Where to Invest Amid the Eurozone Crisis

In early 2010, we created a growth/risk heat map focusing on the largest 64 economies in the world.  Using projected real GDP growth, nominal GDP size, and sovereign debt credit default swap spreads* as a proxy for risk, we identified 16 countries with the greatest growth potential and lowest risks. We termed these countries the “Sweet 16.”  With the recent downgrade of US sovereign debt and deepening European debt crisis, we decided to re-run the analysis to identify where the hot spots are today. Click here to see the updated heat map.

Risk/Reward Trade-Offs for Many Emerging Markets are Now More Favorable

Despite the deepening Euro zone crisis, the overall growth outlook remains respectable.  The 64 largest economies are expected to post 3.7% median growth in 2012, which is slightly higher than the 3.4% median expansion in 2011 and significantly higher than the 2% forecasted 2010 growth rate when we conducted the analysis in early 2010.  Of note, growth expectations are driven disproportionately by developing nations (even though their growth rates have also been revised downward in recent months). In fact, none of the G7 nations are expected to generate above median growth in 2012.

Conventional wisdom would suggest that developing nations are inherently riskier.  The heat map tells a surprisingly different story: France is now perceived to be riskier than many emerging nations, including Brazil, China, and even Malaysia, Thailand, Colombia, Chile, and Peru.  While risks across the world have shot up since early 2010, this is mostly attributed to European countries: CDS spreads for Greece, Ireland, Italy, and Portugal are all trading well above 400 bps.

The US Remains the Safe Haven

Despite a persistently high unemployment rate and a stagnant housing market, the US is expected to perform relatively well compared to other G7 countries:  its economy is forecast to expand by close to 2% in 2012, which is slightly behind Canada and Japan but noticeably higher than its European peers.  Furthermore, despite a recent credit rating downgrade and ballooning debt, its country risk (in the eyes of the CDS market) actually declined compared to early 2010.  It has also moved from being the seventh-safest country (in terms of credit risks) to the second-safest country today.  This may appear counterintuitive after the credit rating downgrade.  However, in a world of heightened uncertainty, demand for US Treasuries, the most liquid sovereign debt, continues to be robust.  That said, it is questionable how long the US Treasuries can remain a safe haven with persistent budget deficits.

The Sweet 16 – 16 Countries with Above-Average Growth and Below-Average Risk

No European or North American nations made this year’s list of 16 high-growth, low-risk countries.  The US, Australia, Canada and Israel, which made the cut in 2010, dropped out of this year’s list as their recovery momentum receded.  Morocco also exited the list when its credit default swap spread shot up to more than 200 bps during the Arab Spring movement.  Taking their places in the Sweet 16 are South Africa and emerging economies in  Latin America (Brazil, Colombia, Peru, and Panama).  All of these countries continue to exhibit high growth while their risk, as measured by CDS spreads, fell below the world median.

The complete Sweet 16 list is now dominated by Asia and Latin America states and consists of:

• Seven Asia-Pacific states: China, Malaysia, Thailand, Hong Kong, Singapore, South Korea, and Taiwan
• Five Latin America nations: Brazil, Chile, Colombia, Peru, and Panama
• Four Middle East and Africa nations: Kuwait, Qatar, Saudi Arabia, and South Africa.

Develop A Portfolio Strategy for International Expansion

While the heat map provides an unbiased view of country attractiveness from a macro vantage point, managers, of course, weigh a variety of macro and micro factors to evaluate markets.  CEB has conducted extensive research on how the best companies sharpen globalization strategy, prioritize investments and adapt capabilities to new markets.  CEB Corporate Strategy members can access additional research on:

• 12 Emerging Market Strategies that Matters
• 40 Capabilities of Emerging Markets Leaders
• Interactive Global Opportunities Database for an interactive heat map and forecasts on various macro indicators

*Credit Default Swap (CDS) Spread can be interpreted as the insurance premium for protection against default.  For example, CDS spread of 100 bps implies a premium of $1 for $100 protection.  A higher CDS spread indicates the market perceives a higher risk of default.