U.S. Drops Below NZ in Index of Economic Freedom

I have been following for some time the annual report on the
Index of Economic Freedom published by the Heritage Foundation and the Wall
Street Journal. It ranks countries based on a grading system that includes ten
freedoms such as property rights protection, investment freedom, tax rates,
government intervention in the economy, business freedom, freedom from
corruption and monetary, fiscal and trade policy.

The idea is not just to rank countries but to track movement
both up and down and to highlight the proposition that freedom and prosperity
are highly correlated.

Here are the top twelve countries for 2009 and their
corresponding ETF.

         1)         Hong
Kong (EWH)

         2)         Singapore
(EWS)

         3)         Ireland
(IRL)

         4)         Australia
(EWU)

         5)         New
Zealand (up one slot)

         6)         United
States (SPY) (slipped from #5)

         7)         Canada
(EWC)

         8)         Denmark

         9)         Switzerland
(EWL)

         10)         United
Kingdom (EWU)

         11)         Chile
(ECH) (slipped from #8)

         12)         Netherlands
(EWN)

The average score for the 183 countries that were ranked was
roughly what it was last year. It is interesting to note that all of the top
seven slots are countries formerly associated with the British Empire (sorry,
Mr. Jefferson the Francophile, it looks like Alexander Hamilton was right on,
France is #48) and that half of the ten top ranked countries hail from Europe.
Egypt, Mauritius and Mongolia were the three countries that moved the most up
the rankings.

I was a bit surprised that some well respected economies as
well as fast-growing emerging markets with high flying stock markets did not
move up much at all and actually had rather poor rankings.

Here are just a few examples.

         #19         Japan
(down two slots)

         #25         Germany

         #23         Austria
(up 7 slots)

         #49         Mexico
(down 5 slots)

         #58         Malaysia
(down 7 slots)

         #54         Thailand

         #105         Brazil

         #123         India
(down 8 slots)

         #131         Indonesia
(down 12 slots)

         #132         China
(down 6 slots)

         #144         Russia
(down 10 slots)

This brings us to the relationship between stock market
performance and the degree of economic freedom. Cynics might point to the fact
that Ireland (#3) has been perhaps the worst performing market during the last
year and that Chile has been sliding and Singapore has also hit a rough patch.
Meanwhile, the hottest markets of the last few years were three countries
ranked below #100; Brazil, India, China & Russia also so known as the
BRICs.

But wait just a darn minute. First, we need a much longer
perspective than just a year or even a few years to test whether this
divergence is sustainable. For example, both the Ireland and Chile markets
outperform any of the BRIC countries if you use a five-year time frame. Plus
the MSCI emerging markets index in U.S. dollar terms is down 20% year-to-date.

The other interesting angle is just how good some of these
emerging markets could perform with only marginal progress in all or some of
these economic freedom categories. My opinion is that it is very unlikely that
China and India can maintain double-digit growth rates without addressing these
issues as soon as possible.

Then you need to look at per capita income levels. The top
20% of countries ranked have per capita incomes twice that of the next 20% and
a stunning five times that of the bottom 20%. It is time for economic freedom
to trickle down and the sooner the better.

Instead of just talking about these important issues, why
not put some money on the table and put them to the ultimate test. Chartwell
Partners Wealth Management has launched the Chartwell Country Freedom Folio for
private clients. It is a basket of the top ten ranked countries using country
specific exchange-traded funds also known as ETFs. Because that New Zealand and
Australian markets have a great degree of overlap, we are putting the
Netherlands in the tenth slot and will weight each country equally.

And don’t forget America in the #6 slot. The record of stock
markets during a recession is sometimes surprisingly quite good. In the nine
U.S recessions (zero to negative growth) since World War II, in four of those
recessions the stock market actually soared: 40% in 1954, 22% in 1961, 30% in
1980, and 30% in 1991.

It is a tough and tricky time to put new capital to work but
why not start with the freest economies in the world?