The Best Market This Year

The best stock. The best fund. The best exchange-traded fund. As investors, we're constantly on the lookout for the best opportunities.

Just as we salivate to crown the year's best-dressed celebrity or the best pizza in Manhattan, we drool over charts and tables of stocks that surged hundreds or thousands of percentage points in 12 months. That way, we can dream about finding the next stock that will repeat or beat that performance in the coming year.

But rather than just looking at the story of individual stocks that soared last year, investors can learn more by looking at markets in general for the lessons they teach.

Looking back at the best of 2006
Comparing world markets is tricky because it involves adjusting for currency fluctuations and inflation, which is never straightforward. Thankfully, the Motley Fool Global Gains team has developed a model to compare world markets on an even basis. With a common reference, yearly and monthly comparisons help investors see just what regions of the world are flourishing or decaying.

What they found was amazing. Surprisingly, the United States doesn't even crack the top 10 for 2006. Neither do many other advanced, industrial nations we commonly equate with economic growth. So, which international stock exchange actually tops the list?

(Opening the envelope ...)

Zimbabwe. Yes, you read correctly. Zimbabwe's market returned a stunning 912% in 2006 -- a single year. But is this real? Can investors actually realize this kind of gain?

This is where the tricky part comes in. The dramatic return of Zimbabwe's exchange is partly the product of a restricted currency value in the face of hyperinflation. The inflation and currency chaos have also been behind extended periods of negative returns in the Zimbabwe market. So, no, investors shouldn't expect Zimbabwe (or any other stock exchange, for that matter) to deliver achievable organic growth at this level.

But other, more stable markets are booming. No. 2 and No. 3 on the Global Gains list, Venezuela and China, more than doubled in the year, up 156% and 130%, respectively, and some of these regions have grown at extremely high rates for years.

For the U.S. markets to grow at rates this high, you'd have to see hundreds of high-growth success stories such as the recent monster Terra Nitrogen (NYSE: TNH  ) , up 690% over the past three years, or Smith Micro (Nasdaq: SMSI  ) , up 120% the past 24 months. Even Best Buy (NYSE: BBY  ) or NVR (Nasdaq: NVR  ) -- both posting more than 30% compound annual growth over the past 10 years -- are too rare in the United States. Much of the U.S. market is made up of slower-growing or cyclical industries.

But many of the industries that show slow growth in the U.S. are booming internationally. For example, insurance provider China Life Insurance (NYSE: LFC  ) has returned 900% over the past three years. Vimpel Communications (NYSE: VIP  ) -- the Russian wireless service provider -- gained 78% in 2006. That was on top of a 25% return in 2005.

Looking forward to 2007              
Certainly, past performance of markets gives little indication for the future. However, there is one prediction I'll go out on a limb and make -- the United States will not be the top market of 2007. If it is, I'll eat a pair of dirty socks.

The reason I'm comfortable betting on such a sweaty encounter is because the odds are heavily in my favor -- international stock markets contain solid yet little-known companies that are pursuing largely undeveloped and untapped markets. All this is the recipe for dramatic growth -- growth that investors would be imprudent to ignore.

That said, dramatic growth also comes with considerable risk, so tread cautiously. Or join us at the Global Gains international investing service, which was created to help investors leap from simple geographic knowledge to understanding international market dynamics. Global guru Bill Mann and his team of analysts scour the world for the best international companies with solid management and transparent finances for your consideration.

In fact, Bill recently returned from a research trip to India, China, and Taiwan. You can read all of his updates and research from that trip by clicking here and joining Global Gains free for 30 days. If after a test run you aren't convinced that the best market of 2007 is international, save a pair of your best socks -- we'll see who's chewing on soiled cotton come year's end.

This article was originally published as "The Best Market in 2006" on Feb. 14, 2007. It has been updated.

Fool contributor Dave Mock doesn't sweat, he glistens. He owns no shares of companies mentioned here. The longtime Fool is also the author ofThe Qualcomm Equation. Best Buy is an Inside Value and Stock Advisor recommendation. The Motley Fool has a disclosure policy.


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