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What to Buy for the Global Recovery

By    |   Thursday, 14 May 2009 10:56 AM

Bear markets, as we now know, are very different from bull markets. The painful truth is that in a bear market everything goes down.

In the large decline we recently endured, everything went down, and all global stock markets went down a lot.

Those losses were caused by an economic crisis that was centered in the United States. Economists have long said that when the United States sneezes, the rest of the world catches the flu.

This adage proved true in 2008. Sure, the U.S. economy suffered, but many other nations fared far worse as the U.S. consumer stopped buying their goods and services.

As the U.S. recovers, demand will lift the economies of other nations. In a bull market, everything may go up, but some stocks will go up faster than others. After the devastating damage to portfolios sustained over the past year, investors should seek repair via these rapidly growing stocks.

Just as stocks move at different speeds, the economies of different countries will recover at differing paces, too. Stocks trade at prices which reflect the underlying economic health of a company or country and the stock markets of the fastest-growing countries should show the strongest gains.

Investors often look at the relative strength of different stocks to locate the best investment opportunities. Numerous academic studies show that the stocks which have done the best over the past six months are likely to do very well over the next six months.

This same idea can be applied to countries recovering from the recession. Exchange-traded funds (ETFs) offer individuals a way to invest in international indexes, in effect betting on how well a nation’s economy will do.

It’s less risky than betting on a single bellwether and hoping there’s no hidden bad news. Instead, the fund combines multiple stocks into one trade, like a mutual fund, although much more cheaply.

Over the past six months, we have seen a sharp decline and an equally sharp recovery in many markets. The leading international ETFs over this timeframe have largely been from the emerging markets.

The best performer has been Russia, the MarketVectors Russia ETF (RSX) is up more than 75 percent since it reached its low in January. Russia is not only a growing economy but it offers an inflation hedge because of its large oil and gas reserves. It also has great mineral wealth which can be mined for ever-growing profits as prices rise.

Among developed countries, Sweden has been the biggest gainer, as measured by the iShares MSCI Sweden Index Fund (EWD). Sweden’s Central Bank has been very aggressive in its response to the slowing economy. It cut its benchmark short-term interest rate to 0.5 percent. The government has come up with a prudent stimulus spending package.

EWD is up almost 57 percent since the March lows. The U.S. market is up about 38 percent over that same time. Clearly investors think Sweden will fare better than the United States in the months ahead.

Not surprisingly, Chinese ETFs are also doing very well. Both iShares FTSE China Hong Kong Listed (FCHI) and iShares FTSE China/Xinhua 25 (FXI) are among the top five performers over the past six months. Both ETFs have delivered gains of more than 40 percent in less than two months.

Other emerging markets with large gains include Brazil and South Africa. ETFs are available for both countries, through iShares MSCI Brazil Index Fund (EWZ) and iShares MSCI South Africa Index Fund (EZA).

All of these are aggressive investments for those who believe a global recovery is underway. More conservative investors can use the iShares MSCI BRIC Index Fund (BKF) ETF to gain exposure to a recovery with geographic diversification. This ETF owns stocks in Brazil, Russia, India, and China.

While these kinds of funds offer the greatest potential gains in a recovery, they also imply bigger losses if a recovery falters. When trading in these ETFs, a stop-loss order should be used to limit losses.

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Bear markets, as we now know, are very different from bull markets. The painful truth is that in a bear market everything goes down.In the large decline we recently endured, everything went down, and all global stock markets went down a lot.Those losses were caused by an...
Thursday, 14 May 2009 10:56 AM
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