In the list of "fallen angels" below, we focus on buy-rated stocks that fell sharply in the second q...
How to build a global portfolio: What countries do you want to own?
02/05/2010 9:16 am EST
Personally, over that time period I’d pick India over China, Poland over India, and Brazil over them all. And I’d give U.S. stocks a bigger piece of the pie than they’d earn if you looked just at near term numbers.
Let me explain how I get to those weightings.
To build a global portfolio you could, of course, start by investing in what you know. That’s why so many U.S. investors are massively over weight U.S. stocks. That’s a problem since the U.S. economy—and therefore some if not all U.S. stocks—is forecast to grow more slowly than China and India and Brazil, to name just three countries, over the next few years.
You could, of course, build a portfolio that mirrors today’s global capital markets. In 2004 U.S. capital markets accounted for 53% of all the shares in the world that were free to trade. By 2008 that percentage was down to 41%. Over time, I guess you could keep adjusting the portfolio allocations so that your portfolio mirrored a changing world. That would leave you constantly chasing last year’s returns, however, and buying at the top of whatever market had done best in the last year (or whatever period you choose.)
You could, of course, go with near-term projections and overweight fast growing economies such as China (10.2% in 2010 and 9.3% in 2011 according to the Organization for Economic Cooperation and Development (OECD)) and India (7.3% in 2010 and 7.6% in 2011), and underweight the European Union (0.9% in 2010 and 1.7% in 2011) and Japan (1.8% in 2010 and 2% in 2011.) That would give you a shot at getting ahead of the game, but not much of one since everybody has the same access to these projections that you do. A great deal of that near-term projected growth is already factored into stock prices.
So are your portfolio allocations forever doomed to lag behind a changing world?
Not if you use the handy-dandy, Jubak’s Global Three-Part Asset Allocator. (Send no money now and we won’t bill you later either. No operators are standing by to take your call.)
I’m not promising that you’ll find the hottest markets before anyone else knows they’re even warm, but I think you can use long-term trends in these three areas to adjust the weightings of your portfolio before all the good stuff is priced in.
But remember, I’m talking long-term allocations here. The three factors that I’m going to explain in the rest of this post will shove markets in one direction or another over the next decade or two. They aren’t going to give you a buy for tomorrow’s market or next week’s either.
Start with demographics.
Age counts—at least when it’s the average age of a population. The data shows that there’s a strong correlation between the age of a population and how fast an economy grows. The younger a country’s population by and large the faster its economy grows.
By 2020 about 16.3% of the U.S. population is projected to be 65 or older.
One reason to think that the developed world will be growing faster than the United States that far out is that those countries are supporting fewer retired (if they’re lucky) workers. In China, for example, projections say that only 12.4% of the population will be 65 or older in 2020.
But the difference among countries in the developing world is just about as large as the difference between the United States and China. China with 12.4% of its population 65 or older by 2020 looks positively ancient next to Brazil (at 8.7%) or India (at 6.7%)
In fact, almost all the world looks ancient compared to India. If you’re allocating assets just by what percentage of oldsters there are in a population, you ought to put all your money into India. (And if you like really scary demographic numbers from even further out the time line see my post http://jubakpicks.com/2010/02/02/the-scariest-numbers-in-the-world/ )
But population age isn’t the only factor I’d consider in planning my long-term global stock market allocations. I’d also throw domestic consumer consumption as a percentage of GDP into the mix too.
You can read a lot more about consumer consumption and GDP in my post of February 2 http://jubakpicks.com/2010/02/02/can-the-chinese-consumer-save-the-global-economy/ . But let me explain here why I think a bigger domestic market (as a percentage of GDP) is a factor that will drive stock market returns (and hence should drive your allocations) in the future.
If you listened to President Barack Obama’s State of the Union address on January 27, you heard him promise to expand U.S. exports to create well-paid new jobs for U.S. workers.
Good luck on that.
Every other country in the world has pretty much the same plan to export its way to prosperity. Now, according to economic theory that dates back to the days of Adam Smith, a country that has (or creates) some advantage in making a product can, by selling to other countries that have an advantage in making other products, add to global wealth. But when everybody can pretty much make cars and aluminum and solar cells and steel with the same lack of relative advantage, the result can be a race to the bottom where everybody cuts prices to build market share. In that case the world doesn’t get richer, but winds up locked in a series of destructive trade wars.
Now that doesn’t have to happen. Trade wars don’t have to break out all over the globe. But I do have problems seeing how global industries with mature technologies—and that describes everything these days from cars to computer memory chips—can avoid destructive price wars that result in nobody making a whole lot of money.
That’s why when I’m building my country allocations for this long-term stock portfolio I’d give extra weight to economies with big domestic markets (as a percentage of total GDP). China at just a 36% consumer consumption to GDP ratio is on the low end of the scale. Brazil at 65% comes in close to the 70% share in the United States. I’d give extra points to Poland on this factor because the country is a low cost producer of many goods that now belongs to the huge consumer market of the European Union.
And finally I’d give extra weight in my country allocations to countries that look like they’re zigging everybody else is zagging.
So, for example, every developing economy in the world seems determined to create a national car industry. Whether the world market for those new cars exists or not. China alone now has more than 100 car companies. And every care company started in the last five years—and perhaps every car company now operating anywhere in the world—is a candidate for death or merger in the impending consolidation of the global car industry. (And in the meantime every car company is trying to export its way out of a global market stuffed with excess manufacturing capacity. See my point above for why you’d like to avoid that kind of situation as an investor.)
The number of developing economies that are following China’s export model and that are targeting the same industries is extraordinarily large. It’s why China is trying to move up the technology ladder in these industries. If it can increase the value added content that it puts into a product it won’t find itself competing with, say, Vietnam to see who can make something for less. As China gets wealthier, it will wind up losing that competition on price more and more frequently.
And here again is a reason to be overweight Brazil in my global stock portfolio. While China and India and much of Eastern Europe are duking it over information services and automobile manufacturing, Brazil is headed down a road with very little global competition.
You can see the outlines of this road in the recent joint venture between Brazil’s Cosan (CZZ), the largest sugar and ethanol processor in the world and Royal Dutch Shell (RDS). The joint venture will combine Shell’s distribution system in Brazil with Cosan’s sugar and ethanol production assets. And Shell will throw in $1.6 billion in cash as part of its contribution to the venture.
I think that cash payment tells you something very important about who controls the scarce resources and technology here. It’s the oil company that’s coughing up the cash.
If your company wants to be a part of the cutting edge in crop to energy technologies and increasingly in other areas of plant technology, the day is coming when you’ll have to have a presence in Brazil.
In the long-term then, I think investors should over-weight Brazil. In the short-term I think you should take a look at Bunge (BG), the soy bean and oil giant. In December the company bo9ught Brazilian sugar and ethanol producer Moema for $452 million in stock. With this post, I’m adding Bunge to my watch list. (See Jim’s Watch List here http://jubakpicks.com/ ). The company is already a part of my Jubak Picks 50 portfolio.
And for those who are light the Polish market I’d recommend Central European Distribution (CEDC). It’s already a pick in my long-term Jubak Picks 50 portfolio. I’m also adding it to my watch list for possible inclusion in my 12 to 18 month Jubak’s Picks portfolio.
Full disclosure: I own shares of Central European Distribution in my personal portfolio.
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