How did the stock market do in 2010?

Depends.

Which stock market are you talking about?

The United States–where the Standard & Poor’s 500 stock index climbed 15%–or Spain—down 19% for 2010?

China–where the iShares FTSE China 25 was up just 3.5% for the year—or India—up 21% for the year?

Chile—up 47%–or Brazil—up only 8%?

Last year, like most years, how you did as an investor depended very much on where you did your investing.

So in 2011 what are you going to do about it? Invest in the world’s best stock markets, of course. And today I’m giving you my take on how to separate the best from the rest in 2011. Below you’ll find my five picks on stock markets to overweight in 2011.

Once upon a time, of course, investors didn’t have much choice about where they put their money; they invested in their home market, of course. When my mom and uncle took me to buy my first shares, I put my money in the New York Stock Exchange. A friend’s parents had bought him shares that traded on something that sounded kind of shady called the American Stock Exchange. The NASDAQ? Never heard of it.

Today, though, you’ve got a choice. You can buy an ETF (exchange traded fund) that gives you ownership of the Indian market or Brazil or South Africa. You can buy hundreds of overseas stocks on U.S. markets where they traded as ADRs (American Depositary Receipts). You can even buy shares directly on some foreign exchanges. (Although after six months running the Jubak Global Equity Fund, I can tell you that it’s still not easy to buy direct on many of the world’s stock markets.)

You’ve got a choice and the choice matters. So how do you pick where to put your portfolio?

Forget about going with the growth and simply plunking down your money in the markets that represent the world’s fastest growing economies. You see everyone in the world has read those same growth forecasts. They know that economic growth rates in China and India and Brazil, for example, are projected to better 9%, 8% and 7%, respectively, in 2011. But that’s why India’s stock market is among the most expensive in the world, right now, with China not so far behind.

And, of course, what everyone knows to be true about 2011 can turn to be not to true when projections translate into real returns. That’s why China’s stock market was up just 3.5% last year even though China’s economy grew by more than 10% in 2010.

Instead, the stock markets you want to overweight in your portfolio are those where investors entertain lots of (what you think are) unreasonable fears or doubts. That’s one of the reasons that the U.S. market did so well in 2010. Everybody was worried about a double dip or projecting end-of-the-year growth at just 1% or so. When your expectations are that low, 2.5% or 2.7% GDP growth looks like Olympus Mons. And, surprise, U.S. stocks delivered a 15% gain for the year.

What markets would I put in this category of over-achievers this year?

The United States again. Not so surprisingly, unemployment of almost 10% can damp the spirits, especially when the unemployment rate refuses to go down. This has produced a classic Wall Street/Main Street piece of cognitive dissonance. Wall Street keeps pointing to signs that the economy is growing at a rate that might approach 3% a quarter or two into 2011, and everybody who lives on Main Street—which is most of us—just can’t quite believe it. But what Wall Street knows is that jobless growth is great for company profits and that 2011 is shaping up as another year when the U.S. economy and U.S. stocks outperform relatively modest expectations.

If you want to buy individual stocks in the U.S. market for 2011, rather than an index, focus on the banking sector where prices are still low and leverage to an economic recovery high. JPMorgan Chase (JPM), U.S. Bancorp (USB), and Citigroup (C) are all members of my Jubak’s Picks portfolio https://jubakpicks.com/the-jubak-picks/

Where else do doubts litter the ground?

Europe.

Okay, okay. Most of the doubts about the European Union are absolutely justified. Most of the best economies in the group will grow by 2% this year—if they’re lucky. The euro is likely to lurch from crisis to crisis for much of the year. Which is why even the stock markets of countries that weren’t caught up in the debt crisis did so badly in 2010. French stocks, for example, fell by 3%.

But what’s bad for the euro—within reason—is good for the export-driven German economy. As the euro sinks, German exports priced in euros get more competitive with goods from strong currency economies. So while the euro tanked in 2010, German stocks thrived racking up a 20% gain.

No reason the market shouldn’t outperform again in 2011. Doubts about Europe haven’t receded. The euro is likely to fall further. German exporters are just as efficient as they were in 2010. Buy Siemens (SI) to get broad exposure to German export strength in industries from energy to transportation to telecom.

If Germany is the engine of European exports, then Poland is the train. Polish companies have become the low-cost suppliers next door for many of Germany’s export companies. Unless you can trade in Warsaw, I’d use an ETF (exchange traded fund) for this market. The Market Vectors Poland ETF was up 12% in 2010. (But as with all emerging markets, check to make sure that you’ll be able to hang on through the market’s extreme volatility to get any gain.)

Australia isn’t an emerging market—it just supplies the raw materials to them. Here horrific floods in Queensland that have put much of the country’s big coal industry out of operation have fed into a slowdown engineered by the central bank to raise big doubts about the economy. The Australian dollar, one of the world’s natural resources currencies, has even been in retreat against the U.S. dollar. If you want a one stock package for the Australian market I’d go with BHP Billiton (BHP). You can find out more about the stock by checking out my long term Jubak Picks 50 portfolio https://jubakpicks.com/jubak-picks-50/ If you want more leverage to Australia’s coal industry check out MacArthur Coal (MACDY). For more on the industry see my post https://jubakpicks.com/2011/01/04/aussie-floods-push-price-of-coal-for-steelmaking-toward-new-record/

Among true emerging stock markets I’d pick Brazil. Brazil’s stocks underperformed in 2010, climbing just 8%, as a cocktail of worries negated much of effects of an economy that looks like it grew by better than 7% on the year.

Those worries haven’t vanished but I think they are receding faster than investors so far believe. Incoming Brazilian president Dilma Rousseff doesn’t have any of the populist touch of Luiz Inacio Lula da Silva, but so far she’s saying all the right things about reducing the rate of increase in government spending, on taking steps to stem the rise of the real, and reducing the country’s extremely high real interest rates by fighting inflation.

Dilma, as she’s known in Brazil, has some important trends on her side so she won’t have to rely on words and her shaky legislative majority. The economy is growing fast enough that reducing government spending without hurting the poor should be easier. International investors and traders agree that the real is now overpriced and that will reduce the speculative bets on a further rise in the currency. And the central bank has already moved to reduce inflation—by raising interest rates—so rate cuts sometime in 2011 are likely. My recommendations for Brazilian stocks include banks such as Itau Unibanco (ITUB) and Banco Bradesco (BBD). The first is a member of my long-term Jubak Picks 50 portfolio and the second is a member of my Jubak’s Picks 12 to 18-month portfolio.

The obvious omission from this list is China. Here’s my logic. (As always, you’re free to disagree.) China seems committed to trying to finesse rising inflation that hit 5.1% in November without taking any big macroeconomic steps, such as raising benchmark interest rates by 2 full percentage points or so or reducing its annual quota for new bank loans. Those macroeconomic steps might actually slow the country’s growth rate and that would be bad for the continued rule of the Communist Party, which depends on delivering higher living standards for its legitimacy, and for the wealth of the politically well connected. Instead China looks like it will try a mix of price controls, supply augmentation measures, and income boosts such as another round of increases to the minimum wage. (For more on the minimum wage increase see my post https://jubakpicks.com/2011/01/04/beijing-moves-to-reduce-the-profitability-of-chinas-big-export-companies/ )

My reason to omit China from my list of best markets for 2011 is my belief that these baby steps won’t work and that sometime in the second half of 2011—after the harvest has failed to stem rising prices for vegetables in China—Beijing will be forced to take those macroeconomic steps that it is trying to hard to avoid. I’d rather own Chinese stocks after the market correction that those steps would bring, than before on hopes that those measures won’t be necessary. I don’t think you need to dump all the Chinese stocks from your portfolio. I would emphasize domestic consumer companies rather than state-owned export companies. And I wouldn’t rush to add more Chinese stocks to a portfolio unless you’re prepared to sell at the first sign that of the scenario I’ve outlined.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Bradesco, BHP Billiton, Citigroup, Itau Unibanco, and MacArthur Coal as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have a list of the portfolio’s holdings as of the end of December up in a few days.