Early Line Favors Hong Kong, Turkey, Africa

01/07/2011 12:24 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

It’s possible to make entirely too much of the trading action during the first few days of a new year. The US stock market’s direction during January has coincided with that for the entire year about 80% of the time, but that’s likely a more coincident indicator than a leading one, and there are those other pesky 20%, like last year’s January correction.

Still, January is more than just another month for investors. The turning of the calendar eases performance anxiety and shifts attention to the next 12 months. Fund managers allocate new cash and rebalance portfolios. Every recent trend is, literally, last year’s news. What happens in early January at the sector and country level often sets the tone, and certainly carries more weight than what happens during a slow week in August.

Hong Kong, Malaysia Set Pace
So while Hong Kong shares’ 3.3% rise year-to-date is no more than what it is, it does imply a welcome mood change for a market that’s still down 5% from the two-year peak hit two months ago. Malaysian stocks’ 3% surge to a record this week suggests infectious optimism has spread across the region. So does the South Korean’s stocks’ 8% surge in the weeks since North Korean shelling killed soldiers and civilians on a South Korean island.

In Europe, the New Year has been good to Turkish and Hungarian equities, which have been rallying alongside another cheap emerging market, Russia. On the other hand, traders have not been in a hurry to keep bidding up Colombia and Peru, the Andean upstarts that had the rest of the world gasping for air last year. They’ve preferred Brazil, which badly lagged in 2010. Chile has added to its gains.

BP Dodges Bullet; Santander Gets Hit
It’s also been a good week for UK stocks (+2%) and their tarred flagship BP (NYSE: BP), which is up nearly 5% on growing indications that its tab for the Gulf oil spill will be smaller than previously feared. Meanwhile, Spanish banking giant Santander (NYSE: STD) has been treated like a carrier of a communicable disease. No one is exactly sure who will buy the hundreds of billions euros of debt that European banks need to roll over this year and next, besides the European Central Bank. Coincidentally, the euro has moved down from $1.34 to $1.30 since the year began, though some of that is attributable to improving US prospects.

Canadian and Australian stocks have noticeably lagged this week, checked by corrective action in commodities. Beyond the price of gold, copper and grain, these countries are weighed down by overpriced real estate and high consumer debt. Anxieties that a day of reckoning awaits are growing. Opinion is divided as to whether Australians will keep licking $6 ice cream cones or finally fall prey to sticker shock as home values start to melt.

Africa Calling
Much further off the beaten track, stocks in Nigeria have gone on a tear to start the year. Other African markets in rally mode include Morocco, Tunisia, and Kenya.
Partial though I am to US stocks geared to overseas growth, I see a good year ahead for markets as diverse as Russia, Taiwan, and Mexico. Whereas it’s already clear that the Eurozone will limp along at best until a breakup or much closer integration. Brazil may struggle with higher interest rates, while India and Indonesia simply look expensive.

This Week in Global
As Eoin Treacy notes, the breakouts in a number of overseas averages suggests cheap money from developed nations continues to seek out higher returns abroad. But it’s not as if all emerging-market investments are all speculative long-shots: the Indian drug maker favored by Paul Goodwin has built a $6 billion business by catering to Western consumers as well as local ones.

The Canadian electricity and gas supplier recommended by Paul Slee is even less exotic. On the other hand, its 8% dividend yield is certainly rare outside of Canada’s former trust sector. Such yields are rarely on offer in a bubble economy. I expect Canada to overcome its anxieties soon enough, aided by better growth south of the border.

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