12/13/2012 10:45 PM ET|
Investing for 2030: 4 key forecasts
Germany outperforms China?
The best-researched example is a comparison of Germany and China from 1993 through 2011. During the period, China's GDP grew at a real annual rate of 10.2% a year, while Germany's real GDP growth was a piddling 1.3% a year. And yet the return produced by the MSCI China Index during the period was a cumulative loss of 44%. The return for the MSCI Germany Index was a gain of 180%.
Astonishing, no? And other academic studies of the connection between GDP growth and financial market returns come to pretty much the same conclusion: There is no simple connection between GDP growth and market returns.
There seem to be a lot of reasons for this. For example, one peculiarity of GDP is that it doesn't distinguish between good/efficient growth and bad/inefficient growth. For example, the recovery from a storm like Sandy adds to GDP even though the storm and the recovery, when you net them out, might result in a decrease in national net worth.
Financial market returns, on the other hand, ultimately measure increases in net worth. From the point of view of a pure GDP calculation, a factory that increases production by hiring a lot of poorly trained and inefficient workers isn't better or worse than a factory that increases production by increasing productivity through adding better machines or hiring workers with better training. In the short run (and the short run can run quite some time in a country with a large supply of surplus labor) what counts is the gross production from the factory, not the profitability of that production. In the long run, profitability raises net worth.
But one set of reasons that should be intensely interesting to investors is research showing that risk and the cost of capital are key to determining how GDP growth relates to financial-market returns. I'd summarize the research this way: If a country with a high rate of GDP growth also has a high risk premium and a high cost of capital -- perhaps because of political instability or a history of inability/unwillingness to control inflation -- then the financial market returns will lag the rate of GDP growth.
I don't think this means investors should ignore differentials in GDP growth among countries. And it certainly doesn't mean you should ignore faster growth in a China or an Indonesia when you're building a portfolio and instead load up on low-risk but very-slow-growth Japan. (That would be a very odd view coming from someone who started a global mutual fund in 2010 in order to tap into global growth outside the U.S. economy.)
But it does mean you need to rethink the way you try to profit from higher GDP growth rates in emerging economies.
The right way to read growth
How? In two ways.
First, when thinking about investing in national economies with high relative GDP growth rates -- I'd call this the ETF approach, since it involves buying Korea or China or Brazil with the purchase of an exchange-traded index fund -- it requires that you think about the direction of the risk premium in that country as well as the magnitude of GDP growth.
Here's an example to think about. The return on the iShares MSCI All Peru Capped Index ETF (EPU) over the past three years is an annualized 14.29% as of Dec. 12. The annualized return over that same three years for the MSCI China Index -- which is tracked by the iShares MSCI China Index (MCHI) -- is a loss of 3.36%.
This is not explicable if you look only at GDP growth rates. From 2009 to 2011, Peru averaged real GDP growth of 5.5%, according to the World Bank. China's average annual real GDP growth rate from 2009 through 2011 was 9.6%
What happened during that period that (to me) partly explains the outperformance of Peru over China, despite the discrepancy in GDP growth rates in favor of China? I'd point to expectations. For China, growth of 9% was close to expected. For Peru, 5% was astonishing. And I'd also note the steady improvement of Peru's credit rating, with all three major credit-rating companies raising Peru to BBB (or equivalent) ratings by August 2012. Moody's Investors Service, in its August upgrade, cited Peru's prudent fiscal and macroeconomic policies and the continued decline in the share of Peru's debt denominated in foreign currencies. (Less foreign current debt means less exposure for Peru to hot money flows from overseas investors.) In contrast, worries over the health of China's banking system and over the overextended balance sheets of heavily indebted local governments have increased during that period.
Putting it all to work
As a working hypothesis, let me suggest that if you're trying to decide which relatively faster-growing countries in the Global Trends 2030 report to overweight in your portfolio, think about Colombia, Mexico and Turkey, where growth expectations are still relatively modest and credit quality is improving. I'd also think about putting Brazil in this group: Growth has lagged so badly recently that expectations are modest. Yet if some of President Dilma Rousseff's structural reforms pay off, Brazil could see its traditional double-digit interest rates start to converge with those in the rest of the world.
I don't think this hypothesis rules out investing in companies in, say, China, or other countries with fast-growing GDPs. It does, however, suggest that the "buy-the-country" ETF approach might not be the best fit.
Think of it this way: If China is going to grow GDP by 8% or 9% annually in the next few years, do you want to own China or do you want to own companies inside or outside China that will be able to tap into that growth? From this perspective, it doesn't matter whether your China exposure is from a U.S.-based company such as Yum Brands (YUM) or from a China-based company such as snack and beverage leader Want Want China (WWNTY). You just want to own shares of companies with the biggest competitive edge.
So, second, when putting together a portfolio to take advantage of higher relative GDP growth in emerging economies, look for companies that are beating up on their competitors and/or who dominate their sector.
For example, in China's retail sector, you want to own Sun Art Retail Group (6808.HK in Hong Kong) despite its odd parentage as a venture between Taiwan's RT-Mart and France's Groupe Auchan. In 2011, Sun Art moved to the top spot in China's hypermarket sector with a 12.8% gain, versus 11.2% for Wal-Mart Stores (WMT) and 8.1% for Carrefour (CRRFY). Sun Art is thriving -- Wall Street analysts estimate 20% growth in profits in 2013 -- while competitors such as Tesco (TSCDY) are closing some stores and slowing expansion plans. The key seems to be Sun Art's ability to run a Wal-Mart-style low-price megastore that is still attuned to Chinese tastes. For example: A Wal-Mart in Shanghai sells snacks at low prices, but its Sun Art competitor has a kitchen where customers can buy fried noodles and steamed pork buns just like they do when they shop in traditional neighborhood markets.
What other (potential) competitor-killers in fast-GDP-growth economies would I take a look at for my portfolio? How about cellphone tower operator IHS (trading as IHS.NL in Lagos, Nigeria), which has pioneered tower operation in a country with very unreliable power supplies and shaky security, but which happens to be one of the largest and fastest-growing markets for cellphones in the world? Or Megastudy (072870.KS in Seoul), the largest of Korea's 28,000 "cram" schools? (When the Korean government recently cut back on the country's six-day school schedule so that Korean kids would have more free time and feel less pressure, Korean parents rushed to sign up their offspring for extra tutoring.)
And don't forget developed-market companies that have sunk deep roots in fast-GDP-growth economies. KFC parent Yum Brands is the biggest quick-service food operator in China -- and has India in its sights. Johnson Controls (JCI) has become a critical supplier to any automaker assembling cars in China. (Johnson Controls is a member of my Jubak's Picks portfolio.) Luxottica (LUX) is the largest retailer of designer sunglasses in China.
Investing in the future can be tricky, no doubt, but it is essential. After all, we're all going to live in the future one day.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Why investors shrugged at Costco's quarter
- What's behind Apple's volatility
- Time to sell Bristol-Myers Squibb
- Why the Freeport McMoRan deal stinks
- Here's how to read IDC's Apple forecast
- Australia's woes may boost Cheniere Energy
- China slowdown hurts Yum Brands
Meet Jim Jubak at the World MoneyShow
Is it time to give your portfolio its annual checkup? Then join thousands of investors like yourself at the World MoneyShow Orlando, which runs from Jan. 30 to Feb. 2 at the Gaylord Palms Resort in Orlando, Fla. At the world's largest investor and trader gathering, you'll hear from MSN Money columnist Jim Jubak and dozens of other top investment experts. Registration is free for MSN Money users; just follow this link.
At the time of publication, Jim Jubak did not own or control shares of any company or fund mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any company mentioned in this column. The fund owned shares of Johnson Controls as of the end of September. Find a full list of the stocks in the fund as of the end of September the Jubak Asset Management website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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Jubak's earnest demand that you buy his out of print (probably for a very good reason, like the contents are 5-years out-of-date), his 2008 book "Jubak's Picks" is really what you should be paying attention to here. Jubak's picks today may be just as out of date today as they were in 2008.
The people responsible for preventing, causing, creating, reporting on, and writing books about, the greatest financial collapse since the Great Depression are still loose, and running among us. Not one of these criminal shyster politicians, banksters, and Wall Street types has been prosecuted and jailed. Hence, the only thing you will learn from people like Jubak is how nothing has changed. The game remains the same.
They were not telling the truth back then. They are not telling the truth today.
John Kenneth Galbraith used to say, "If you're going to predict, predict often." I've always taken that to mean that you're more likely to stumble into a correct answer, and more importantly, you can correct your previous predictions that have gone wrong.
Jubak illustrates Galbraith's wisdom.
The over paid writer here ,should be pulling weeds ,in a field somewhere , he is a spectulitive, wanna be
piper , that should really be shoot, or throat cut , in puplic few, knowing is just that , but a guess is more arrrogence then any issue with substance, stop the bs and this man is just that
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