5 below-the-radar-screen global stock market trends

12/04/2012 8:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Meanwhile in the rest of the world…

For what seems a lifetime—but is actually only the duration of the Euro debt crisis, the slowdown in Chinese economic growth (with fears of a hard landing), and the Federal Reserve led wave of global central bank intervention—price trends in global financial markets have been driven by macro trends. The price action in global financial markets have been dominated by swings between fear—the U.S. economy is about to slip back into recession—and hope—China’s new leaders will launch a big new high-profile economic stimulus package.

But although it’s been hard for individual stocks or industries or sectors or countries to buck the macro trends and the big swings they’re produced in the price of assets that doesn’t mean nothing has been happening at those lower levels while global money has been sloshing hither and yon. There’s been big changes going on off the radar while traders and investor have been obsessed with will we/won’t we go over the fiscal cliff, break up the euro, sink below 7% growth in China. Maybe the best way to think about the current macro driven pricing for assets and continued fundamental change at the individual company, industry, sector, or county levels is that the good and bad of those changes, the power of those changes to drive stock prices higher or lower, is being stored up right now for the day when the market is ready to pay attention to these types of fundamentals again.

Which means, I think, that if you can manage to divert some of your own attention from the present domination of global asset prices by the big macro trends to figure out what changes are taking place at other levels while the financial markets aren’t paying attention, then you’ve got a chance to pick up part of that store of change and stash it away in your portfolio for the day when prices move up to reflect it.

Some very disciplined long-term investors are at work doing that now. Warren Buffett, for example, has been buying shares of DaVita (DVA), a provider of kidney dialysis services. In late October Buffett’s Berkshire Hathaway (BRK.A or BRK.B) bought another 63,928 shares of DaVita at somewhere in the vicinity of $110 a share. That was Buffett’s fourth buy of DaVita shares in less than a less than a month and brought his holdings to 10,547,040 shares.

For Buffett the domestic and global growth in the number of diabetes patients requiring dialysis services at one of DaVita’s clinics is a long-term fundamental story that will get eventually get heard and drive the stock price higher no matter what macro trends do to the overall financial markets. Not that Buffett has done too badly with DaVita recently: the shares are up 40% in the last year. (For more on the global plague of diabetes and on diabetes stocks such as Novo Nordisk (NOVOB.DC in Copenhagen or NVO in New York) see my post http://jubakpicks.com/ )

Okay, so let’s say you have the patience, discipline, and foresight of a Warren Buffett—Don’t we all? What other trends are developing beneath the radar in this macro dominated financial market?

Let me point you at five. Some of these are barely off the radar—you may be aware of them but hesitant to commit any cash while the market so volatile. Some are much more obscure and you may not be following them at all.

  1. Continued capital spending cuts in the mining sector say it’s still too early for Joy Global (JOY), Caterpillar (CAT) and other equipment makers. Brazil’s Vale (VALE), for example, is expected to announce a reduction in capital spending to $15.3 billion in 2013. In September projections put the 2013 budget at $16.8 billion. Either figure would be a big cut from the $21.4 billion budgeted for 2012. And Vale isn’t alone. Last week Rio Tinto (RIO) said it would cut spending on exploration by $1 billion in the remainder of 2012 and in 2013. The company would also look to reduce operating and support costs by $5 billion by the end of 2014. I think this argues that any optimism about a turn around in mining equipment sales in the first half of 2013 is jumping the gun.

  2. The mining story for the next year is country and commodity specific. Mining companies in Australia, for example, have been hammered by soaring costs. In announcing its budget and operating cuts Rio Tinto noted that support costs in Australia had become the most expensive in the world. Five years ago they had been among the cheapest. The coal sector is Australia has been hit especially hard by rising costs. That’s put pressure on BHP Billiton (BHP) and Peabody Energy (BTU), which had aggressively expanded its presence in Australia. On the other side of the ledger, copper miners, faced with a deficit of supply over demand—in the first half of 2012 anyway and quite possibly longer—continue to press ahead with expansion projects and acquisitions. The indicator deal here is First Quantum’s (FM in Toronto) $4.9 billion (rejected) bid for Inmet (INM in Toronto), the owner of the undeveloped Cobre Panama copper resource, projected as the second largest undeveloped copper resource in the world.

  3. And speaking of Panama, the country is has been the fastest growing of any Latin American economy in 2012 and in 2011. But it is by no means the only growth story in the region. (Panama has averaged 9% annual growth over the last six years.) Add in Columbia—growth of 5.9% in 2011 and projected growth of somewhere between 3% to 5% in 2012 and 2% to 5% in 2013—and Mexico—4% in 2012 and plans by incoming President Enrique Pena Nieto to push growth to 6% by the time his six-year term is over—and Latin America has some of the world’s best growth prospects. Most interesting to me at this point is Mexico because the recent success is such a change from the last decade when growth averaged just 1.6% a year in the ten years to 2010 and because the improvement looks sustainable. Mexico, which lost export business to China, has started to gain it back as China’s wages climb and as the lower cost of exporting to the United States from nearby Mexico becomes a significant advantage. On current trend, Mexico has a shot at becoming one of the ten largest economies in the world by 2020. One key to watch is Pena Nieto’s success or failure in changing the basic law governing Mexico’s state-owned oil company Pemex so that the country’s oil industry can attract the capital and expertise it needs to reverse the dramatic decline in Mexico’s oil production. Mexican companies to take a look at include global cement giant Cemex (CX), home builders such as Desarrolladora Homex (HOMEX in Mexico City or HXM in New York), food producers such as poultry producer Industrias Bachoco (BACHOCOB in Mexico City) and media company Grupo Televisa (TV in New York.)

  4. The other Latin American story that interests me now is the rise of banks in the region who have picked up share as the big Spanish banks, Banco Santander (SAN) and Banco Bilbao Vizcaya (BBVA) have had to pull back or sell off businesses to raise capital needed to recover from the bust in the Spanish real estate sector and the decline of the Spanish economy. Two to look at are Chile’s CorpBanca (CORPBANC in Santiago or BCA in New York), which has made two major acquisitions in Colombia this year (including the purchase of Banco Santander’s Colombian unit) and Colombia’s Banco Davivienda (PFDAVVND in Bogotá), which has recently expanded into Panama with plans for an expanded role in the United States.

  5. The other big regional growth story is taking place in Africa, specifically sub-Saharan Africa. GDP for Africa as a whole will grow by 5% in 2012, the International Monetary Fund projects with 5.7% growth a reasonable target for 2013. But that growth won’t follow the usual pattern on the continent with South Africa leading the way and countries such as Nigeria squandering their promise. Currently it’s South Africa, mired in labor unrest, corruption, and dysfunctional politics, that is trailing behind countries such as Nigeria and Kenya. Africa remains a very tough nut to crack for investors with relatively little information available on the relatively few publicly listed companies. Two that I’ve been researching lately are Nigeria’s IHS (IHS in Lagos, Nigeria), a owner and operator of cell phone towers in Africa and Naspers (NPN in Johannesburg,) a South African media company with 6 million pay-tv subscribers in South Africa and 1.8 million in the rest of Africa.

These five stories certainly don’t exhaust the world of company, sector, industry, and country specific trends that are unfolding while the market devotes the bulk of its attention to macro trends in Brussels, Washington, and Beijing. For example, there’s the move by Norway’s $660 billion sovereign wealth fund to increase its allocation to real estate, including the U.S. real estate market, to 5% of its portfolio from 0.3% at the end of September.

But these five trends should be enough to get you going. Someday this macro dominated financial environment will end—if only for a while—and your portfolio will be grateful that you managed to devote a little of your attention to long range, below the radar thinking.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares Banco Bilbao Vizcaya, Banco Davivienda, Banco Santander, CorpBanca, Grupo Televisa, Industrias Bachoco, and Novo Nordisk as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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