Seven picks for the growth drought: Fine-tuning my road map for the next nine months

11/04/2011 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Take a deep breath and let’s decide not to talk about the Greek debt crisis, the Italian debt crisis, or the euro debt crisis. Let’s instead think long-term, say, eight or nine months down the road. (Yes, that’s long term in this volatile market.) Greece will have defaulted or it won’t. (I bet on default.) Italy will have finally replaced its government and restored some confidence in its finances. EuroZone leaders will be buried in negotiations to amend the treaties that govern the monetary union.

And what will be top of the mind for investors?

Growth. And where to find it in a world where economic growth is very scarce. Rather than building portfolios with a goal of avoiding a potential blow up in Greece, Italy, or the European banking sector in general, investors will be trying to build portfolios that wring the last drop of growth out of what will be a very slow growth world.

Shall we get a head start? (Please think of this as an update and fine-tuning of my October 11 “My road map for the next nine months http://jubakpicks.com/2011/10/11/my-road-map-for-the-next-nine-months/ )

Okay, begin with the macro economic picture.

Growth in the world’s developed economies in 2012? Dream on.  On October 31 the Organization for Economic Cooperation and Development (OECD) lowered its growth forecast for the United States to 1.8% for 2012. (That comes after U.S. economic growth picked up to a 2.5% rate in the third quarter. For all of 2011 the projection called for 1.7% growth.)  For the EuroZone, the organization said, growth will fall from a projected 1.6% in 2011 to just 0.3% in 2012.

And the actual results could be even worse, the OECD said. If the EuroZone can’t come up with a solution to its current crisis, then the region might slip into a recession in 2012. That’s essentially the view that new European Central Bank President Marie Draghi outlined in his first bank press conference on November 3. When the bank releases its new economic forecasts for 2012 next month, they will likely project lower growth for 2012, he said, and the EuroZone could see a mild recession next year.

There are, unfortunately good reasons to think that these pessimistic forecasts for growth in the EuroZone and in the United States are correct—and maybe even too optimistic. It’s not just that growth is slow now, but that governments in the developed world seem committed to removing the last bits of stimulus left from the 2008 Lehman crisis (the United States) and to cuts to government spending (the EuroZone and the United States.)

In the United States stimulus measures such as a reduction in the Social Security payroll tax and another round of extensions to unemployment benefits for the long-term unemployed that were put into place in the 2010 Lame Duck session of Congress are set to expire with the end of 2011. And right now I’d say the odds are that Congress won’t renew that package. New stimulus measures proposed by President Barack Obama are also unlikely to pass and new stimulus from the Federal Reserve now under discussion such as plans to buy mortgage-backed securities in yet another effort to lower mortgage rates are likely to have very limited effects on the economy.

In both the United States and in the EuroZone governments are looking at budget cuts that are necessary to bring long-term deficits under control but that will cut into economic growth in the short-term. In France, for example, plans to bring the 2011 budget deficit down have run into lower government revenue due to a slowing economy and that has led to plans to cut government spending even further. In the U.S. the so-called Super Committee (officially the Joint Select Committee on Deficit Reduction) is under a November 23 deadline to produce a package of budget cuts and tax increases (excuse me, I mean “revenue enhancements.”) If the committee can’t come up with at least $1.2 trillion in spending cuts and/or tax increases—or if Congress in a straight up or down vote doesn’t pass the committee’s recommendations—then a menu of automatic budget cuts would go into effect in January 2013. (After the election, of course.)

It would be nice to think that emerging economies are set to bail out the developed world but that doesn’t seem likely—in the first half of 2012 anyway. The BRICS nations are still seeing growth slow under the impact of measures designed to lower inflation.

It now looks like those economies are starting to reverse those policies—Brazil, for example, has started to cut interest rates—but what isn’t clear is how quickly economic policies will shift direction. Growth in Brazil looks unlikely to pick up significantly in the next six months, for example.

The big question, of course, is China. And there I think investors can see the first steps that will lead to a reversal in policy strong enough to put a bottom in on economic growth around the middle of 2012. Here’s part of a timetable put together by Caixin Online http://english.caixin.cn/2011-11-01/100319741.html

October 25: The China Banking Regulation Commission published new policies for granting preferential loans to small companies and limits on service charges to small companies. China’s smaller companies have been hit hard to the government’s attempt to rein in bank lending.

October 29: Premier Wen Jiabao spoke of the need to fine-tune China’s macroeconomic policies.

Fourth quarter of 2011: The government looks to be planning to move from a slight budget surplus in the first nine months of 2011 to a slight deficit in the fourth quarter. The total deficit for the year would be only about $130 billion but the switch from surplus to deficit would signal a move to stimulate the economy.

All this, in my opinion, puts China on track for a growth bottom near an 8% annual growth rate (down from the current 9.1% rate) in the middle of 2012 and then a gradual acceleration in growth.

That’s roughly the picture that the Organization for Economic Cooperation and Development sees as well: Growth in the world’s 20 largest economies will slow to 3.8% in 2012 from 3.9% in 2011 before accelerating to 4.6% in 2013. (I’ve got my doubts about that 2013 part , but let’s leave that for another day.)

So what investors are really looking at is a kind of growth desert in the first half of 2012 with growth slowing in the developed and developing economies before picking up in the developing economies in the second half of 2012.

Now on to the hard stuff—where do you put your money?

Dividend stocks—since we’re waiting for the growth train to come in, getting paid a yield of 3.5% or more while we wait seems attractive. That was part of the logic behind my recent recommendation of DuPont (DD) http://jubakpicks.com/2011/11/02/buy-dupont-dd/

Developing economy bank stocks—bank stocks will be one of the first sectors to pick up as central banks in these countries cut interest rates since that will increase the net interest spread for the banks and lower the risk of loan defaults. One to consider here is Brazil’s Itau Unibanco (ITUB). I’d stay away from China’s banks because of big unrecognized bad loan problems.

Developing economy stocks that focus on the domestic economy—if developed world export markets will grow slowly or not at all, a majority of acceleration in developing economy growth will come from domestic sales. I’d rather own a Baidu (BIDU) or a Ping An (PNGAY in New York or 2318.HK in Hong Kong) in China or a Gol (GOL) in Brazil rather than an exporter such as Brazil’s Vale (VALE).

Developed market stocks with a big exposure to developing economies. China is the big growth market for Coach (COH) and the emerging markets are the big targets for a food company such as Nestle (NSRGY).

(Coach and Gol are members my Jubak’s Picks portfolio http://jubakpicks.com/ and Baidu and Itau Unibanco are members of my long-term Jubak Picks 50 portfolio http://jubakpicks.com// )

Any investing road map is subject to revision—this one, for example, is a revision of a road map from all the way back at the beginning of October. The major reason I can see to change this map is even slower than expected growth in the world’s developed economies over the next nine months. If the euro debt crisis has proved nothing else it has proved that investors should never underestimate the ability of politicians to muck things up.

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 of Baidu, DuPont, Gol, Itau Unibanco, Nestle, and Ping An as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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