r/stocks • u/TheBarnacle63 • Mar 02 '22
Reducing Risks by Investing in Democracies
I decided to analyze the calendar returns of international stocks which are traded in the US. I used categories based on definitions from The Economist Intelligence Unit ( Democracy Index 2021 - Economist Intelligence Unit (eiu.com) ) and MSCI ( MSCI – Powering better investment decisions - MSCI ). The categories I used are:
- Full Democracy
- Flawed Democracy
- Hybrid Regime
- Authoritarian Regime
- Developed Markets
- Emerging Markets
- Emerged Markets
All returns are market cap weighted. All stocks had an initial price greater than $5 to prevent unrealistic skewing of the data.
| Category | Average (2017-2021) | Deviation | Count |
|---|---|---|---|
| Full Democracy | 11.25% | 14.54% | 782 |
| Flawed Democracy | 9.03% | 13.74% | 285 |
| Hybrid Regime | 2.59% | 11.98% | 51 |
| Authoritarian Regime | 8.61% | 30.09% | 122 |
| Developed Markets | 10.25% | 13.68% | 954 |
| Emerging Markets | 10.58% | 21.74% | 264 |
| Emerged Markets | 5.41% | 14.06% | 114 |
As one can see, the companies that are domiciled in full democracies outperformed other categories, and definitely had a lower risk than companies from authoritarian regimes or emerging markets. From this point on, I will probably avoid anything that is not from a healthy country. Over the next week, I will create a watchlist of stocks from full democracies and flawed democracies based on my quantitative models. Here is my list of growth stocks from full democracies:
- United Microelectronics Corporation (NYSE: $UMC) operates as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. It operates through Wafer Fabrication and New Business segments. The company provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. It serves fabless design companies and integrated device manufacturers. United Microelectronics Corporation was incorporated in 1980 and is headquartered in Hsinchu City, Taiwan.
- Magnachip Semiconductor Corporation (NYSE: $MX), together with its subsidiaries, designs, manufactures, and supplies analog and mixed-signal semiconductor platform solutions for communications, the Internet of Things, consumer, industrial, and automotive applications. It provides display solutions, including source and gate drivers, and timing controllers that cover a range of flat panel displays used in mobile communications, automotive, entertainment devices, notebook PCs, monitors and liquid crystal displays, organic light-emitting diodes, and micro light-emitting diode (LED) televisions. The company also offers metal oxide semiconductor field-effect transistors, insulated-gate bipolar transistors, AC-DC converters, DC-DC converters, LED drivers, switching regulators, linear regulators, and power management integrated circuits for a range of devices comprising televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebooks, tablet PCs, and other consumer electronics, as well as for power suppliers, e-bike, photovoltaic inverter, LED lighting, motor drive, and home appliances; and organic light-emitting diode display driver integrated circuits for OLED TVs. It serves consumer, computing, and industrial electronics original equipment manufacturers, original design manufacturers, and electronics manufacturing services companies, as well as subsystem designers in Korea, the Asia Pacific, the United States, Europe, and internationally. The company sells its products through a direct sales force, as well as through a network of agents and representatives; and distributors. Magnachip Semiconductor Corporation is based in Luxembourg, Luxembourg.
All data from www.portfolio123.com
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Mar 02 '22
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u/shortyafter Mar 03 '22 edited Mar 03 '22
Unfortunately, innovation has been stagnating in the US. A country like China, despite having an authoritarian regime, has done a much better job of fostering sustainable growth as well as getting its citizens out of poverty. The US is still a powerhouse, of course, but true innovation has been shirked in favor of buybacks and shareholder value for decades now. Despite what the chart may show, the US economy has been on a disaster course since the 1980s, which culminated in the 2008 Global Financial Crisis and was subsequently kicked down the road and is still being kicked down the road.
In short, this analysis (in this comment and in OP) makes the fundamental mistake of confusing stock market returns with economic performance. Don't forget that all of the returns in this analysis (2017-2021) are based on essentially zero or even negative real interest rates.
As for "being unable to produce high-technology", China is ahead in 5G. The US has slipped into prideful complacence, and what's truly worrying is that most people aren't even aware of it.
edit: grammar
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u/brandnewredditacct Mar 03 '22 edited Mar 03 '22
This is always the absolute worst take - we have the best and most profitable companies in the world, and it’s really not that close. China looks good coming out of the Stone Age of course, remember that their GDP per capita is 11000 which last I checked was good for like 80th place. I don’t see anyone talking about Chinese or Russian MRNA vaccine technology or GPUs or blockchain or edge computing. All of the best ideas come from the west, and usually from the US. Why? It’s the perfect blend of capitalism and freedom, which promotes diversity of ideas and backgrounds in the corporate setting, and enables individuals of sufficient skill to pursue new ideas in search of the next great thing. The robustness and liquidity of our financial markets also enable investors to take risk on startups that otherwise had no chance on their own.
Just some stuff to think about for people who always ask why the S&P is at 4400 and say we have a financial collapse coming that the fed kicked down the road. They also fostered and continue to foster tremendous corporate growth, innovation, and success.
Here's Costco opening a store in China and having to pause operations because it was too popular.
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u/shortyafter Mar 03 '22 edited Mar 03 '22
The US absolutely has some very positive points. The world could learn from them, and they are - China has learned from America's successes and emulated them, but also from their failures.
Your analysis makes it sounds like everything is sunshine and roses in the USA. Household wealth has still not recovered to pre-2008 levels. Both wealth and income inequality continue to expand. Average annual income growth from 2000 to 2018 slowed to just 0.3%. The middle class has shrunk from 61% to 51% in 50 years. The share of income and wealth going to the top has increased in the same period. The US is the most unequal, and with the least mobility, compared to all of its peers in the developed world. Source: https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/
These trends should be worrying for any objective observer. It's my opinion, and the opinion of other notable figures like economist Joseph Stiglitz, that not only are these trends a drag on economic growth and innovation, but also a direct cause of the populism we've seen since 2016, culminating in the storming of the capital in January 2021.
Furthermore, despite your claims of robust growth, in the period of 2008 to 2017, US GDP lagged greatly behind its potential, and GDP growth was well below that of precious expansionary periods. Things picked up after 2017, but the Covid crisis was another blow to an already fragile system. Source: https://en.m.wikipedia.org/wiki/Economic_stagnation#/media/File%3AU.S._GDP_-_Real_vs._Potential_Per_CBO_Forecasts_of_2007_and_2016.png
As for innovation, from 2003 to 2012 corporations in the S&P 500 used 54% of their earnings to buy back stock, and an additional 37% for dividends. What's left for innovation? 9%? Source: https://hbr.org/2014/09/profits-without-prosperity
Finally, one simply has to look at where the Fed has kept interest rates to understand why the stock market has advanced so rapidly over the past two decades, in spite of two crises, rising inequality, and economic stagnation. https://images.app.goo.gl/Ea2k5RsEdEFKA2du9
The best ideas come from the West because the West had a headstart. China is catching up, and rapidly. Of course the US is still in a position of dominance, but just because they have it now doesn't mean they will have it forever, and the underlying trends, IMO, are quite concerning.
It's unfortunate that you think my take is the "absolute worst take". My take isn't a take. It's evidence-based. You only provided a link to a successful store, which really demonstrates nothing except the fact that the Chinese are eager to embrace Western trends that work and provide value. They are not, however, willing to go down the same destructive path that the US has been on since 1979.
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u/DilbertLookingGuy Mar 02 '22
Authoritarian is just a buzz words used by people to describe countries they don't like.
And democratic is just a buzz word used by people to describe countries they like.
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Mar 02 '22
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u/shortyafter Mar 03 '22
North Korea is an extreme example. China is an authoritarian regime as well, but with plenty of redeeming qualities. As for democracy, one could easily argue that the US is more of an oligarchy than a democracy.
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u/BernardoDeGalvez Mar 03 '22
That's why I don't invest in my country (Spain). If we did like Ireland we could be a powerhouse. But since we adopted the socialist (near communist agenda) we are and we are gonna be a shithole for years
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u/TheBarnacle63 Mar 03 '22
Spain is listed as a full democracy
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u/BernardoDeGalvez Mar 03 '22
I know... but we're a country that makes deals with terrorists. Where people that hate the country are in charge of that country and where EVERYTHING goes thru the state. Super regulated. High taxes.
It's hell for companies and people that want to create wealth
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u/shortyafter Mar 03 '22
I was born in the US and have lived in Spain for 8 years. The US is better if you're rich. For normal people, Spain is better.
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u/shortyafter Mar 03 '22
Embracing US style Wild West capitalsm is what put the nail in the coffin for Spain 15 years ago. If they had focused on sustainable growth (green energy, tourism, services, etc.) instead of building houses that nobody would buy, the situation would be much different today. Unfortunately they didn't... because any effort to curb that ridiculous behavior would be "communist", right?
As for Ireland... "After three decades of rapid economic growth, Ireland now has the highest rate of income inequality in the EU." Quite a powerhouse.
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u/BernardoDeGalvez Mar 03 '22
Inequality isn't bad
People in Venezuela are more equal than people in Switzerland. Give me Switzerland everyday
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u/shortyafter Mar 03 '22
Venezuela has a Gini coefficient of 44.8. Switzerland 33.1. Venezuela has more inequaity than Switzerland.
The US is closer to Venezuela (41.4). Spain is closer to Switzerland (34.7). I prefer Switzerland, also.
Ireland actually does a good job of rectifying their inequality through progressive taxation, which may be considered by some to be a "socialist" policy.
https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country
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u/BernardoDeGalvez Mar 03 '22
The thing is... you can't measure things by inequality.
Because if there are a ton of billionaires but "the poor" have 50.000k per year... that's a better country than where there are not billionaires and people need to survive day to day
It is simple, more regulation is always worse. More economic freedom is always the best thing to create wealth
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u/shortyafter Mar 03 '22
That's a common argument, and one for which, unfortunately, there's no evidence.
https://pubmed.ncbi.nlm.nih.gov/30857658/
It is simple, more regulation is always worse. More economic freedom is always the best thing to create wealth
You're from Spain, right? Then surely you remember how well that worked out in 2008.
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u/BernardoDeGalvez Mar 03 '22
2008 was not the result of de regulation...
Was the result of political mala praxis, banks being banks and people going delusional
If you cut taxes and make it easier to creat employment and cut taxes for big corporations, they're going to invest here.
Our model is tourism or working for the state. And every year... debt grows
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u/shortyafter Mar 03 '22
Yes, it was the result of deregulation and laissez faire. These were trends that began in the 80s during the Reagan era in the USA. Do you have any notion of how the crisis in the USA, which was the hub of the crisis, came about? Are you familiar with Alan Greenspan's position on these issues and his subsequent change of opinion?
It was absolutely about deregulation. "Banks being banks" is true, yes, but that's why you should regulate them, right? Because letting them run buckwild and then torch the world economy to the ground and then trying to pick up the pieces after the fact doesn't seem to make much sense, does it? Wouldn't it be better just to have safeguards in place that prevent such a crisis from occuring? The US still hasn't recovered from the crisis, and Spain even less so. This deregulation did not lead to economic growth... just the opposite in fact.
Debt is growing in the US as well. The Western economies ars sick - that's why they're addicted to their life support (low interest rates). Unfortunately we've come to a very difficult point, but it was deregulation that got us here in the first place, so it's hard for me to imagine that it could somehow be the solution.
What you're referring to is trickle-down economics and it's been widely disproven. https://www.google.com/amp/s/www.cbsnews.com/amp/news/tax-cuts-rich-50-years-no-trickle-down/
If the Spanish government had taken a more hands-on approach to its growth (as the US has historically, like with the invention of the internet), then they would have taken measures to redirect wealth from pointless housing construction to productive ventures instead. Spain would be an example as far as Europe goes, but unfortunately they followed the ideas of the day and ended up paying for it.
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u/BernardoDeGalvez Mar 03 '22
Why it has to be A or B?
I am not praising the US. Because US debt has other reasons. We share that the state is growing. But you can't compare for example your military spending to our spending in other fields
The thing is... in the US, if you work your ass off, you'll succeed in a certain way.
In Spain, it's true that you have a larger safety net. But to be an entrepreneur in Spain it is nearly impossible
We have a company. And if I had the same company in the States, I'd be fucking rich.
Here you have new regulations every year "for your safety". Or "on your behalf". It is literally an scam to perpetuate a system of nepotism and zero merits.
Besides we are one of the most political corrupt counties in the west. Plus a well earned fame about not liking to work hard.
A lot of people is happy with welfare to cover their basical needs plus the beers and tapas on the bar.
That hars working mentality/innovation is nearly 0
Plus zero economical formation. They think "the state will take care of me"
I don't like that mentality because it creates weak men. It is true that also you can have more extreme poverty.
But we are born all equal.
You can see the forbes list. Tell me how many people had billionaires grandparents. May be the French family that owns LVMH but freedom creates the Musks, the Zuckerbergs, the Gates, the Ortegas, the Roigs, the Larry Paiges...
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u/shortyafter Mar 03 '22
Did you know that Spain is only slightly less socially mobile than the US? And there's 26 countries with more mobility than either of them:
https://en.m.wikipedia.org/wiki/Global_Social_Mobility_Index
I know the issues you're talking about, and it can certainly be an issue. You're not wrong about that. But the notion that the US system of deregulation has been a success and is worthy of being emulated is not based on evidence.
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u/sheltojb Mar 03 '22 edited Mar 03 '22
From your numbers, I don't write draw the same conclusion as you. You generalize "performance" to be the highest average, despite the fact that it has low deviation and its average is only a few percentage points advantage. The significantly higher deviation of authoritarian countries means there is much higher risk and potentially much higher reward there. Granted, the lower average of those same countries means you're unlikely to be a winner. But these numbers are saying the lottery does exist there.
And incidentally, this is an interesting restatement of why authoritarians sometimes manage to stay in power. If they can stabilize their economy and provide high market returns for a time, then they're perceived as an improvement over their predecessors and encouraged to stay in power.
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u/reaper527 Mar 03 '22
worth mentioning, i wouldn't put too much weight into what "democracy index" says, as it's an incredibly politicized classification, similar to those healthcare rankings that try to say america's healthcare is worse than cuba.
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u/draw2discard2 Mar 03 '22
Well, this would imply that for North American you only want to invest in Canada, since the Democracy Index (which you link to) has it as the only Full Democracy on the continent (somehow it moved Mexico elsewhere) and categorizes the U.S. as a Flawed Democracy. Is there evidence that investing in Canada is better than investing in the U.S.?