If you were building a global stock portfolio for the long run—let’s say 2020 and beyond—how would you weight the world’s stock markets?
Personally, over that time period I’d pick India over China, Poland over India, and Brazil over them all. And I’d give U.S. stocks a bigger piece of the pie than they’d earn if you looked just at near term numbers.
Let me explain how I get to those weightings.
To build a global portfolio you could, of course, start by investing in what you know. That’s why so many U.S. investors are massively over weight U.S. stocks. That’s a problem since the U.S. economy—and therefore some if not all U.S. stocks—is forecast to grow more slowly than China and India and Brazil, to name just three countries, over the next few years.
You could, of course, build a portfolio that mirrors today’s global capital markets. In 2004 U.S. capital markets accounted for 53% of all the shares in the world that were free to trade. By 2008 that percentage was down to 41%. Over time, I guess you could keep adjusting the portfolio allocations so that your portfolio mirrored a changing world. That would leave you constantly chasing last year’s returns, however, and buying at the top of whatever market had done best in the last year (or whatever period you choose.)
You could, of course, go with near-term projections and overweight fast growing economies such as China (10.2% in 2010 and 9.3% in 2011 according to the Organization for Economic Cooperation and Development (OECD)) and India (7.3% in 2010 and 7.6% in 2011), and underweight the European Union (0.9% in 2010 and 1.7% in 2011) and Japan (1.8% in 2010 and 2% in 2011.) That would give you a shot at getting ahead of the game, but not much of one since everybody has the same access to these projections that you do. A great deal of that near-term projected growth is already factored into stock prices.
So are your portfolio allocations forever doomed to lag behind a changing world?
Not if you use the handy-dandy, Jubak’s Global Three-Part Asset Allocator. (Send no money now and we won’t bill you later either. No operators are standing by to take your call.)
I’m not promising that you’ll find the hottest markets before anyone else knows they’re even warm, but I think you can use long-term trends in these three areas to adjust the weightings of your portfolio before all the good stuff is priced in.
But remember, I’m talking long-term allocations here. The three factors that I’m going to explain in the rest of this post will shove markets in one direction or another over the next decade or two. They aren’t going to give you a buy for tomorrow’s market or next week’s either.
Start with demographics.
Age counts—at least when it’s the average age of a population. The data shows that there’s a strong correlation between the age of a population and how fast an economy grows. The younger a country’s population by and large the faster its economy grows.
By 2020 about 16.3% of the U.S. population is projected to be 65 or older.
One reason to think that the developed world will be growing faster than the United States that far out is that those countries are supporting fewer retired (if they’re lucky) workers. In China, for example, projections say that only 12.4% of the population will be 65 or older in 2020.
But the difference among countries in the developing world is just about as large as the difference between the United States and China. China with 12.4% of its population 65 or older by 2020 looks positively ancient next to Brazil (at 8.7%) or India (at 6.7%)
In fact, almost all the world looks ancient compared to India. If you’re allocating assets just by what percentage of oldsters there are in a population, you ought to put all your money into India. (And if you like really scary demographic numbers from even further out the time line see my post https://jubakpicks.com/2010/02/02/the-scariest-numbers-in-the-world/ )
But population age isn’t the only factor I’d consider in planning my long-term global stock market allocations. I’d also throw domestic consumer consumption as a percentage of GDP into the mix too.
You can read a lot more about consumer consumption and GDP in my post of February 2 https://jubakpicks.com/2010/02/02/can-the-chinese-consumer-save-the-global-economy/ . But let me explain here why I think a bigger domestic market (as a percentage of GDP) is a factor that will drive stock market returns (and hence should drive your allocations) in the future.
If you listened to President Barack Obama’s State of the Union address on January 27, you heard him promise to expand U.S. exports to create well-paid new jobs for U.S. workers.
Good luck on that.
Every other country in the world has pretty much the same plan to export its way to prosperity. Now, according to economic theory that dates back to the days of Adam Smith, a country that has (or creates) some advantage in making a product can, by selling to other countries that have an advantage in making other products, add to global wealth. But when everybody can pretty much make cars and aluminum and solar cells and steel with the same lack of relative advantage, the result can be a race to the bottom where everybody cuts prices to build market share. In that case the world doesn’t get richer, but winds up locked in a series of destructive trade wars.
Now that doesn’t have to happen. Trade wars don’t have to break out all over the globe. But I do have problems seeing how global industries with mature technologies—and that describes everything these days from cars to computer memory chips—can avoid destructive price wars that result in nobody making a whole lot of money.
That’s why when I’m building my country allocations for this long-term stock portfolio I’d give extra weight to economies with big domestic markets (as a percentage of total GDP). China at just a 36% consumer consumption to GDP ratio is on the low end of the scale. Brazil at 65% comes in close to the 70% share in the United States. I’d give extra points to Poland on this factor because the country is a low cost producer of many goods that now belongs to the huge consumer market of the European Union.
And finally I’d give extra weight in my country allocations to countries that look like they’re zigging everybody else is zagging.
So, for example, every developing economy in the world seems determined to create a national car industry. Whether the world market for those new cars exists or not. China alone now has more than 100 car companies. And every care company started in the last five years—and perhaps every car company now operating anywhere in the world—is a candidate for death or merger in the impending consolidation of the global car industry. (And in the meantime every car company is trying to export its way out of a global market stuffed with excess manufacturing capacity. See my point above for why you’d like to avoid that kind of situation as an investor.)
The number of developing economies that are following China’s export model and that are targeting the same industries is extraordinarily large. It’s why China is trying to move up the technology ladder in these industries. If it can increase the value added content that it puts into a product it won’t find itself competing with, say, Vietnam to see who can make something for less. As China gets wealthier, it will wind up losing that competition on price more and more frequently.
And here again is a reason to be overweight Brazil in my global stock portfolio. While China and India and much of Eastern Europe are duking it over information services and automobile manufacturing, Brazil is headed down a road with very little global competition.
You can see the outlines of this road in the recent joint venture between Brazil’s Cosan (CZZ), the largest sugar and ethanol processor in the world and Royal Dutch Shell (RDS). The joint venture will combine Shell’s distribution system in Brazil with Cosan’s sugar and ethanol production assets. And Shell will throw in $1.6 billion in cash as part of its contribution to the venture.
I think that cash payment tells you something very important about who controls the scarce resources and technology here. It’s the oil company that’s coughing up the cash.
If your company wants to be a part of the cutting edge in crop to energy technologies and increasingly in other areas of plant technology, the day is coming when you’ll have to have a presence in Brazil.
In the long-term then, I think investors should over-weight Brazil. In the short-term I think you should take a look at Bunge (BG), the soy bean and oil giant. In December the company bo9ught Brazilian sugar and ethanol producer Moema for $452 million in stock. With this post, I’m adding Bunge to my watch list. (See Jim’s Watch List here https://jubakpicks.com/watch-list/ ). The company is already a part of my Jubak Picks 50 portfolio.
And for those who are light the Polish market I’d recommend Central European Distribution (CEDC). It’s already a pick in my long-term Jubak Picks 50 portfolio. I’m also adding it to my watch list for possible inclusion in my 12 to 18 month Jubak’s Picks portfolio.
Full disclosure: I own shares of Central European Distribution in my personal portfolio.
jim
is it possible to get an update on your take for
cedc.
thank you
Hey Jim,
Long time supporter, first time poster and newbie to this portion of your sight.. Given the recent turbulence in the global environment would you recommend an entry into this stock now at the current price? It is down over 77% since you mentioned it on your watch list? Also off topic do you still not like RIG(TRANSOCEAN)?
Jim,
What are your thoughts on CEDC at this price? Is the model broken, or did the company really just go through a really bad stretch with a bad economy?
I agree with Jim. If someone is serious about long-term investment, he/she has to look for the countries which are set to grow.
China? Yes, but I have very little trust in Chinese data management system, and I do consider Chinese stocks to be overbought. In addition, the long-term prospects, as Jm pointed out, are not as shiny as I want them to be.
So, I am looking for some healthy alternatives. India is one particular example, it has more potential for growth than China. Brazil is another example, being rich in its natural resources. Indonesia – I love the potential, but their corruption scares me. Russia? Pretty much the same story. Vietnam? Love it, but find it is hard to find any information on companies over there.
What is left? India and Brazil … I have an extended list of stocks on my watch list (mostly, from reading Jim’s site and couple others), and I am just ready buy, when the price is right. My only problem (as I see it), I can’t hold the stock, if it goes up more than 50% in less than 3 months. If stock does not go up quickly, I can afford to wait. No matter what, India and Brazil will be developing fast than the developed countries, and their stock market will move up quicker. For those, who in doubt, look at 1, 5, 10 year performances of those markets, as compared to the US, which is considered to be one of the better ones in the developed world.
Thanks for all your hard work, Jim!
Not to be picky, but Bunge is actually an Argentina Company by heritage (Bunge Y Born) with a long history of moving grain products out of the river Plate. They of course have grown and moved around with a strong presence in the USA.
mibnyr, MXWL reports earnings on 18 Feb. I thought I’d do the update then.
nukeage, yes, an update on how to worry would be useful.lI’ll put it on my to do list for next week. Might be especially useful because I think some of the sell off in the last few days really amounts to Wall Street losing patience. Long term thinking isn’t the street’s strength
taterbug, I try to make sure that if a post contains anything actionable the readers of this blog get it at what is functionally the right time–as if before the market opens. There’s no real policy that means I have to give MSN Money the posts earlier than here. It’s just that they’re on Seattle time so they post as the head home–10:30 or so Eastern. Posting the evening before really creates havoc with the software that we use to send out email alerts. But thanks for reminding me that it’s important and keeping me on my toes.
Another vote for Best of the Year. Thanks!!
What I’d really like is an update on “What to worry about and when.” . . . Or am I the only one still worrying?
Astrid,
I have the same problem with ABV! But how hypocritical am I? I never thought twice about oil companies . . . that’s a BIG global addiction. Still, I want to look for companies other than a Vodka distributor, if only for the reason that I think booze is so last century.
He gets paid to post on msn not here. Most typical blog posts are posted here before they are posted on msn’s topstocks but the longer essays are posted first on msn due to the fact that they paid him to write it. I, for one, am glad msn pays him because that helps keep this site free.
taterbug, Yes, and felt the same way. I gave him a 5 star rating, great post!!
Did anyone else notice that this article was posted on MSN last night but not posted on this site until this morning. Jim, how could you let the rest of the world in on your great knowledge before the faithful………. Thanks for everything!!
This is your best post of 2010 so far, thanks!
Hi Jim,
This is totally off topic, but I’ve seen other posters ask for an update on MXWL and I’m chomping at the bit to add to my position on this recent dip.
Would you please give an update on your target projection and timeline. Status quo or positive sentiment would pull the trigger for me right now.
Thank you for all your insight.
Jim,
Commodities and miners are taking a beating. You have several associated stocks and I am curious if you see significantly more pain in the area or if you see this as a good entry point. One of your previous articles touched on excess global capacity being an issue – does this make you consider removing some of these type stocks form your picks? I’ve been thinking about going against the grain today and buying commodity stocks, but not sure if I’d be stepping in front of the train?
Jim,
I get the feeling that everyone tends to overlook Indonesia. From my perspective, Indonesia is where Brazil was 5-10 years ago. Of course, Indonesia is a little more risk than Brazil but should pay-off quite well in the long run. What are your thoughts?
Keen insight, Jim. One question. Your weight to the US. I ,for one, am still have trouble coming up with a growth mechanism for the US. Where is it going to come from? Consumption? I doubt it. The US myth of its great innovative capability? Like everyone trying to export their way to wealth, the innovation myth is likely to drive those who ascribe to it, extremely disappointed because company cultures have become so risk adverse. Home building?
I do like your point about Brazil zigging rather than zagging. One way to think about their growth path is that maybe they are adhering to the concept of investing scarce capital with the idea of actually producing economic value in the long term.
This is the post I’ve been waiting for – very helpful! However I can’t bring myself to invest in a vodka company (CEDC) – surely there must be a more positive way to invest in Poland’s future?
Market Vectors Poland Fund (PLND) is the only thing I’m aware of. Be warned: It’s taken a huge hit lately along with the rest of the European markets.
I was wondering. You’ve suggested ETF’s and mutual funds for China and Brazil, do you have any to suggest for Poland?
It looks like a new profession was born: the farmer-oil kind.
Jim,
You get a BIG thumbs-up for this one! One of your best!