Saturday, March 9, 2024

The Cost (and Value) of Freedom

AN OXFORD CLUB PUBLICATION

The Cost (and Value) of Freedom

Matt Benjamin, Senior Markets Expert, The Oxford Club

Liberty Through Wealth is the name of our column because we firmly believe that successful investing can lead to wealth - and give you the freedom to live the life you want.

Yet it has become particularly obvious that investing IN freedom and liberty can also boost your portfolio's performance.

We can see that by considering nations that are economically unfree.

They lack many of the fundamental human and economic freedoms that we in the West take for granted: property rights, rule of law, and the ability to trade and make contracts, plus the basic freedoms of speech, association, religion and assembly.

To be sure, there is no simple "free or unfree" dichotomy.

The Fraser Institute produces an annual report on economic freedom around the world, and the 2023 edition is now out.

According to Fraser's metrics, Singapore is the economically freest nation, followed by Switzerland, New Zealand, the United States, Ireland, Denmark, Australia, the United Kingdom and Canada.

The 10 least free nations are the Republic of Congo, Algeria, Argentina, Libya, Iran, Yemen, Sudan, Syria, Zimbabwe and Venezuela.

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So, what does all this matter to investors?

It turns out that avoiding unfree countries is a good idea. They tend to have rulers who are capricious and unpredictable - and investors tend to misprice the risk that comes along with that.

There's an exchange-traded fund (ETF) I wrote about almost two years ago, the Freedom 100 Emerging Markets ETF (CBOE: FRDM), that uses economic freedom indexes - like the one above from the Fraser Institute - along with other metrics to create an emerging markets investing strategy that embraces personal and economic freedom.

Recently, I compared the Freedom 100's performance over the past five years with that of the broader iShares MSCI Emerging Markets ETF (NYSE: EEM). It's up 29% over that time, while the broader emerging markets index is down about 7%.

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International Diversification

Here at The Oxford Club, we encourage our Members to diversify their portfolios by including a healthy share - about 30% - of foreign or international stocks. That could include emerging market stocks, too. As Chief Investment Strategist Alexander Green often says, these stocks tend to zig when U.S. stocks zag, so they provide a nice balance.

And there are many places to invest your money on the planet. Many of them are the unfree autocracies that score so poorly in the Fraser index.

While you may never consider investing in Congo, Yemen or Zimbabwe, you might have had investments in other, larger unfree nations. For example, in Fraser's freedom index of 165 countries, Russia ranks 104 and China 111.

So, how have stock markets done there?

Well, as measured by the iShares MSCI China ETF (Nasdaq: MCHI), the Chinese stock market peaked in February 2021 and is down 60% since then (in turn, the S&P 500 is up 27% since February 2021).

Part of that dramatic drop in Chinese stocks was due to the fact that in 2021 China's government unexpectedly - and with little warning - cracked down on internet, education and video game companies in the name of "common prosperity."

And how about Russia?

The country is widely known as one of the world's largest oil exporters.

Russia's stock market floated along quite nicely for several years until late 2021 when the winds of war began to blow. After Russia's unprovoked invasion of Ukraine two years ago, freedom (of speech, association, press, etc.) went out the window.

The iShares MSCI Russia ETF (NYSE: ERUS) was once a proxy for Russia's stock market...

And now, it has to be seen to be believed.

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BlackRock (NYSE: BLK) ran the ETF and has since shuttered it.

So, avoiding such unfree nations when you invest is very likely a good way to boost your portfolio's returns.

Freedom isn't free, as they say. But it may be profitable.

Invest wisely,

Matt

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Saturday, March 9, 2024