Scared Stiff in Foggy Bottom

06/25/2009 10:56 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

What vantage point is guaranteed to reliably produce the gloomiest views of the global economic crisis? A shanty in a Mumbai slum? A place within a UK dole queue? Hardly. The most miserable mutterings have issued from Washington, DC, from the recession-proof sinecures of international economists.

Until recently, the International Monetary Fund had hosted the pity party with its constantly rising estimates of banking losses, now expected to approach $2.5 billion for the US and Europe by the end of 2010. Its World Economic Outlook, issued in April, chewed on such lemons as "How Did Things Get So Bad, So Fast," "Policies Fail to Get Traction," "The Financial Hole Has Become Even Deeper," and "Short-Term Prospects Are Precarious." Two weeks ago, the IMF let its guard down just a bit, upgrading its global growth forecast for 2010 from 1.9% to 2.4%, after an expected 1.3% contraction this year.

That's when its gloomy cousin, the World Bank, pounced: "…Analysis of the global economy paints an unprecedented picture: global output falling by 2.9% and world trade by nearly 10%; accompanied by plummeting private capital flows…" And lest readers dismiss all this as a blip, "the world enters what appears to be an era of markedly slower growth…"  And so on for 150 hair-raising pages, not counting the one on which the Bank claims to have saved eight trees by printing the whole thing on recycled paper.

The timing was flawless: US and overseas investors had already begun to get cold feet last week, apparently unwilling to keep paying up for stocks on tentative signs that the downward spiral has slowed.
 
The World Bank survey, released Monday, hit a dead spot in the news cycle all but devoid of other economic releases or profit reports. It made the first working day of the northern summer a very long one for the bulls, who suffered their worst thrashing in two months.

On the bright side, even the World Bank's mandarins expect China and India to keep chugging along, a likelihood not lost on investors in those markets. The Shanghai Composite Index hit an 11-month high Monday. And while most stock exchanges followed Wall Street's lead into the abbatoir, Shanghai and Mumbai combined to lose a mere six points Tuesday, maintaining sacred-cow status.

And while commodity prices have retreated of late alongside stocks, the fight for miners seems to be heating up. Switzerland-based Xstrata (LSE: XTA) has been rebuffed in its attempt to snag major platinum and diamond producer Anglo American (LSE: AAL; Nasdaq: AAUK) at less than half of its 2007 peak value. That fostered speculation  that Aluminum Corp. of China (NYSE: ACH), recently spurned by Rio Tinto (NYSE: RTP) as a minority investor, might chase Anglo American instead. Brazil's Vale (NYSE: VALE) was another rumored suitor. These days, whenever something costly's up for grabs, all eyes naturally turn east and south.

Get used to it, Marc Faber would say. The European-born, Asian-based investment guru and publisher of The Gloom Doom & Boom Report remains a scathing critic of US economic policies, notably overspending and overconsumption. In this week's interview, Faber endorses Asian stocks and commodities almost by default, despite what he sees as the rising risk of a severe correction.

Meanwhile, in this week’s strategy excerpt, Lawrence Roulston points out that bustling Hong Kong and China value metals more than the more quiescent northerly locales. The big picture is that [nearly three] billion people in China and India are gradually graduating from subsistence farming to middle-income status, and from there presumably to bigger and better things.

In other parts of the world, this shift has required much more intensive use of energy and raw materials, and there's every reason to believe that Chindia will follow that path over the next several decades, no matter how many US mortgages go bad next month.

Of course, it's perfectly possible to go broke betting on commodities in the short run no matter how bullish the long-term view. But, in the long run, it does help to swim with the current. This week's investment ideas are not the first ones that come to mind as beneficiaries of a metals boom, which is part of their charm.

UK-based Weir Group (LSE: WEIR) specializes in the pumps and valves essential to the mining business. As Peter Shearlock points out in The IRS Report, Weir pays investors a 3.6% dividend yield to wait for an industry recovery, and could more than double that if it cared to, even from this year's depressed profits.

Carl Delfeld, writing in the Chartwell ETF Global Report, looks further afield to Indonesia, which may have run down its oil reserves but still boasts enviable mineral and agricultural riches, as well as a growing economy much less reliant than China's on declining manufactured exports. The Jakarta Composite had run up 62% in three month before correcting 9% over the past two weeks.

According to Morningstar, the closed-end Indonesia Fund (NYSE: IF) that Delfeld recommends is being valued at less than five times trailing cash flow. Even the World Bank expects Indonesia's economy to grow 3.5% this year at its low point. Considering the source, that looks like a glowing endorsement.

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