Advance caution: I am sorry. I went just a little over-the-top with high temperature maps in this article. They are nice, though, because you can hover more than a country (with your mouse or clicker) and you ought to have the ability to start to see the data for that country. If you prefer your data in old-fashioned furniture, they are available as links at the bottom of the post. I am pleased to say that I am finished with my data improvements for 2015. While I love analyzing data, I am glad that I’ll not have to utilize really big and slow excel spreadsheets until next season.
The US market got a good 12 months in 2014, with the S&P 500 delivering a total return of 13.48% for the entire year. However, the year it was not the best-performing market for, as a few emerging markets ranked higher quite. As an investor, I am uncertain how these numbers should affect my investment selections for the year ahead.
While the contrarian in me is telling me to steer clear of the winning markets and seek out the losing ones, I have learned through painful experiences to respect momentum enough not to be a blind contrarian. As a result, I will stick with my base plan of valuing individual companies, no matter what country they are incorporated or operate in, and looking at undervalued companies.
- SATS Ltd
- Induced Investment
- Room and board
- 276 The Gap Inc. (NYSE:GPS) -52.6% 10.09 21.28
- Fixed and Semi-Fixed Ratio to Total Cost
- Direct contribution revenue
To estimate value for companies, though, I really do have to wrestle with calculating risk internationally, and variants in risk across countries. For the last two decades, I have been aiming to measure country risk and have reported my estimates annually. While I am thinking about measuring exposure to equity risk ultimately, I start with measures of default, because they are more easily available and are simpler to connect to expected returns.
The most widely reported measure of sovereign default risk are sovereign ratings, with Moody’s, Standard and Poor’s and Fitch all providing this service. The January 1 The attached spreadsheet uses, 2015, data from S&P and Moody’s to give a comprehensive listing of the local currency sovereign ratings of all rated countries.
One critique of sovereign ratings is that they often lag developments in real life, with changes in ratings occurring well after traders have costed in the obvious changes. The sovereign CDS market provides market-based estimates of sovereign default risk, though only 68 countries have sovereign CDS spreads (far less than the 142 countries that have sovereign ratings on them).
As I pointed out in advance, my end game requires collateral risk rates by country. I began with the sovereign ratings (since they are available for more countries and then used the look up table below to estimate default spreads by country. After scaling up these default spreads to reflect the known truth that equities collectively are riskier than bonds, I obtained country-risk premiums for each national country. When you can download the spreadsheet that contains my estimates of country and equity risk premiums by clicking here, the picture below captures the risk distinctions across the global world.
Note that I have used 5.75% as the mature market premium not simply for the US but for all countries ranked Aaa by Moody’s that the equity risk-monthly premiums for non-Aaa scored countries reflects the additional country risk premium. Again, the red places on the map symbolize the national countries with the best equity risk rates. At this time, if you are an investor in US companies primarily, you might be heaving a sigh of relief that you don’t have to deal with these country risk measures, however your relief should be temporary.
It holds true that some markets are riskier than others, but a knee-jerk avoidance of the riskiest markets might not always be a good strategy. After all, at the right price even the riskiest market can be a bargain. To obtain a way of measuring how global markets are being priced right now, I estimated a range of pricing multiples including price earnings ratios.