Invest Globally in Domestic Bliss

11/16/2010 9:42 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

China plans to focus its economy on domestic consumers; that's probably a good tactic for investors, too. Here are nine stocks (you may not have heard of) to help.

At the end of October, China's Communist Party formally endorsed the country's new, 12th five-year economic plan. For 2011-2015 the plan envisions changing China from the world's factory to the world's market. During this period, China's leaders intend to change the economy from one driven by exports to one focused on domestic consumers.

I think investors should pursue something like that transformation in their stock portfolios. Most investors who have put money into the world's emerging economies have bought the big export companies in those economies: a Vale (NYSE: VALE) or Petrobras (NYSE: PBR) in Brazil, an Infosys (Nasdaq: INFY) or Coal India in India, a Petrochina (NYSE: PTR) or Lenovo Group (OTC: LNVGY) in China. Even investors who don't own these companies have likely heard of them.

But I think it's time to develop your own five-year plan that shifts some of the money in your portfolio that you've allocated to overseas equities from export-driven companies to companies that focus on consumers within Brazil or India or China or…

You don't need to abandon those exporting powerhouses all at once, or even at all. But you do need to rebalance your portfolio to include more companies that focus on domestic growth.

Let me give you the two reasons for undertaking this rebalancing. And then give you a short list of stocks that you should consider as potential tools for that rebalancing.

Reason Number One: Beat the Bubble

First, if you're worried that the aggressive monetary growth coming from the Federal Reserve and China is inflating a new bubble that could burst as early as 2011, you should add domestic-focused emerging-market stocks to your portfolio.

I laid out the reasons for thinking we might be headed toward a bubble in my column "Oops, Has the Fed Done It Again?" And I outlined some thoughts on a strategy for avoiding the worst of such a potential bubble—while staying as invested as safely possible in case the potential bubble never turns into a busted bubble—in "How to Invest for the Next Bubble."

One of the tactics I suggested was to try to invest in less-risky assets, those that won't take as much of a beating from a bubble and bust. In any sector, there are more-risky and less-risky stocks based on such factors as how close prices are to historic tops. Investor familiarity and investor enthusiasm play a role in pushing any stock toward the top of its historic valuation range and beyond.

In the case of emerging market stocks, that means that stocks that embody the big themes that everyone has heard of are more likely to be carried aloft by investor enthusiasm until they're selling at prices that signal bubble land. Think of the "China's growth will increase demand for…" argument. It's simple, easy to understand, and familiar to most investors. And then think of the relatively small number of familiar stocks that most investors use to invest in this argument. You know the list: Vale, Freeport McMoRan Copper and Gold (NYSE: FCX), Southern Copper (NYSE: SCCO), Potash of Saskatchewan (NYSE: POT), Petrochina, and so on.

If you're worried about a potential bubble, these are the stocks most likely to participate and the ones that will get hit hardest when enthusiasm turns into "get me out of here." (By the way, as I noted in my posts, I don't think we're in bubble land yet. And I continue to own stocks like these in my Jubak Global Equity Fund (JUBAX). For a complete list of the holdings of that fund as of the last quarter, follow this link.)

I'm not going to argue that the idea of investing in the growth of the middle class in Brazil or in the rise of an urban elite in China is exactly an undiscovered theme—but they're more likely to be the second or third thought that comes to mind when investors think of putting money into emerging economies. That means the stocks that embody this opportunity are, in many cases, less familiar to investors. I'd argue that Brazil's Vale is more familiar to investors in emerging economies than is Cosan (NYSE: CZZ), the big producer of ethanol for Brazil's flex-fuel auto market. (Although I hope Cosan isn't unfamiliar to you, since I added it to Jubak's Picks on November 12 in a post titled "Buying Sugar at a Sweet Price.") And I'll bet you that Home Inns & Hotels Management (Nasdaq: HMIN) is less familiar to most China-minded investors than Petrochina.

This unfamiliarity effect is multiplied when the domestically focused stocks are harder to buy than the export names. Want to buy Vale or Petrobras? Easy. They trade as ADRs in New York with huge volumes. Average daily volume for Petrobras is 21.3 million, and for Vale, it’s 20.3 million.

Contrast that with the 466,000 average daily volume for the New York traded ADRs of Home Inns & Hotels, or the zero daily volume in New York for Natura Cosmeticos, one of Brazil's fastest-growing cosmetics companies. The stock does trade 880,000 shares on average every day in São Paulo. Think that puts it on the radar screen of most individual or professional investors in the developed economies?

NEXT: Profit from Historic Growth in Emerging Markets

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Reason Number Two: Catch the Growth

Second, there's the attraction of that domestic growth in the emerging markets of Brazil, China, Indonesia, Vietnam, etc. The growth of the middle class in these economies provides growth leverage. Yes, Brazil's gross domestic product is likely to grow by 7% to 8% in 2010. That's enough to make Ben Bernanke groan with envy.

But that's nothing compared with the pop that companies are getting from the 32 million people—in a population of 190 million—who have joined the middle class in Brazil since 2003. Last year, Brazilians bought 4.5 million cars, twice as many as in 2003. The number of credit cards issued to Brazilians is up 438% in the last ten years. Brazilians took 56 million airplane flights in 2009; in 2003, the figure was 33 million.

That story is being repeated in emerging economies around the world where the growth of a middle class from a very small base adds up to some very impressive rates of growth for companies catering to that market. (And don't forget that China's next five-year plan says it will shift spending and policies toward this part of the economy. China has said that before, I grant you, without achieving much of a shift. But this time could be different. Hey, it's possible.)

Start Your Balancing Act

If you buy my argument for a domestic rebalancing of your own emerging markets portfolio, what stocks do you start with?

I'm going to give you a very bare-bones list that I'll fill in over the next month or so with fuller descriptions and fundamental details in Jubak's Picks and my Watch List. (And I haven't included any stock that you can't buy with relative ease in the United States. I've saved the tough-to-buy stuff from my Jubak Global Equity Fund portfolio.)

My list would include:

  • Anadolu Efes Biracilik ve Malt Sanayii (OTC: AEBZY), which produces and sells beer, malt, and Coca-Cola products across Turkey, Russia, Southeast Europe, and the Middle East.

  • Brasil Foods (NYSE: BRFS), which processes chickens and produces frozen pastas and distributes frozen vegetables.

  • China Resources Enterprise (OTC: CRHKY), which owns retail, beverage, food processing, and distribution companies in China and Hong Kong.

  • Gol Linhas Aeréas Inteligentes (NYSE: GOL), which provides domestic flights in Brazil.

  • HDFC Bank (NYSE: HDB), which as of March 2010 had 1,725 branches and 4,232 automated teller machines in 778 Indian cities.

  • Home Inns & Hotels Management, which operates a chain of budget hotels in China and has started a chain of mid-market hotels.

  • ICICI Bank (NYSE: IBN), which besides banking, operates life insurance, home finance, and pension funds in India.

  • Standard Bank Group (OTC: SBGOY), which from its base in South Africa operates banking services in 18 countries in sub-Saharan Africa.

  • Tingyi Holding (OTC: TCYMY), which manufactures and sells instant noodles, baked goods, and beverages in China.

In the United States, some of these are penny stocks and some have tiny volumes. But I've tried to pick companies that have sizable market capitalizations and share floats in their home markets. So for example, Turkey's Anadolu sells for just $2.85 a share on the over-the-counter (OTC) pink sheets market in the United States, where its trading volume averages just a bit over 5,000 shares a day. But back in Turkey, the company has 450 million shares outstanding and a market capitalization of $7 billion.

What you see in the US markets is sometimes just the tip of the iceberg.

At the time of publication, Jim Jubak did not own shares of any of the companies mentioned in this post in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.)

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.

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