5 Stocks for a Shifting World

The traditional divides separating North/South and developing/developed countries are blurring, as the distinctions between those economies narrow (and in some cases, reverse!). Those investors who equate "emerging markets" with "risk" are shutting themselves out of an enormous -- and growing -- set of investment opportunities.

Bad mental models
Here is a topical example of archaic mental models at work: European leaders are trying to bulldoze developing countries into accepting their candidate for head of the International Monetary Fund, French finance minister Christine Lagarde. This attitude is a relic of the feudal tradition, according to which the role is reserved for a European (often French).  While it will probably succeed this time, that approach is ill-suited to the realities of today's global economy.

Looking forward
Some forward-looking organizations are anticipating the shift in the balance of economic power that is already taking place. Giant bond fund manager PIMCO held its annual confab this month, the Secular Forum, in which the firm's professionals from around the world gather in Newport Beach, California to discuss what the next three to five years are going to look like for the global economy.

PIMCO's CEO, (Egyptian-born) Mohammed El-Erian, summed up some of the conclusions of the Forum. He remarked that, over the next few years:

Advanced economies will face sluggish (call it 2%) growth and persistently high, increasingly structural (and therefore protracted) unemployment…Emerging economies will achieve higher growth (in the 6% range), and their income and wealth levels will continue to converge with those of advanced economies.

Six countries, half of global growth
That growth differential will have profound consequences. The World Bank reckons that over the next 15 years, six countries will contribute more than half of global growth: The BRICs (Brazil, Russia, India and China) plus Indonesia and South Korea.

With that said, economic growth isn't a panacea for investors in slower-growth developed economies. In analyzing long-term stock returns across numerous countries, three academics from the London Business School found that "the supposed link between economic growth and stock-market performance is statistically weak and often perverse. Unless an investor is blessed with clairvoyance, there is no evidence that GDP growth is useful as a predictor of superior stock-market returns." (If you are blessed with clairvoyance, don't waste your time reading this article; if not, read on.)

Mind the valuations
In order to capture economic growth, part of the key is not to overpay for emerging-market stocks. When an asset class is overvalued, you want to be under-allocated, but that doesn't appear to be the case for emerging markets today (on an aggregate basis, at least). Asset allocation experts GMO, who are intensely valuation-focused, estimate that emerging market equities will produce annualized real returns of 4.5% over the next seven years. That compares very favorably with large-cap U.S. stocks, with an annualized loss of 0.5% (not to mention U.S. small-caps, which GMO expects will lose one-fifth of their real value over the next seven years.)

Emerging-market blue-chips
In that context, are you prepared for the shift that is taking place? Do you know all of the names in the following table, for example? All of them are blue-chip companies in their home country – the equivalent of Exxon Mobil or JPMorgan Chase – and they look reasonably priced, at first glance:

Company / Country


Forward P/E*

Banco Santander (NYSE: STD  ) / Spain Financials 7.8
Petrobras (NYSE: PBR  ) / Brasil Energy 6.8
Sasol (NYSE: SSL  ) / South Africa Energy 9.2
Turkcell (NYSE: TKC  ) / Turkey Telecoms 10.4
China Mobile (NYSE: CHL  ) / China Telecoms 9.5

*As of May 27, 2011. Source: Capital IQ, a division of Standard & Poor's.

I realize that Banco Santander is domiciled in a developed country -- and a troubled one at that -- but the bank generates half of its revenues in Latin America. That said, investors should be extremely cautious in assessing Santander's prospects, due to its exposure to the European sovereign crisis. That's another key aspect of intelligent international investing: Multinational companies are borderless – what matters is not domiciliation, but where they do business. When you buy Wal-Mart (NYSE: WMT  ) shares, you're not betting on the economy of Arkansas; in addition to the U.S economy, you're getting exposure to faster-growing foreign markets, too. Nearly a third of Wal-Mart's assets are dedicated to non-U.S. markets.

A real alternative to U.S. stocks
Incidentally, I suspect the inability to accept this re-balancing in economic heft is one of the reasons some investors are resorting to putting money into precious metals through products such as the SPDR Gold Shares or the iShares Silver Trust (NYSE: SLV  ) . These investors cite the U.S. government debt burden and the decline of the dollar. If that is your primary concern, why not invest in South Korean or South African equities instead? Both countries have impeccable sovereign balance sheets and you'll get a positive boost from any drop in the dollar's value. Who'd have thought?

Looking for more international stock ideas? Check out "This Stock is Set to Soar, as China's First Global Brand Emerges."

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Petroleo Brasileiro and China Mobile. Motley Fool newsletter services have recommended buying shares of Turkcell Iletisim Hizmetleri AS, Sasol, Petroleo Brasileiro, and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2011, at 2:54 PM, kickaz4911 wrote:

    Alex, "Everyone sometime in their life stumble unto the truth, however most pick themselves up and hurry off as if nothing's happened." (Mark Twain) David Buckwitz. Hazel Park,Michigan,USA.

  • Report this Comment On June 07, 2011, at 4:26 PM, Veritas1010 wrote:

    I'll leave truth aside for a moment and just address fundamentals. A gigantic shift in wealth and resources are occurring across the globe. A weak dollar and ailing American economic growth mandate wise and judicious international investments for long term profit.

    Specifically, I would add several other firms to this short list of giants mentioned within:

    1) E (E.N.I. ADR) - Italy's energy giant has excellent dividend growth, low P/E and energy diversification across the planet.

    2) STO - (ADR) Statoil, Norway's part government owned oil company maintains excellent yield, PE, price and has terrific global prospects and excellent corporate governance.

    Other companies to consider -

    3) VOD - Vodafone PLC (ADR) While price has been stagnant its move to divest non-preforming corporations and buy-back stock should assist in the long term. Besides, it still owns 45% of Verizon (V) Wireless ans one day this real estate will be 'cashed - in' by VOD when it doesn't cause irreversible damage to Verizon (and thus itself ultimately).

    4) TEF - Telefonica ADR Spain may be in a mess economically but Brazil surely isn't TEF's buy-out of Portugal's VIVO in Brazil is positioning TEF to be a giant in the largest wireless market in South America.

    One could continue easily into the food sector, but I think you get my drift. It is an international world and American investors should not abandon our nation, but rather look for excellent companies overseas that reflect the positive growth and transparency we expect as mature investors, and have been fortunate to have had as Americans.

  • Report this Comment On June 15, 2011, at 6:08 PM, chris12tom wrote:

    STD is a great buy. They also pay a great 9% dividend and have great exposure to Latin America. Check out the article on it below:

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