Wealthy Nations Daily Update - Japan World Cup Shock !!

Last week, in jest, we projected what the Rugby World Cup (RWC) results might be if they were correlated with the countries’ corresponding Net Foreign Assets (NFA) scores. We speculated that Japan, with a NFA of +62% and 5000/1 odds to win the tournament, would take the cup to become defending hosts in 2019. In reality this was unlikely as up until this weekend the Japanese ‘Cherry Blossom’s’ only previous RWC victory was in 1991 against Zimbabwe. To make expectations worse, their first opponents this year would be RWC twice champions South Africa. But on Saturday the Blossoms clinched a 34-32 point victory against the ‘Springboks’ in what is being widely heralded as the greatest shock in World Cup history.

Odds for the Nippon team winning the entire tournament have tightened by a factor of 20 and now stand at 250/1. The win has sparked a national ambition of reaching the quarter-finals and made us take a second glance at our RWC/NFA predictions. However, our drollery was incorrect at predicting Ireland’s 50-7 conquest of Canada and will probably not see Japan through to winning the tournament (though reaching the quarter-finals would be nice for them and great for spreading enthusiasm for the tournament in Asia prior to them hosting for the first time).

But whether or not NFA analysis turns out to be a good predictor of tries and conversions it continues to uphold its track record as an early identifier of vulnerable debtor countries. Since 1998 there have been 31 sovereign defaults across 22 countries - including 5 (Argentina, Belize, Ecuador, Ivory Coast and Nicaragua) who have defaulted twice whilst Greece and Ukraine 3 times. All these countries were net foreign debtors at the time and leading up to their default. Moreover half the defaults were at times where the net foreign liabilities exceeded 100% of GDP. This level of debt is a dangerous threshold and we avoid investing in any countries with NFA as a percentage of GDP of less than -50%.

The most recent defaults of Argentina, Greece and Ukraine were somewhat predictable by various metrics but in the example of Greece their NFA position was already at a concerning level when they joined the Euro in 2001 and surpassed -100% of GDP in 2007 when the country was still rated A1 by Moody’s. Similar to Greece, Spain and Portugal have run current accounts deficit every year for more than 3 decades and also have total net foreign liabilities in excess of 100% of GDP. Greece is a clear example of how years of profligacy require years of austerity to redress and this cycle of global deleveraging will continue to favour net creditors whose growth is not subject to the same constraints. Even with the favourable re-election of Syriza this past weekend the country continues to face financial and political impairing. Other vulnerable debtors are susceptible to the same risks but not necessarily the same breaks. NFA is a simple early indicator to avoid such hassle altogether and identify value elsewhere.