Looking for the Next Bull Market? Ask the UN
One of my favorite trading books is Inside the House of Money by Steven Droby. What I really enjoyed was that through the interviews, we were able to get a good idea of the kinds of mindsets some global macro traders had.
The book featured an interview with James Leitner of Falcon Management Corp which I especially enjoyed. In his interview, he described how he uses magazines like The Economist as a way of sourcing ideas.
Now, in a recent issue of The Deal magazine, Leitner shows us another way to source investment ideas. This time by using development indices created by groups such as the United Nations, the Heritage Foundation, and World Bank.
Leitner says:
Through our research at Falcon Management Corp., we have uncovered linkages between good governance, economic freedom, human development and stock market returns.
Essentially, Leitner’s group of researchers found that the year after these indices are published, the top ten nations of each ranking will dramatically outperform market benchmarks.
In theory, a lot of this makes sense. Stability is essential for strong capital inflows in many developing nations. Increased development and investment should help the economies and companies of these nations grow creating positive changes in their respective markets. Instability on the other hand creates increased risk and higher costs of borrowing (just see the move in Pakistani CDSs after the Bhutto assassination)
The types of returns detailed in the chart are certainly strong and I believe it’s something worth studying further. So far already, the data has helped Leitner find attractive securities in areas once thought of as being too dangerous to invest in. For example, he’s picked up shares of one bank in Ghana after visiting and witnessing the changes occuring within the nation.
Links:
UN Human Development Reports
The Heritage Foundation’s Economic Freedom Index
The World Bank’s Ease of Doing Business Rankings
The Leinter Center at Fordham Law School
