China Is Not Enough

Global investing discussions focus on China. It seems as though there are two camps: those like Jim Chanos who say “No” on China and those like Jim Rogers who say “Yes” on China. Media attention is fixated on the possibility and extent of a slowdown in China’s economy, almost to the exclusion of coverage of other developing markets.

Are there other stock markets that are attractive for global diversification? Do they offer competitive investment prospects?

Different markets were screened for cheapness on the basis of purchasing power parity (PPP) of their currencies relative to the dollar. To assess the risk of investing in nations with the cheapest currencies, Investment Freedom and Property Right scores were collected from The Heritage Foundation’s 2011 Index of Economic Freedom. The results follow:

Currency	Relative Valuation	Investment Freedom	Property Rights
Indian Rupee	-63.2%	35	50
Pakistani Rupee	-60.3%	40	30
Egyptian Pound	-56.7%	65	40
Ukrainian Haryvnia	-50.6%	20	30
Sri Lankan Rupee	-50.5%	30	40
New Taiwan Dollar	-45.5%	65	70
Thai Baht	-43.9%	40	45
Polish Zloty	-43.0%	65	60
Philippine Peso	-42.7%	40	30
Argentina Peso	-41.2%	45	20
Malaysian Ringgit	-41.2%	45	50
Hungarian Forint	-40.8%	75	65
Peruvian Nevo Sol	-40.6%	70	40
Mexican Peso	-38.2%	65	50
New Turkish Lira	-36.6%	70	50
Indonesian Rupiah	-35.7%	35	30
Chinese Yuan	-35.7%	25	20
US Dollar	0.0%	75	85

Strangely, nearly all of the nations whose currencies are cheaper than the Chinese Yuan score higher in investment freedom and property rights. The only exceptions seem to be the Ukrainian Haryvnia and the Argentina Peso. Thus, there are 14 other nations and currencies on this list are more compelling from a top-down standpoint. Clearly there are more compelling nations for value investors on the basis of cheapness and risk.

Moreover, there are many attractive funds which invest in the securities of these 14 nations. For example, consider Mexico. US investors could invest in Mexico through the Mexico Equity & Income (MXE) close-end fund (CEF) which trades at a 9.95% discount to net asset value (NAV). Alternatively, iShares offers the MSCI Mexico Investable Market Index (EWW) which is an ETF with a low 0.53% annual fee. Either option allows investors to gain from a market with better property rights, higher investor freedom, and a cheaper currency than China.

Taiwan is another nation that offers a cheaper currency and a more reliable property rights. U.S. investors can invest in this market via the iShares ETF (EWT) or through the Taiwan Fund (TWN), a CEF which trades at a 8.43% discount to NAV. Like Mexico, Taiwan is a more attractive alternative than China on the basis of currency valuation, investor freedom, and property rights.

Clearly there are opportunities for investors to side-step questions about China and head to greener pastures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing. Moreover, this research does NOT constitute a guarantee.