How likely is it that Europe and China will seem less risky over the next few months? Notice the exact wording of my question. I'm not looking for an actual solution to the deep-seated problems of the European currency union or a rebalancing of the Chinese economy and reform of the Chinese banking system. Instead I'm trying to gauge whether we'll see temporarily convincing short-term moves that raise confidence in those two economies.

And the answer to the question, when it's phrased that way, is that an increase in short-term confidence is likely in the next two months.

Optimism on Europe, China

November is likely to bring a formal request from Spain for the European Central Bank to start a program of buying Spanish government debt, as well as a disbursement of the next payment of cash to the Greek government from the European rescue fund.

Neither of these acts will solve the eurozone debt crisis in the longer term. I think Greece will need another write-down of its debt sometime in 2013, and this time the ECB will have to swallow the bitter medicine and participate in the write-down. And I think bond-buying support for Spanish government debt won't significantly add to Spain's economic growth; reduce the country's horrific unemployment rate; save its regional governments from what amounts to bankruptcy; or make the huge amounts of bad real-estate debt disappear from the balance sheets of Spanish banks. All these efforts will do is buy time.

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But -- and this is the crucial aspect, from an investor's point of view -- November's actions will reduce fears that the eurozone is about to blow up and that Greece and/or Spain is about to be thrown out of the club and into international default. That may not bring cash flooding back into European assets -- the eurozone economies will still be near recession levels of growth -- but it will be enough to reduce the demand for U.S. assets as a hedge against a European disaster.

China is in an analogous position. Its financial markets have rallied in the past six weeks on a belief that the third quarter marks a bottom for China's economic growth rate. Recent weeks have brought retail-sales, export and money-supply numbers suggesting that August may have been the low and that September has brought a modest recovery. The fear of a hard landing for China's economy will recede as long as we don't get data that turn current hopes into disappointment.

What's the effect of all this on the markets?

  1. The dollar weakens against the euro. That's good for commodity prices, which are likely to move up on hopes for Chinese economic growth. It also leaves room for gold to advance on a decline in the U.S. currency and fears over the U.S. fiscal cliff.
  2. Emerging-market stocks will look more attractive as fears that the eurozone debt crisis will blow up ease, temporarily, to a simmer from a boil.
  3. China stocks in particular and emerging-market stocks in general should get a boost as fear of a Chinese hard landing diminishes and as hope rises that China's growth rate has bottomed.
  4. Better-than-expected economic growth in the United States will, of course, improve the prospects of U.S. stocks. But to investors who fear the U.S. fiscal cliff, non-U.S. companies that export to the United States might be a better way to play this extra growth.

How scary is the cliff?

The exact way this plays out across global markets depends largely on how scary the U.S. fiscal cliff starts to seem.

If it's very scary, I think we'll see a continuation of the recent trend of most markets and assets moving together. If the U.S. looks like it's headed off a fiscal cliff, I think it will be hard to imagine other markets moving up. The one asset I'd expect to do well in this scenario is gold, which would rally on fear and the fall of the U.S. dollar.

If, however, the U.S. scenario is only moderately scary, I think we will see some markets move out of strict correlation. A moderately scary crisis is enough to make investors think about whether the potential of a 9.2% gain in U.S. equities (that's the distance to the 1,565 top of 2007 from the Oct. 19 S&P close of 1,433) makes up for the risk of a credit downgrade, a fiscal logjam in Congress or an irresponsible compromise that rattles credit markets. When the bullish analysts on Wall Street are offering you only a 9.2% potential gain from current prices, it doesn't take much fear to make the offer unattractive.

And in this case, emerging-market stocks would make an attractive alternative -- if growth in China looks like it has stopped tumbling. Certainly the potential upside is more attractive. The Shanghai Composite Index is down 38.1% from July 2009 and down 63.2% from its November 2007 high. That's enough potential, if macro trends don't make any risk look too risky, to make China and other emerging markets attractive in any less-than-really-scary global scenario.

The moves to make

In practical terms, what does that suggest you do?

Check your portfolio's exposure to gold and other precious metals. Gold has done reasonably well this year, with the SPDR Gold Shares (GLD) exchange-traded fund up 9.86% as of the close on Oct. 19. But that does trail the S&P 500 so far this year (up 15.96%). I think those relative performances could reverse in 2013, with gold leading the S&P.

I don't think you need to move out of all your U.S. positions by any means. But I would concentrate on sectors that show some ability to outgrow the general U.S. economy right now. Two I'd suggest:

  • Housing and housing-related stocks, which are big beneficiaries from the Fed's newest round of quantitative easing.
  • Technology shares, which have been battered by bad earnings news from PC sector leaders Intel (INTC) and Microsoft (MSFT). (Microsoft publishes MSN Money.) This week brings a quarterly earnings report from Apple (AAPL),  which will go a long way to determining the near-term chances of a technology rally.

A little further down the road, check to see how scary the U.S. fiscal cliff crisis seems to be. The scarier it is, the more you should look for safety in your U.S. stock portfolio. I'd look to dividend payers and consumer stocks, especially if they've been crushed lately, like McDonald's (MCD) was last week.

At the same time, I'd be slowly adding positions in China, Brazil and other emerging markets. My column "4 good (and 5 bad) China stocks" gives you some suggestions on stocks to look at and how to stage any buying in that market. I'll be taking a similar look at Brazil in the next week or so.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time of publication, Jim Jubak did not own or control shares of any of the companies 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 stock mentioned in this post. The fund did own shares of Apple and McDonald's as of the end of June. Find a full list of the stocks in the fund as of the end of June here.

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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