How to Pick 2020's Hot Stocks Now
02/05/2010 9:22 am EST
There's a lot of talk about China and India, and for good reason. But Jubak's global three-part asset allocator suggests another country's long-term prospects are even brighter.
If you were building a global stock portfolio for the long run—let's say 2020 and beyond—how much of your money would you put in the world's stock markets?
Personally, over that time period, I'd pick India over China, Poland over India, and Brazil over them all.
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 US investors are massively overweight US stocks. That's a problem because forecasts say the US economy—and therefore US stocks—will grow more slowly over the next few years than those of China, India, and Brazil, to name just three.
You could, of course, build a portfolio that mirrors today's global capital markets. In 2004, US capital markets accounted for 53% of the world's shares that were free to trade. By 2008, that number was down to 41% and has kept falling. 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 past year (or whatever period you chose).
You could, of course, go with near-term projections and overweight fast-growing economies such as China (projected to grow 10.2% in 2010 and 9.3% in 2011, according to the Organization for Economic Cooperation and Development) 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 because everybody else 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.
While They're Not Hot
So, are your portfolio allocations forever doomed to lag behind a changing world?
Not if you use Jubak's handy-dandy 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 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 even next week's.
Start with demographics: Age counts, at least when it's the average age of a population. There's a strong correlation between the age of a population and how fast an economy grows. The younger a country's population, the faster its economy generally grows.
By 2020, about 16.3% of the US population is projected to be 65 or older.
One reason to think that developing countries will grow faster than the US is that those countries will be supporting fewer retirees. In China, for example, projections by the UN Population Division indicate 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 with 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 timeline, see this recent post on the subject.)
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 gross domestic product into the mix, too.
You can read a lot more about consumer consumption and GDP in my previous column. But let me explain 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.|pagebreak|
If you listened to President Barack Obama's State of the Union address on January 27, you heard him promise to expand US exports to create well-paid jobs for US workers.
Good luck with that. Every other country has pretty much the same plan to export its way to prosperity. Now, according to economic theory that dates 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, aluminum, 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 destructive trade wars.
A World Clogged with Competition
But 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 GDP). China, with 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 US. I'd give extra points to Poland on this factor because the country is a low-cost producer of many goods and it now belongs to the huge consumer market of the European Union.
And finally, I'd give extra weight in my allocations to countries that zig when everybody else zags.
For example, every developing economy in the world seems determined to create a car industry, regardless of whether the market for those cars exists. China alone now has more than 100 car companies. And every car company started in the past five years—and perhaps every car company now operating anywhere—is a candidate for death or merger in the impending consolidation of the global car industry. (In the meantime, every car company is trying to export its way out of a global market stuffed with excess capacity. See my point above for why you'd like to avoid that kind of situation as an investor.)
The number of developing economies following China's export model and 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 more cheaply. As China becomes wealthier, it will lose that competition on price more frequently.
Here again is a reason why I overweight Brazil in my global stock portfolio. While China, India, and much of Eastern Europe are duking it out over information services and automobile manufacturing, Brazil is heading down a road with little global competition. You can see the outlines of this road in a recent joint venture between Brazil's Cosan (NYSE: CZZ), the largest sugar and ethanol processor in the world, and Royal Dutch Shell (NYSE: RDS.A).
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.
The cash payment tells you something important about who controls the scarce resources and technology here. The oil company is the one coughing up the cash.
If you want 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 need a presence in Brazil.
In the long term then, I think investors should overweight Brazil. In the short term, Bunge (NYSE: BG), a soybean and oil giant, is worth a look. In December, the company bought Brazilian sugar and ethanol producer Moema for $452 million in stock. With this post, I'm adding Bunge to my watch list. 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 (Nasdaq: CEDC). It's already a pick in my long-term Jubak Picks 50 portfolio as well. I'm also adding it to my watch list for possible inclusion in my 12-month Jubak's Picks portfolio.
At the time of publication, Jim Jubak owned shares of the following company mentioned in this column: Central European Distribution.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.