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9 October 2017

Over the past week Australian shares were down 0.5% while small company shares rose 1.7%. Shares in developed countries were up 0.7% with the US market up 1.2%. Shares in emerging markets rose 2.0%. The Australian dollar continued its four week decline, falling 0.9% to 77.67 US cents. The Australian 10 year bond yield fell slightly to 2.82% while the US 10 year bond yield rose to 2.36%. The oil price fell 4.6% to 49.29 US dollars per barrel.

Patterns in prosperous economies

Understanding the factors that influence prosperous economies plays an important role in deciding which countries offer the best investment opportunities. At Mine we keep a close eye on these factors when constructing our investment portfolios.

Luxury holidays and expensive sports cars are often the de rigueur for the wealthy. But it’s a mistake to assume that a reclining passenger on a P&O cruise or the swift-footed driver of a Lotus Elise must be wealthy. Similarly, it’s a mistake to assume that a country’s military might and diplomatic presence indicate the prosperity of its citizens. 

About $1.7 trillion US dollars is spent around the world on military spending. The league table, in billions of US dollars, makes for interesting and somewhat depressing reading. No prizes for guessing the top three countries; the US with $611 billion, China with $215 billion and Russia with $69 billion. What may be surprising is that Saudi Arabia is fourth, India fifth, while Australia is twelfth, just behind Italy.

What about diplomacy? The Lowy Institute ranks countries according to their geographic and geopolitical reach. Again, the US comes out on top, followed by France and China. Australia comes in 27th, just behind the Czech Republic and well ahead of Norway at 32nd.

So, is there a link with prosperity? One measure of a country’s standard of living is Gross Domestic Product or GDP per capita. It’s not a perfect measure because it doesn’t capture inequality, that’s whether wealth is concentrated in a tiny minority of the population or well distributed, and quality of life, which is rather good in Australia. Leading the GDP per capita table are countries that have provided long term assistance to tax evading individuals and firms; Liechtenstein, Monaco and the Isle of Man for example. Focussing less on these tiny countries and principalities, we see Norway at 13th, the US at 20th, while Australia is 29th. France comes in at 39th, Russia 72nd and China 106th.  So, it seems that a country’s military capability and diplomatic presence isn’t necessarily indicative of its citizens’ prosperity. So, what is?

Transparency International produces a list of countries ranked by an index of perceived corruption.  Here the top of the table (lowest corruption) is occupied by Denmark, New Zealand and Finland.  Norway is ranked sixth, Australia 13th, and the US 18th. China is ranked 79th and Russia a disappointing 131th. There is a pattern here. Countries with low levels of corruption (good governance, good institutions and secure property rights) seem to have a higher GDP per capita. Of course, there are many other factors that help explain why some countries prosper while others falter; natural resources, free international trade, incentives for innovation, and government led initiatives, such as infrastructure and industry development, all play a hand.

North Korea and South Korea are great examples where these factors explain prosperity. In countries with share markets, expectations regarding changes in these factors (for example, trade deals, corruption, democratic reform and infrastructure planning) often set investors’ expectations for share market returns and risk. At Mine we’re mindful of these changes.

Signing off

Sean Anthonisz | Senior Quantitative Analyst – Asset Allocation

Past performance isn't necessarily an indicator of future performance.

All data sourced from Bloomberg.

Sources include Sipri, Global Diplomacy Index, Transparency International and Central Intelligence Agency.