Funds shun high-debt countries
Who would you rather give a loan to? Someone who is up to their eyeballs in debt, or someone with a good income and some savings?
Most of us would feel the latter is the lower risk. Creditworthiness, or the lack of it, can also be a pointer to help fund managers and private individuals decide where to invest. Those countries with sound finances should offer investment growth prospects.
Ken Murray runs Blue Planet Worldwide Financials investment trust. The fund invests in banks and financial companies globally and is the third best-performing trust over the past three years.
Murray picks companies by first deciding which nations to invest in based on the potential of each economy and the amount of debt a country and its population carries. He says: 'No one should invest in a nation that has effectively overused its credit card.
'The prospects for growth will be low because there is less scope for consumers to increase their spending while servicing the debts they already have.'
This means he is sceptical of countries such as the UK and Germany, where average consumer debts are high. Instead, he looks for those with a good growth potential, such as Russia, Poland and Brazil. 'People behave the same way around the world,' he says.
'They have scope to borrow to spend and they will, fuelling growth. Look for countries that are creating the wealth.'
Bruce Stout of Aberdeen Asset Managers runs Murray International investment trust (not connected to Ken Murray). He has a similar investment philosophy.
'We buy companies, but we are aware of the fundamentals of the economies they operate in and prefer saver, not spender nations,' he says.
So only 10% of Murray International is invested in the world's largest stock market, the US. Stout says: 'A nation such as the US that persistently imports more than it exports is effectively borrowing growth from the future. At some point, this has to be paid for and that means a long painful slowdown.'
By contrast, he is overweight in Latin America, where nations such as Argentina and Brazil have got on top of old debts and now run healthy trade surpluses.
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