Published: September 19 2010 18:04 | Last updated: September 20 2010 09:49
Everyone is a bit competitive. Who doesn’t love a list? So what could be more interesting than a global ranking of competitiveness? This month the World Economic Forum released its annual survey of “institutions, policies and factors that determine the level of productivity of a country”. The list tells a familiar story: the most competitive nations (Switzerland, Sweden, Singapore, Finland, Denmark, Canada) are also the richest per capita. Factors such as the rule of law, economic stability, education and innovation matter.
Can investors use such rankings? According to the WEF, productivity determines the rates of return on investments. Assuming a constant cost of equity, competitive countries should be the best places in which to own stocks. Over the past five years, however, the range of index returns within the top 10 was 60 per cent, before currency adjustments. Investors would have lost money in six of the top 10. On the other hand, four of the five best performing markets were well into the bottom half of the competitiveness list.
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Opportunists make the greatest returns (albeit not on a risk-adjusted basis) in less competitive countries. The Brics, equity market darlings of the past decade, range from 27th (China) to 63rd (Russia). Carlos Slim built the world’s biggest fortune in spite – or perhaps because of – operating in the uncompetitive environment of Mexico (66th).
Competitive economies can also be highly speculative. Switzerland (1st), the US (4th), Germany (5th) and the UK (12th) are home to the banks worst affected by the global financial crisis. Sweden’s (2nd) financial system imploded in the 1990s. Japan’s (6th) 1980s real estate bubble is legendary. Perhaps the WEF should discriminate among different types of financial market development and innovation. They are all rated as positives.
The reason some countries succeed is because they try new things, some of which fail. For investors, that means timing is everything.
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