting the availability of capital to flow through to the EU economy.
Germany holds an advantage over the U.S., with a government debt to GDP ratio of 68% versus 105% in the U.S. Japan’s ratio, at 253%, is exceptionally large, limiting the government’s ability to pursue meaningful pro-growth fiscal policies. Government spending as a percentage of GDP in Europe is 48%. In Japan, it is 39%, close to the U.S. at 38%. While economists differ as to opinions about the impacts of government spending on the economy, we concur with recent articles published by the St. Louis Fed indicating that the multiplier impact is less than 1. We believe spending by government generally produces lower-return investments compared to commercial enterprises, so economies in Germany and Japan are held back by this government spending.
Given the global nature of economies around the world, we believe it is important to assess a country’s current account balances as a percentage of GDP, as well as debt held by foreigners. Germany is very much an export-oriented economy, has a surplus in its current account position and is ranked first, with the U.S. behind both Japan and Europe ex-UK. As a result of all these factors, real GDP growth over the last 10 years has been the strongest in the U.S. among the developed markets. Our collective rankings of the Policy factor show the U.S. to be the leader, slightly ahead of Germany, with a large advantage over Europe ex-UK and Japan.