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Jubak's Journal
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| | Jubak's Journal
3 guilt-free steps to making money overseas
As globalization rearranges jobs all over the planet, you can play the trend without exploiting others' misfortune. Here's how.
By Jim Jubak
Even my 8-year-old, whos been to Vietnam and back, knows that globalization is the wave of the future.
But what many of us are wrestling with is how to take advantage of global growth without abandoning convictions about workers rights, environmental protection and job security at home.
Its surely hypocritical to castigate American companies for moving factories overseas while you look for revenue gains from Chinese-made sneakers and Philippine-produced shirts in the quarterly reports you get from The Gap (GPS, news, msgs) or Wal-Mart (WMT, news, msgs).
Or to go into a rage over IBMs (IBM, news, msgs) plan to move 3,000 high-paying programming jobs to developing countries from the United States yet beam happily at the profits you reaped when IBM reported higher-than-expected earnings on Jan. 15.
Globalization presents investor opportunities
I dont think its possible to overstate the effect globalization will have on the jobs, incomes, security and prospects of people worldwide. Ive sketched out some of the negative effects of globalization here in the United States in columns such as Why this recovery feels so painful and The threat of the job-is-worth-less recovery.
At the same time, I dont think its possible to ignore globalization if you want to make money as an investor. With China reporting 9% growth for 2003 and India projecting 8% growth for the fiscal year that ends in March, we all know just which economies are driving global growth.
Will you be able to look yourself in the mirror?
I dont claim to have every detail figured out, but I do have a three-step approach on how investors can get exposure to global growth while maintaining their own moral and political standards. Ill lay out the first two parts of the equation in this column and the third part in my next column. Think of this very, very tentative list of stocks as a stalking horse to get your own thoughts going on the subject of globalization and the world we live in.
I started my construction of this list by focusing on three principles. First, do no harm. Second, share and create the wealth. Third, work for sustainability. Each one of these principles suggests a group of stocks to me. And the three together describe an arc of increasing activism in shaping the world through how you put your money to work. The first two are the topic of todays column. Ill deal with the third in my next outing.
More on global investments
First principle: Do no harm
Some companies are active drivers of globalization. The relentless pressure Wal-Mart places on suppliers to lower prices effectively pushes manufacturing jobs to the lowest-cost countries. (This is a good example of globalizations double edge: While its good for consumers who pay lower prices, its bad for U.S. workers who lose jobs.)
Some companies, on the other hand, are passive participants in globalization. The process brings them more revenue and bulks up their bottom lines, but they arent key players in speeding along the process.
These companies arent good guys or bad guys in globalization so much as neutral parties content to profit from the trend.
Id group transportation companies here for example. Freight forwarders and customs expeditors see revenues rise as the volume of goods in world trade rises, whatever the direction of that flow. Another class of neutral beneficiaries is the North American railroads that move raw materials and agricultural products for shipment to overseas manufacturers and increasingly prosperous Asian consumers -- and then carry finished imported goods in the other direction.
The North American companies with the biggest exposure to China and hence to globalization, Id argue, are Expeditors International of Washington (EXPD, news, msgs) where about 10% of 2003 revenues came from moving goods to and from China, according to Morgan Stanley. Others are Canadian Pacific Railway (CP, news, msgs), 7% of 2003 revenue; Burlington Northern Santa Fe (BNI, news, msgs), 5%; and Union Pacific (UNP, news, msgs), 4%.
The revenue China-related business generates for these companies is relatively small, but as a percentage of overall income it is growing far faster than company revenue as a whole. The 2003 growth rates of this China-revenue range from a high of 30% at Expeditors International to a low of 15% at Canadian National and Union Pacific. Thats big stuff at Canadian National, since total revenue for the first nine months of 2003 is running just 7% above revenue for the first nine months of 2002.
Second principle: Share and create the wealth
The faster companies in this group grow, the less disruptive the effects of globalization are likely to be. Thats because the faster that production of raw materials ramps up, the less likely it is that the global economy will face runaway inflation. And the faster that developing economies such as China and India switch from export-driven growth to consumer-driven growth, the less stress the global monetary system is likely to face.
Growth in places such as China from this stage of globalization is dramatically and dangerously out of balance. Last year, about two-thirds of Chinas economic growth came from industrial production, and half of that came in the heavy industrial sectors that make steel, chemicals and construction machinery. That means consumer goods and services accounted for just one-third of last years growth.
This concentration in industrial production has turned China and India into leading consumers of raw materials. Since 1980, for example, global oil production has growth by 22%, but oil consumption is up 182% in China and 231% in India.
This kind of tilt toward the industrial side of the economy isnt sustainable. China has poured so much capital into a few sectors that the number of bad loans backing economically unsound projects may be as high as 40% at the four-largest state owned banks. And the emphasis in the developing economies of Asia on capital-intensive industrial production is likely to keep global prices for some products depressed for years.
One answer is more growth on the consumer end of these economies and there are signs that the growth is starting to happen. Per capita gross domestic product broke the $1,000 barrier in China last year, and thats a level that has in other countries led to a new wave of consumer demand. Internal demand for computers, cars, TVs, appliances and the like would help soak up some of the supply generated by that industrial investment.
In the short run, I think this means big profits from investments in the raw materials companies that are fueling this industrial growth because the demand from these developing countries will keep prices high. I dont see any globalization ethical downside to investing in this sector -- although individual companies have their own blemishes. And theres even some social upside, since the more capital these companies have to invest in expanding production, the less likely the global economy is to face runaway commodity inflation. And putting a little extra supply into the global system is clearly a good thing because even current tightness is leading to nasty little natural resource conflicts like that now simmering between Japan and China over oil.
A short list would include Rio Tinto (RTP, news, msgs), Inco (N, news, msgs), Freeport-McMoRan Copper and Gold (FCX, news, msgs), Southern Peru Copper (PCU, news, msgs), Phelps Dodge (PD, news, msgs), Companhia Vale do Rio Doce (RIO, news, msgs) and Noranda (NRD, news, msgs) among metals producers. In oil, I'd include Exxon Mobil (XOM, news, msgs) because of its low costs; BP (BP, news, msgs) because of its stake in the Russian oil fields that are one of the few currently visible sources of additional supply; Apache (APA, news, msgs) because of its expertise in wringing extra oil out of older fields; and, in Asia, PetroChina (PTR, news, msgs) because China is even shorter of oil refining capacity than it is of oil; and CNOOC (CEO, news, msgs) because it is the Chinese oil company with the inside track on working with foreign oil interests and on drilling offshore.
In the longer run, Id look at stocks in consumer companies that cater to the rising consuming classes in China, India and elsewhere.
What kind of stocks? North American food protein stocks might be a good candidate. In this category Id put soybean processor Bunge (BG, news, msgs) because of the known correlation between income and protein consumption. Among U.S.-traded stocks, look at Tsingtao Brewery (TSGTY, news, msgs); among stocks not yet traded here, consider Tingyi, which trades on the Hong Kong market and has just sold 50% of its beverage business to Japans Asahi.
India lags behind China in the shift to consumption, but even there the trend is taking hold. Household consumption spending is projected to climb at a compounded average annual rate of 15% from 2003 through 2008, according to Merrill Lynch. Theres a definite paucity of Indian stocks traded on U.S. exchanges, so instead Id look to invest through mutual funds that own consumption-oriented names. Look for companies such as State Bank of India and ICICI Bank as plays on rising consumer loans, BSES, one of the fastest-growing utilities in India, and retailers Trent and Pantaloon in the fund portfolio.
A look ahead: Watch the bubbles
My third theme, work for sustainability, will be the subject of my next column. A quick preview: I dont think that the course of economic development in these rapidly developing countries will track the development history of the currently industrialized world. Theres already evidence that these countries are finding their own way -- look at wireless technology, for example -- and that globalization will shift the direction of technology development. In my next column, Ill tackle how to think about technology investing from the perspective of a developing India or China.
Before I leave this column, a few words on valuation, timing, bubbles and the like. Globalization is a long, long trend, and no investor has to buy any of these stocks now. In fact, theres something of a bubble in Chinese stocks at the moment. Some China analysts are expecting the rate of growth for exports to slow from the current 30%-plus to something more like 15% in 2004. Thats still a fantastic rate, but with stocks trading at current valuations, a drop like that would produce a fair-sized correction in many of these names.
And please dont get the idea that I think investing in stocks like these will solve all the problems of globalization. This portfolio wont do much in any timeframe that matters for the U.S. manufacturing worker who has lost a job to globalization. And it wont do anything to help the 750 million people who live in one of the 54 countries in the world where per capital real income has declined between 1990 and 2001.
In other words, a portfolio built around these steps can help reduce your personal wince factor. But dont kid yourself into thinking that investing like this is all you have to do to change the way that globalization unfolds.
New developments on past columns
3 stocks to own as turmoil grips Russia
Noranda (NRD, news, msgs), long the laggard, has begun to catch up with the rest of the stocks of base metal producers, but I think its still got a way to run. As of Jan. 23, Im raising my October 2004 target price to $20 a share from the previous $16.50 target. Analysts have raised their estimates for the main metals -- copper, zinc, aluminum and nickel -- yet again as demand from China continues to push up prices in the sector.
The stocks relative strength climbed to 87 before dropping back to 86 on weakness in the sector, up from 59 for the last 12 months. Its StockScouter rating is up to 7 from 2 six months ago. (Full disclosure: I own shares of Noranda.)
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Freeport-McMoRan Copper and Gold and Noranda. He does not own short positions in any stock mentioned in this column.
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