Let’s take a look at the index (you can see the full version here):

Predictably, North Korea, Iran, Burma, Zimbabwe, Libya, Venezuela, Belarus and Cuba were all at the bottom of the list.

The Heritage Foundation defines economic freedom as, “the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive.”

But why should you as an investor be concerned about the Index of Economic Freedom? David Marotta of Marotta Asset Management explains, “On average, international stocks appreciate more than U.S. stocks, and stocks in countries with the most economic freedom appreciate more than the international average. The MSCI EAFE International Index gained 26.6 percent during the one-year period ending June 30, 2006, and averaged 23.9 percent annually for the past three years. And, stocks in the ten most economically free countries gained 24.5 percent during the past year, averaging 27.3 percent annually for the past three years.”

The freer a country is economically, the better it trades with the rest of the world. Its companies’ earnings are of high quality and, as a result, yield better shareholder value. This is why Marotta invests his clients’ money in the economically free countries. And the strategy works. Just take a look at the one-year returns (June 2005-June 2006) in some of the freest markets:

Interestingly, all of the above countries beat the U.S.’s 8.2% returns. If you want to invest in economic freedom, the best way to do that is buy the ETF that represent each country’s stock market. Here is a list:

Countries like Luxembourg and Ireland (that are on the economic freedom list) aren’t represented by ETFs.

Marotta puts about 50% of his clients money into the above country ETFs. The other half is invested in iShares EAFE Index (NYSE:EFA) and the iShares Emerging Markets Equity Index (NYSE:EEM).

Not only does Marotta strongly believe in investing in economic freedom, he’s willing to bet all his money on foreign markets: “Foreign markets have beaten U.S. markets all the time except the latter half of the 1990s — and that was an aberration, not a trend.”

Marotta’s strategy is great. And it works. But here is a way to get ahead of the crowds. Look out for countries that might join the Index of Economic Freedom in the future. Here is exactly how you go about doing it:

• Pick a country where a long lasting dictatorship or another “un-free” form of governance is about to end.
• Make sure that the country has a natural resource or the ability to trade with the rest of the world once it becomes free.
• Then find indirect ways to invest in the country. That means finding companies traded in the U.S. or other more stable markets that will benefit from the country entering the Index of Economic Freedom.

For our readers of Global Profit Hunter, we have identified exactly such a nation. It’s Cuba. If Fidel Castro dies, it might weaken Cuba’s socialist regime. That’s one step closer to becoming an economically free country.

Cuba also has a very sought after natural resource: Oil. In fact, China and India are signing agreements to drill for oil off Cuba’s coast. If Cuba becomes a democracy, its economy will experience an oil-driven boom.

And we at Global Profit Hunter headquarters have found three companies that will all benefit greatly from a free Cuba. And not to worry, they are fundamentally solid companies on an uptrend even now. Best of all, you can easily buy them in the U.S.

Regards,

Sala Kannan
October 13, 2006

Overseas Investing Opportunities was originally featured in the Penny Sleuth.