A simple macro-economic model for ranking the best economies
The aim of the comparison study is to find the top sustainable economies for value investment (cheapest markets with the highest appreciation potential/markets trading for less than their intrinsic value).
First, let’s establish a key filter to narrow our search..the ‘Economic Freedom Score’. We’ve chosen this factor due to its direct impact on the economic well-being of any country (measured by GDP per capita). Before jumping into the rankings and the factors used, here’s a look at the correlation between the Economic Freedom Rank and the GDP per capita for over 160 countries measured:
We notice the strong correlation between the two factors, as 44% of the change in GDP per capita for any economy can be explained by how they rank on the economic freedom scale.
With this in mind, the sample of countries shrinks from 160 to about 35. These countries are the highest ranked on the economic freedom scale and labeled as either ‘free’ of ‘mostly free’ and scoring above 70:
Now, let’s look at key factors and their function in determining the health and prospects of each country’s economy, so we can use them in the ranking:
GDP Per Capita PPP
A country’s Gross Domestic Product (GDP) per person is calculated by dividing its GDP by its average population. GDP refers to the total value of goods and services produced within a country’s borders during a specific period.
While GDP is the most widely used measure of a country’s economic activity, per capita GDP is a better indicator of a nation’s living standards since it adjusts for the population.
Small, rich countries and more developed industrial countries tend to have the highest per capita GDP.
We used the PPP version (Purchasing Power Parity) of the per capita GDP because it measures economic variables in different countries better, so that irrelevant exchange rate variations do not distort comparisons.
Source of data: tradingeconomics.com
The Competitiveness Index analyses competitiveness along 12 pillars: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.
Source of data: World Economic Forum Global Competitiveness Index
The Corruption Perceptions Index (CPI) is an index published annually since 1995 which ranks countries “by their perceived levels of public sector corruption, as determined by expert assessments and opinion surveys.”
The CPI generally defines corruption as “the misuse of public power for private benefit”. It currently ranks 176 countries “on a scale from 100 (very clean) to 0 (highly corrupt)”.
Source of data: Transparency International
Doing Business Rank
The Doing Business project provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the sub-national and regional level.
The Doing Business project, launched in 2002, looks at domestic small and medium-sized companies and measures the regulations applying to them through their life cycle.
By gathering and analyzing comprehensive quantitative data to compare business regulation environments across economies and over time, Doing Business encourages economies to compete towards more efficient regulation; offers measurable benchmarks for reform; and serves as a resource for academics, journalists, private sector researchers, and others interested in the business climate of each economy.
Source of data: doingbusiness.org
Quality Of Life
Quality of Life Index is an estimation done by Numbeo of the overall quality of life by using an empirical formula, which takes into account purchasing power index, pollution index, house price to income ratio, cost of living index, safety index, health care index, traffic commute time index and climate index.
Due to limitations in the data for this factor, We have excluded the following 4 countries from the final ranking: Luxembourg, Rwanda, Taiwan, and Mauritius.
Source of data: Numbeo.com
Economic Freedom Index
Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.
The Index covers 12 freedoms — from property rights to financial freedom — in 186 countries.
Source of data: heritage.org
Government Debt Utilization
Is a calculation we have utilized -after proving to have a significant effect of predicting economic health- by dividing the government’s sovereign debt by the per capita GDP.
Basically, it tells us how efficient is the government in utilizing debt to generate GDP per Capita.
Price: Earnings Ratio
The price-to-earnings multiple is a common valuation metric used by investors to assess the current value of a stock or the market as a whole. In short, this is the ratio between the price per share and the earnings per share of a company.
It is a useful metric for evaluating the relative attractiveness of a company/market’s price compared to the firm’s current earnings.
Source of Data: Bloomberg
All the 7 economic factors have received an equal weighting of 10% each making the economic health score weighed at 70% and 30% was assigned to the Price: Earnings ratio to judge the investment market attractiveness.
The top 5 economies that you can hardly go wrong investing in for the next 5–10 years as of the end of 2019 are:
United Arab Emirates
Here is the detailed ranking and data for all the economies tested: