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3 new global hot spots for investors
Many global markets soared in 2005 and look good in 2006. But the key is finding the markets that will make the next big move up -- or down. I'm watching Iceland, Peru and Indonesia.
By Jim Jubak
Investors, in case you haven't noticed, we're not in Kansas anymore.
In 2005 and so far in 2006, the global economy has been the story for stocks, whether the companies are based overseas or in the U.S. The best performances have been turned in by markets and stocks riding positive trends in the global economy.
But let me share a dirty little secret: To be a successful investor in the global economy, you actually have to follow the news from places that hardly ever make headlines in the typical American newspaper. (Remember newspapers? I've heard that you can still buy one on eBay.) And that's true even if you haven't put a dollar into the shares of any company headquartered outside the U.S.
The global economy is so interconnected these days that vandalism in New Guinea or election campaigns in Peru send out ripples that move stocks that trade in New York in companies that are headquartered in cities such as Phoenix and Denver.
In this column, I'll give you a rundown of the news from three global hot spots that are likely to move stocks over the next quarter. My goal isn't so much a checklist of global hot spots to watch -- three items are just a bare beginning of such a list -- but to give examples of how thinking globally can lead to very local (as in, your pocket) profits.
Foreign markets on the march
The globalization of the economy has been pretty good to U.S.-based investors lately.
Global demand for commodities has pushed up the price of everything from oil to gold to coal, sending U.S. stocks in those sectors up, way up. For example, Occidental Petroleum (OXY, news, msgs) shares are up 35% in the last 12 months, Goldcorp (GG, news, msgs) shares are up 118%, and Peabody Energy (BTU, news, msgs) shares are up 123%.
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And global stock markets haven't performed too shabbily, either. In the first quarter of 2006, for example, the Mexican, Indian and Australian stock markets each hit record highs. In the first quarter of 2006, the Brazilian stock market was up 12.7% in the local currency (and up 21.2% in U.S. dollars) and Norway's stock market was up 19.2% (and 23% in U.S. dollars). Even stodgy ol' Germany's stock market climbed 14.5% (and 11.6% in U.S. dollars), and beleaguered France, where somebody always seems to be rioting about something, was up 14.4% (and 11.5% in U.S. dollars).
No wonder that U.S. investors have been snapping up the shares of U.S companies with overseas exposure and pouring money into foreign mutual funds, ETFs (exchange-traded funds) and equities. For example, in the first quarter, investors had already put $21 billion into a group of overseas emerging-market mutual funds tracked by Emerging Portfolio Fund Research in Boston. In all of 2005, those funds received "just" $20.3 billion.
But I think investors who are simply throwing money at the hot markets of 2005 and the first quarter of 2006 in the hope that lightning will strike twice are, one, asking for trouble by ignoring news of developing negative trends, and, two, ignoring potential opportunities for higher profits that are being created by the events in countries that aren't often on the average investor's radar screen, if at all.
Here's my current global checklist of off-the-radar-screen global hot spots that have the power to move stocks.
Iceland
I'd argue that this is the biggest global financial story right now -- even though it's taking place in a country with almost no clout in the global financial markets. That, of course, is exactly the point -- most countries, unlike the United States, don't have the power to control their own financial markets. They're at the mercy of the tidal flows of global capital that move into a country, turning its markets red hot, and that sooner or later move out, turning its markets stone cold (after the panic subsides, of course). And this is exactly what is happening in Iceland.
Thanks to high relative interest rates, overseas hot money flooded into the country's financial markets in 2003 through 2005. Global investors who could borrow cheaply in Japan, for example, used that borrowed cash to snap up the high yields on Iceland's bonds. The result? The tiny Icelandic stock market rose by 400% from the beginning of 2003 through February 2006.
And now the game is up. Consumers, using cheap, borrowed foreign cash (Sound like any bigger country you know?) went on a spending spree, snapping up imports and driving the country's current account deficit to 16.5% of gross domestic product. (In comparison, we're worried here because the U.S. current account deficit hit 7% of our GDP in the fourth quarter of 2005.)
Inflation in that same period trebled and economic growth, after surging on the flood of overseas capital, has slackened. And the same overseas hot money that fueled this boom is now fleeing the country on fears that the Icelandic currency, the krona, will collapse (it's down 15% against the dollar so far in 2006) and take the country's three banks down with it.
Last week, Iceland's central bank raised interest rates by 0.75 percentage points to 11.5% in an effort to support the currency. You can imagine what that's doing to domestic economic growth. Iceland's troubles aren't likely to spread to other countries in a replay of the Asian currency crisis of 1997. But this should remind investors that many of the best-performing financial markets of 2005 did so well on a flood of global liquidity that is now receding.
It's not a coincidence that Hungary and New Zealand, two other hot money economies that in no other way are linked to Iceland's, are facing their own currency crises right now.
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