2007年投資展望-3(ZT)

Take your portfolio overseas for 2007

Economic growth is slowing in the United States, but it's gaining elsewhere as the world's other economies grow less reliant on the U.S. Investors can mine the trend for protection and profit.

November 09, 2006

Is the best investment advice for 2007 - at least for the first half of 2007 - "anywhere but the United States"?

Look at this lineup of bad news here and good news elsewhere.

Bad news: The U.S. economy has slowed. The economy grew by just 1.6% in the third quarter of 2006. That's the slowest pace since 2003 and well below the 2.6% growth in the second quarter of 2006 and the 4.2% growth in the third quarter of 2005.

Worse news: The U.S economy could be set to slow further in 2006, with some economists calling for growth for the entire year of 2% or less.

And worst news: The U.S. economy could be in for a long period of subpar growth. Some economists think that with more baby boomers headed to retirement, with the rush of women into the work force past its peak and with fewer teenagers working, the potential trend economic growth rate for the U.S. economy could be set to drop to 2.5% from the recent 3% to 3.5% level.

Good news: Key economies in the rest of the world aren't in sync with the U.S. slowdown. Forecasts for 2006 growth in the European Union have climbed by 0.5 percentage point to 2.8%, for example, and in 2007 the European economy, projected to grow by 2.4%, could actually outgrow the U.S. economy. South Asia, a region that includes the huge Indian economy, is likely to see growth slump to 7.3% in 2006 but then pick up to 7.5% in 2007.

So let's hear it for the rest of the world. After years when the United States, and especially its consumers, kept global growth humming while Europe and Japan stagnated, the global economy looks set to return the favor by riding to the rescue of the U.S. economy in 2007. Strength in economies from Stuttgart to Shanghai won't be enough to prevent a slowdown in the U.S. economy as it copes with the big decline in home sales and prices, but it should be enough so that any slowdown in the United States is relatively shallow and short.

And since the world's economies are out of sync with the United States right now, investors worried about the effects of a slowdown in U.S. growth can avoid the potential pain by parking more of their portfolio overseas.

Full speed ahead

In today's column, I'm going to look at evidence for remarkable growth in the rest of the global economy, even as growth in the United States slows. And I'll tell you about some new research from the International Monetary Fund, Goldman Sachs (US:GS) and HSBC Holdings (US:HBC) that concludes that the economies of major exporters such as China and Germany will feel fewer effects from a U.S. slowdown than projected.

• Stock quote: Goldman Sachs
• Stock quote: HSBC Holdings

In my next column, I'll pick a portfolio of "10 global blue chips" that you can use to shelter your portfolio from a U.S. slowdown and profit from faster growth in economies outside the United States.

Europe's big growth projections

Europe has trailed the United States in economic growth for as long as I can remember, but in the second and third quarters of 2006, growth in the European Union actually outpaced growth in the U.S. economy. So you'll excuse Joaquin Almunia, the European Union's monetary affairs commissioner, for sounding a little giddy on Nov. 6. Not only did he raise the growth forecast for 2006 to 2.8% and for 2007 and 2008 to 2.4%, but he predicted that this would all take place without significant inflation, projected to run at just 1.9%. Almunia isn't alone in this optimistic forecast, either: The OECD (The Organization for Economic Cooperation and Development), the Paris think tank for the world's biggest industrialized economies, has raised its projection for the 12 economies in the euro zone to 2.7% in 2006. Next year, the organization is looking for 2.1% growth in the euro zone economies.

Almost as surprising as Europe's projected ability to outgrow the United States is the ability of the Japanese economy to grow at all. But grow the Japanese economy did in 2006 - by a projected 2.5% - as the country finally escaped the deflationary spiral that ruled the "lost decade" of the 1990s. Japan's recovery is still fragile, but right now the OECD is projecting 2.2% growth in Japan for 2007. Hard to imagine, but Japan might actually outgrow the United States next year.

How U.S.-dependent are these economies?

Of course, we're now used to thinking of China and India as the new growth engines of the global economy. And it looks like these economies won't disappoint next year. India, according to the Asian Development Bank, will grow by 7.6% in 2006 and 7.8% in 2007. That's only marginally slower than the 8% growth the Indian economy has delivered on average over the last three years.

China's growth, by the official numbers at least, is even more rapid. The government projects that the Chinese economy will grow by 10.5% in 2006, faster growth than the 10.2% in 2005, and then "slow" to 9.5% growth in the first half of 2007. If I were a betting man, I'd bet that GDP growth will accelerate as China gets ready for the 2008 Olympics in Beijing.

The conventional wisdom is worried about what happens to that growth in the rest of the world as the U.S. economy slows. Since the U.S. consumer accounts for such a big part of the exports from the export-driven economies of Germany, Japan, China, India and the rest of developed and developing Asia, if the United States catches cold, these economies sneeze.

But the conventional wisdom looks like it has overestimated the dependence of these economies on the United States. Investment bank HSBC calculates, for example, that if the U.S. economy slows to 1.9% in 2007, then growth in Asia drops to - are you ready for this? Grit your teeth, hold onto your seat - 6% in 2007 from 7% in 2006. China's economy would grow by 8% in 2007 even if U.S. economic growth dropped to 0% in 2007, Goldman Sachs figures.

A boom in global trading - outside the U.S.

Why not apocalypse now? Because economists and investors have overestimated the importance of exports - and particularly exports to the United States - to these economies and underestimated growth of the domestic market in these countries.

The U.S. trade deficit with China gets all the headlines, but the share of China's exports going to the United States has actually tumbled to 25% from 34% in 1999. Exports to the countries of the European Union make up just as big a share. The pattern is similar for Japan, where the United States now accounts for 23% of the country's exports, down from 40% in the 1980s, and for the European Union, where exports to the U.S. are only slightly higher than they were in 2001.

It's not so much that the United States is importing less. It's more that the rest of the world's economies are trading more frequently with each other. In the period when exports to the United States were flat, the European Union's exports to Asia grew by 20%. And China's exports to the European Union climbed by 110% from 2001 to 2005; the European Union now imports almost as much from China as the United States does.

Big, solid domestic economies

The other surprising conclusion from these studies is that domestic economic growth - rather than export growth - has been responsible for the bulk of growth in countries such as China and India.

Consumer spending in Asia, the IMF has calculated, grew in real terms by 6.3% a year in 2005 and 2006. Asia's consumers, the IMF has concluded, could keep Asia's economies humming at only a slightly lower rate even if exports to the United States dropped significantly. With the recovery of consumer spending in Japan, the case for domestic growth in Asia gets even stronger.

None of these studies concludes that a slowdown in U.S. growth wouldn't affect growth in the rest of the world, but they do suggest that the effect would be smaller than the investment consensus now believes. Truly export-driven economies such as the ones in Singapore and Taiwan could be rocked, but the global economies with big domestic markets shouldn't catch cold just because the United States does. And growth in regional trade among the countries of Asia and between Asia and Europe would reduce the negative impact on growth even for export-oriented economies such as Singapore.

Rosy optimism about growth rates

The U.S. financial markets are still convinced that U.S. economic growth will be stronger in 2007 than the pessimistic projections that call for 2% growth or less. The prevalent belief is that the Federal Reserve will bail out the economy by cutting interest rates in 2007 if growth slows too quickly. But as I've explained in previous columns, the Federal Reserve could well face higher-than-expected inflation in 2007 that limits the central bank's ability to cut interest rates.

And the U.S. financial markets are still convinced that growth will fall off a cliff in China and India, and drop to a lesser extent in Europe and Japan, if the U.S. economy slows.

These studies suggest that growth in the global economy is less dependent on the United States than the consensus believes. And that domestic growth in the developing economies, especially, is stronger than generally believed.

Let's get ahead of the crowd

It's always dangerous being a pioneer. (You know how to identify a pioneer, don't you? He's the one with arrows in his back.) But I think it's worth it in this case to consider getting out in front of the consensus. It's not certain, but likely, that the U.S. economy is slowing as we head into 2007. And it's not certain, but likely, that growth in the rest of the world will turn out to be stronger than expected in 2007.

By getting out in front of the growth-in-the-United-States-is-OK-and-if-it's-not-we'll-take-the-rest-of-the-world-with-us consensus, you stand a chance to profit as the rest of the market in early 2007 reaches the same conclusion that you have reached now and moves in your direction.

My next column will feature 10 global blue chips to add to your portfolio.

New developments on past columns

The state of coal stocks is strong: Well, the state of coal stocks isn't strong now, but that was the headline on my Feb. 3, 2006, column in which I added Headwaters (US:HW) to Jubak's Picks. Not much has gone right for Headwaters since then, and just when the stock looked like it was recovering, shares got slammed by a big earnings miss announced on Nov. 7. At first, the results looked good - earnings of 61 cents a share, well above the Wall Street consensus forecast of 48 cents for the Sept. 30 quarter. But if you cranked away at the numbers, you quickly understood that the big surprise wasn't positive at all: The company had paid taxes at just a 10% rate because business had been so bad, rather than the 27%-38% Wall Street analysts had assumed for their estimates. Correct for that, and the company earned just 41 cents in the quarter. And hence the 15% drop in the stock. The biggest culprit? The company's building materials unit,where revenues were flat with the September quarter of 2005 and margins fell by almost 13% due to the downturn in the residential housing market. The future didn't look as grim as the present, however. I added this company to Jubak's Picks for its synthetic-fuels technology, and on that front Headwaters made good progress.

• Stock quote: Headwaters

The company's direct-synthesis hydrogen peroxide demonstration plant went into operation in October. During the quarter, Headwaters completed the second commercial run of its technology to upgrade heavy oil to a more easily and efficient refined grade. Construction pushed ahead on Headwater's ethanol manufacturing plant, scheduled to go into operation in March 2007. And the company began plans to construct three new coal cleaning plants to go with the two currently in operation. I'm certainly not happy with the short-term performance of the company or the stock, but the long-term picture remains attractive, especially at the recent beaten-down price. As of Nov. 10, 2006, I'm keeping my target at $36 a share by stretching out the schedule to October 2007 from the prior July 2007.

Mine takeover targets for gold: Well, I sure got it backwards when in my Sept. 22, 2006 column I picked Kinross Gold (US:KGC) as a takeover target. Instead of being taken over, Kinross Gold itself launched a bid for Bema Gold (US:BGO) on Nov. 6. The stock market clearly didn't like the move: Kinross shares fell by 9% on the day the deal was announced. I think the drop is reasonable. Speculators who were looking to pick up a premium when a bigger company acquired Kinross were disappointed because the deal delayed any acquisition of Kinross itself. And investors were disappointed because it looks like Kinross is overpaying for Bema. Canada's Desjardins Securities, for example, calculates that the deal will dilute earnings in 2007 and 2008. But the acquisition isn't all negative. Kinross is picking up significant reserves - an increase in gold reserves of almost 70%. Beyond 2008, the deal will lower costs and increase production as Bema's Kupol mine in Russia comes on-stream along with Kinross' own Russian mines and expanded production from its Paracatu mine in Brazil. Given the near-term dilution from the deal, as of Nov. 10, 2006, I'm lowering my 12-month target price to $14.70 by September 2007. Investors with longer time horizons than the 12-to-18- month horizon in Jubak's Picks should note that the negative effects on earnings of this deal are history in 2009. After that, the positive effects of increased production and lower costs kick in. Also note that even the combined company isn't so big that it can't be an acquisition candidate. (Full disclosure: I own shares of Kinross Gold in my personal account.

• Stock quote: Kinross Gold
• Stock quote: Bema Gold

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Editor's Note: Please note that Jubak's Picks recommendations are for a 12- to 18-month time horizon.

E-mail Jim Jubak at [e-mail].

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Kinross Gold. He does not own short positions in any stock mentioned in this column.