The United States is wrestling with negative economic growth, sky-high inflation, and a plummeting stock market. Russia’s invasion of Ukraine has tanked European markets. Japan is its usual mess. The traditional safe havens among developed economies are increasingly perilous. So where can you ride out the current market mayhem, and maybe even make a decent return?
The first step is to understand that a combination of factors makes this the riskiest time to invest since the Global Financial Crisis in 2008. That catastrophe erased trillions of dollars in investor wealth, torpedoed some of the biggest financial firms, and caused a mortgage crisis that forced millions from their homes. But it was, essentially, a banking crisis, caused by Wall Street firms run amok.
The current situation is very different. The near-term pain is being caused by soaring food, energy, and housing prices – annual inflation in the U.S. hit 8.5% in March, a 42-year high – and the interest rate hikes the Fed and other central banks are using to combat this inflation. The Ukraine War and Covid-related supply chain problems are also partly to blame.
To find attractive overseas markets, first look for countries that export things that are in short supply because of the Ukraine War. Russia is the biggest grain exporter, and Ukraine is the fifth-biggest. Russia is also one of the largest oil and gas exporters. Everyone relies on the grain and energy markets, and people are desperate to find alternatives.
The two countries that IMF economists expect to grow the fastest this year are India, a big rice and refined petroleum exporter, and Saudi Arabia, which is the world’s biggest crude oil exporter. The IMF expects India’s GDP to grow 8.2% this year and Saudi Arabia’s to grow 7.6%. (By contrast, U.S. GDP contracted 1.4% in the first quarter.)
These countries’ strong prospects are reflected in the U.S.-traded iShares MSCI India ETF (ticker symbol INDA) and the iShares MSCI Saudi Arabia ETF (ticker symbol KSA). Each handily outperformed the S&P 500 over the past year, as these graphs from Seeking Alpha show.
But be careful. Some countries that export goods affected by the Ukraine crisis are bad bets. Canada, for instance, is the world’s third-biggest wheat exporter, but its property market is imploding and its economy is shaky.
A third potential refuge is the granddaddy of safe havens – Switzerland. It too has a U.S.-traded security, the iShares MSCI Switzerland Capped ETF, traded under the ticker symbol EWL. This ETF has had a volatile start to 2022. It has tracked the performance of the U.S. S&P 500. Analysts worry about its banks’ exposure to Russia and Ukraine. But the April edition of the IMF World Economic Outlook showed that Swiss bank exposure is a very manageable $5 billion, out of the over $130 billion that Russia and Ukraine owe in total.
Switzerland’s stock market is also one of the few developed-country markets that is largely undervalued on an earnings-per-share basis. Plus, the country has no NATO or EU ties that could draw it into a serious conflict with Russia.
To be on the safe side, investors looking to diversify abroad should not invest more than 5-10% of their portfolio in any one foreign country. Apart from their economic situations, countries often have significant political risk, as the Modi regime in India and the bin Salman regime in Saudi Arabia both demonstrate. But for those looking to take the plunge, it appears that high-growth exporters like Saudi Arabia and India, and safe-haven stalwarts like Switzerland, are among the best bets.