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It Can Be Disastrous To Invest This Way

A popular narrative I hear often in the world of investing goes something like this “Country ABC is poised to grow its economy really quickly. You should buy into its stock market!”

This line of reasoning is intuitive, sounds plausible, and makes sense. After all, a domestic stock market index is supposed to track the economic growth of the businesses in the country over the long run. But, as the following tweet from investment manager Ben Carlson shows, this line of reasoning can also be a disastrous way to invest.

The problem with the reasoning is that it’s a form of single-variable analysis – if A, then B. But like investor Howard Marks once said, “One thing you can never be sure of in the investment world is <<if A, then B>>. Processes and linkages are not always predictable.” There’re too many moving parts and things can be a lot more complicated.

Right now, countries such as Indonesia and Myanmar might be the ones capturing the attention of investors in Singapore as both seem poised for growth.

Indonesia has just gotten a new president in Joko Widodo and he seems determined to improve the country’s infrastructure and economy. There’s also favourable demographic changes going on there which can be beneficial toward economic growth.

Companies like Jardine Cycle & Carriage Limited (SGX: C07) and Petra Foods Limited (SGX: P34) might thus be able to enjoy strong tailwinds. Jardine Cycle & Carriage is the largest player in Indonesia’s automotive market and is also involved with many other businesses – such as palm oil production, the provision of financial services, and the sale of heavy equipment and machinery – within the country. Meanwhile, Petra Foods sells chocolates and confectionaries predominantly in Indonesia.

Myanmar has been steadily opening up its doors to foreign investors and companies over the past few years and there’s definitely potential given that its economy is only one-twentieth the size of South Korea’s despite both nations having the same population size. As a likely result, Yoma Strategic Holdings Ltd (SGX: Z59) has been a company that’s been attracting investors’ attention as it has significant exposure to the country with its varied business interests there; as a sign of its popularity, shares of the firm have a trailing price/earnings ratio more than twice that (32 versus 13) of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI).

The aforementioned shares might yet all become big winners in the years ahead – or they might be duds. No one has an accurate crystal ball. But if your basis for investing in them rests entirely on the fact that they’re heavily exposed to countries which are poised to enjoy strong economic growth, then you might want to rethink your thesis. As we saw earlier, single-variable analysis, especially those linking GDP growth with stock market returns, can be disastrous.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.