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Jubak's Journal Recent articles: • 5 stocks for the next spending wave, 4/5/2006 • 5 reader picks for tech's next big thing, 4/4/2006 • Fed kills a key inflation gauge, 3/31/2006 More... | Jubak's Journal 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 Related news and commentary on MSN Money 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. Peru I'm sure your portfolio is just stuffed full of Peruvian stocks -- NOT. But Peru's presidential election, which will take place April 9, is important to your portfolio if you own shares of just about any mining company and, maybe, for stocks in the energy sector, too. The front-runner, Ollanta Humala, is a radical ultranationalist who has promised to revoke contracts with the overseas mining and energy companies that produce copper, tin, silver and natural gas in the country. At the least, a Humala administration could be counted on to raise the taxes and royalties paid by foreign mining and energy companies. At worst, companies could look forward to demands for 50% ownership in mining and energy projects. An interview that Humala granted to Spain's ABC newspaper sums up his strategy: "Our natural resources are committed to foreign capital and they do not yield any profit for us." At stake are the giant Camisea natural gas fields, which are now run by Spain's Repsol With copper supplies already tight and tin inventories falling, an election victory by Humala could send prices for these and other metals soaring even from current levels. Peru is the world's fourth-largest copper producer, the fifth-largest gold producer, the third-largest zinc producer and the second-largest silver producer. Right now, Humala is leading in the election but is by no means assured of a victory. He led Lourdes Flores by 32% to 28% in one recent poll. If no candidate gets a majority, the election proceeds to a runoff. Many observers believe that Flores would defeat Humala in a head-to-head race, but the danger is that fast-closing third-place candidate Alan Garcia might edge past Flores into second place. Humala would, it's believed, easily defeat Garcia, who led the country into economic chaos as president from 1985-1990, in a runoff. New Guinea This is a replay of Peru -- only this time it's a restive local population protesting what many regard as the exploitation of resources and the destruction of the environment by foreign mining companies who have paid off the Indonesian government and the Indonesian military. Clashes have resulted in the death of military officers and protestors, walk-offs that have temporarily stopped production and vandalism that has been serious enough to shut down construction at mines. Protests have targeted gold-mining projects owned by Newmont Mining and Freeport-McMoRan Copper & Gold Playing these markets What would I do to profit from these three news trends? My choice would be to buy shares of BHP Billiton. As an Australian-based company, it operates in a domestic economy and financial system that's large enough and sound enough to avoid the worst of any global slosh of capital. And while it's true that the company has substantial exposure to any turmoil in Peru, the company also produces zinc and silver in Australia and copper in Australia and Chile, in enough volume that a climb in price would be more than enough to offset lost production from Peru. Besides, this is one of the world's most diversified natural-resource companies -- witness its recent sales of uranium to China and Taiwan -- so the company by no means has all its eggs in Peru's basket. For a strategy, I'd buy a half-position now with the thought of picking up another half-position on any price tumble from the fallout after Peru's election. (I can't follow that half now/half later strategy in Jubak's Picks, so I'm going to buy a position in BHP Billiton for that portfolio now.) Investors who don't want to take on BHP Billiton's big Peru risk -- although I see it as an opportunity -- should take a look at Phelps Dodge These three hot spots by no means exhaust the list of news stories that global investors can play. For example, I've left out the turmoil in Poland and the possible buying opportunity that will lead to in shares of Central European Distribution And, but you get the idea ... there's a world of 'em. Updates Buy BHP Billiton As I argued in my April 7 column on global hot spots, the hot metals market is just going to get hotter because of political problems in Peru and Indonesia. Copper, for example, which sold for an average of $1.58 a pound in 2005, should sell for $2 a pound on average in 2006 and 2007, according to Desjardins Securities. That works to the benefit of BHP Billiton New developments on past columns 3 stocks riding the big trends of 2006 The sun's sure shining on solar stocks in Germany these days. In a single day, Ersol Solar Energy Commerzbank forecasts that the company will grow sales by 48% a year from 2004 to 2008. But another recent development driving the stock comes from outside Europe. With the passage of new solar incentives in California, Conergy forecast on Jan. 19 that it will triple its U.S. revenue to at least $75 million in 2006. The company currently estimates it has about 5% of the U.S. market for solar components and systems. Deutsche Bank forecasts that in fiscal 2006 the company will increase sales growth outside of Germany to 25%-30%, from 15% growth in fiscal 2005. Shares of the Frankfurt-exchange-listed company trade in the United States as an unsponsored ADR under the symbol CEYHF. As of April 7, I'm raising my Jubak's Picks price target on Conergy to $220 by June 2006. (Full disclosure: I own shares of Conergy in my personal portfolio.) A golden way to play the dollar's fall It's been a perfect storm for gold in the last few weeks. At the end of March, traders had gone heavily short, betting that the price of gold would fall. But with gold supplies continuing to lag demand, with oil prices kicking up, with the U.S. dollar kicking down, and with trouble flaring in Iran, gold climbed rather than fell. That turned shorts into buyers as they rushed to buy in order to cover their bets and stop their losses. That, of course, pushed gold prices even higher, with gold futures setting a new 25-year high on April 6, at $600 an ounce. This all works to the advantage of Goldcorp Editor's Note: A new Jubak’s Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Conergy and Goldcorp. He does not own short positions in any stock mentioned in this column. | |||||||||||||||||
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