• Where in the world should you invest?
  • It’s all about the direction of change
  • Why the UK is on the wrong path

Investors today have the opportunity to invest in a long list of different countries. They can even keep their money close to home while doing so by investing in exchange-traded funds (ETFs) that hold foreign stocks for you. Now that such opportunities are common and cost effective, where should you put your money?

Japan? Mexico? Australia?

History might provide the correct answer, for a surprising reason…

There aren’t many clean experiments in economics.

Believe it or not, it’s tough to get two precisely the same countries to run a test where each of them changes only one condition, such as the corporate tax rate, and then measure the result over the subsequent years.

It would’ve been fun to have Deng Xiaoping, Mikhail Gorbachev and Ronald Reagan agree to run such a test. However, their countries were completely different and they were too busy changing all sorts of other variables anyway.

And even then, we probably couldn’t agree on the meaning of the results. Some would say that a smaller tax take is a good thing and some would say it’s bad…

Funnily enough, even when economists do devise some sorts of experiments, 40% fail to be replicated (implying they were false or falsified). This may be far better than some other fields of science, but it’s still not ideal.

That’s why economists tend to turn to history instead. They compare what happened rather than setting up a laboratory and conducting an experiment.

And the closest thing to an experiment we have in a historical context is when a country is split into parts and pursues different policies as a result. That’s because the starting condition of the two is the most similar it can be in the real world.

Unfortunately, so many different things tend to happen in the affairs of a country that it’s difficult to figure out what in particular led to the outcomes. That’s why having several such experiments matters so much. The more often the same result occurs in differing circumstances, the more likely your hypothesis is to be correct.

And so we have a long list of examples of similar countries that went very different ways…

Malaysia and its former impoverished backwater of Singapore. East and West Germany, where the Prussians went from uniting Germany to being its economic ball and chain. Resource-rich North Korea and resource-poor South Korea. China, rather embarrassingly, has two comparisons with the islands of Hong Kong and Taiwan. The list goes on.

There are also temporal experiments, with governments doing sudden about-faces on their policies. Japan when it ended its period of isolationism. The countries that left the Soviet Union and communism behind. And when China and the Soviet Union abandoned collectivist policies, if not in name.

What can we learn from each of these “experiments”?

In each example and by each measure, the adoption of free markets led to better outcomes. By no small margin, either. And not just for the living standards of individual people, but investors also benefitted.

Investors in more free-market countries did radically better than those in less free-market countries. And investments performed well as countries abandoned collectivist policies.

Similarly, investors suffered badly when collectivism took over. I once met the granddaughter of an owner of the Chinese stock exchange before communism took over. Things didn’t go so well for them…

The conclusion you might draw from this is that you should invest in countries that are free market. But that’s the wrong conclusion.

You see, it’s all about the direction of change. To identify where to invest, ask yourself this question: is a country becoming more or less free market?

Investment returns are, after all, measures of change – the improving state of companies and economies. Thus, a country that is changing for the better should offer better returns.

In a mature, capitalist economy, returns should be small because of the efficiency of competition. The only way to generate excess returns (unusually large profits) is to partner with the government in some way to create a monopoly, intellectual property protection or a barrier to entry.

The greatest opportunity for investors lies in the countries that are least free, but are becoming radically more so. There, competition is still very poor, so companies can make outsized profits for longer periods of time.

The founder of our publishing company uses this theory to invest in what he calls hopeless causes. Property in places like Argentina and Nicaragua, for example. The idea being that things can’t get much worse there (he’s been wrong about that in some cases so far, but it’s a very long-term play…).

The idea is that countries often need to experience the lows of collectivist chaos before they are ready to embrace free markets.

One country where things might be looking up is indeed Argentina, where an extremist libertarian recently won the first round of presidential elections. Javier Milei is so pro-free market that he believes a country doesn’t need a central bank. It is, after all, conducting price controls – a policy most countries, except the UK, have abandoned because economists and history proved them to be flawed.

The Argentines know a thing or two about inflation. And if their solution is to abolish the central bank, people in the UK might want to sit up and listen…

If Argentina has had enough of collectivist chaos to the point that it votes for the extreme opposite, a major change may be underway there. We may one day say, “as rich as an Argentine” again or “as rich as an investor in Argentina”…

But I better clear something up before we continue. You know, free marketeers don’t really have a problem with collectivism. Indeed, they probably practise a rather extreme sort of it within their own families…

The issue with collectivism, in its various forms, is that it is put in the hands of governments and that you therefore cannot escape or opt out of it. This robs it of any accountability. The free market is primarily that – a form of accountability. It allocates resources away from unproductive uses towards productive ones. That’s how and why it creates prosperity.

The question is: how can you generate prosperity for yourself?

Well, ask yourself which parts of the global economy are becoming steadily more capitalist. Those are the opportunities. Places like the UK in the early 80s, just before the FTSE 100 went on its last great bull market.

The countries that are turning to collectivism are the places to avoid.

All this begs the question: what is the UK doing today? Are we becoming more like East or West Germany? Are we becoming more like Hong Kong and Taiwan, or China? Are we becoming more like North or South Korea?

With the tax burden at a terrifying high rate, government spending as a share of the economy likewise (but for the 2008 crisis and pandemic), regulation constraining everything we do and net zero set to interfere in everything we can do, the government is more involved in our lives than ever. Indeed, as the economist Steve Keen says, net zero would require rationing that would make World War II look like child’s play.

So it seems to me that we are embarking on a level of centralised control that will destroy prosperity and investment returns for many years to come.

At times like this, it’s disproportionately important to ensure the money you’ve earned, saved and invested stays yours. That’s why we’ve created this inheritance tax guide to help your estate escape the clutches of the government’s latest spending proposal.

Until next time,

Nick Hubble
Editor, Fortune & Freedom