Biggest effect of a stronger euro and a weaker yen/dollar will be felt in emerging markets such as China and Brazil

Pick your metaphor.

The tide has turned. The weather is changing. The momentum has shifted with the change in quarterbacks.

Anything works as long as it 1) describes the current reversal in strength by the euro against the yen and U.S. dollar and 2) reminds us that the reversal is itself easily reversed and that we don’t know much about the timing of that reversal.

I prefer “tide” myself because it suggests not just the turn in the currency markets but a change in the flows that all financial assets swim against or with. The reversal in the relative strengths of these big three currencies will, after all, have an effect on everything from earnings at big U.S. multinationals such as IBM (IBM) and PepsiCo (PEP) to the price of commodities and commodity stocks to the balance of imports and exports in China to the growth rate of the Brazilian economy.

The biggest effect, though, is likely to be on the prices of stocks in emerging markets such as China and Brazil. Read more

The new Global Trends 2030 report is a good road map to the future–but how do you invest in it?

What do you as an investor do with predictions? Even well researched predictions by experienced “predictors” like those at the U.S. National Intelligence Council that produced the recently published Global Tends 2030: Alternative Worlds.

And most challenging of all what do you as an investor do with predictions about which countries will grow most rapidly. I think the default response—put your money into the financial markets in the fastest growing economies—is actually mostly wrong. Or at best it’s the “GDP growth equals market returns” trap. Let me use the recent Global Trends 2030: Alternative Worlds report to explain why I believe that.

By 2030 China will be the world’s leading economic power—with the U.S. second.

The world’s oil producers—especially Russia—will see their influence wane in part because the U.S. will attain energy independence.

For the first time in history—as far as we can know—a majority of the world’s population won’t be impoverished. But half of the world’s population will live in areas with severe shortages of fresh water.

At least 15 countries will be at risk of state failure by 2030—Pakistan, Yemen, Afghanistan, and Uganda among them. Aging populations will slow growth even further in Europe, Japan, South Korea, and Taiwan. China and Brazil will have stepped up to new global roles, and countries that include Colombia, Indonesia, Nigeria, and Turkey will become newly important to the global economy.

Those are some of the conclusions in the recently published Global Trends 2030: Alternative Worlds, a four-year effort by the U.S. National Intelligence Council. (You can get your copy http://www.dni.gov/index.php/about/organization/national-intelligence-council-global-trends/ here in multiple electronic and paper formats.)

Some of the themes—the economic rise of China and the rest of the emerging world, global aging or a scarcity of water, for example–in the study will be familiar to readers of my posts and 2008 book The Jubak Picks (out of print but you can buy a used copy here with http://www.amazon.com/gp/product/0307407810?ie=UTF8&tag=thejubpic-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0307407810%22%3EThe .)

In other areas—the risk of a computer network attack on global infrastructure that affected millions or the possibility that a global health pandemic could reverse economic globalization—the study raises issues that I haven’t thought about at any length (except in the occasional nightmare.)

But to me as an investor the most useful function of the study is the challenge that it throws down. What, if anything, do I as an investor want to do about these predictions? Read more

Some of the BRICS are looking rather worn just as some emerging emerging markets are taking off

Something not so funny has happened on the road to the future. The BRICS markets that were supposed to pave that road have crumbled—by and large—and some of them have even turned into potholes.

Oddly enough, the emerging markets that look like the best road now to future profits are much, much smaller than the BRICS—Brazil, Russia, India, China, and South Africa—and don’t even register in many investors’ portfolios.

And on the evidence they should. Most of us should own more stocks from Chile, Colombia, and Mexico, from Turkey, the Philippines, and Singapore, from Nigeria and Kenya than we do. It’s not easy—I spend my days looking for great companies to buy in those markets for my mutual fund Jubak Global Equity (JUBAX) and I can tell you it’s a hard search. But it is possible. And I think that search is crucial to building a portfolio for the emerging, emerging markets world.

There’s nothing especially wrong with the BRICS markets—except that in the cases of Russia, India, and South Africa those economies have developed deep, deep problems. And that across the BRICS group as a whole, many of biggest of emerging markets have underperformed their smaller peers.

Drum roll: some numbers, please. Read more

Catching up with the bookkeeping on my July 3 sell of AmBev in my dividend income portfolio

When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ within a couple of days.

Promises. Promises.

Here it is early September and I’m just updating the portfolio now. My bad.

For those of you without perfect recall (or who have better things to stuff their brains with than changes in my portfolios) on July 3 I dropped AmBev (ABV), Brazil’s dominant beer company from that portfolio. The price on July 3 was $38.68 a share.

The biggest problem with AmBev as a dividend income investment now is its own success as a stock and as a company.

In the two years from July 2, 2010 to July 3, 2012, the stock was up 104%.

Unfortunately, the dividend hasn’t kept pace. The payout in 2011 it was $1.16 a share, and for the most recent trailing 12 months payouts add up to $1.08 a share. You can imagine what that has done to the yield on AmBev. Morningstar calculates the trailing 12-month yield at 2.04%.

The company’s extreme level of success also creates problems. AmBev so dominates Brazil’s beer market that it’s hard for the company to pick up significant market share. That leaves revenue and profit tied very closely to volumes and the cost of goods sold. In the last couple of quarters volume growth hasn’t been anything to write home about. In the second quarter, for example, organic volume grew by 2.4%. A favorable cost of goods sold in that quarter was offset by a big increase in the selling, general & administration expense as inflation and rising marketing costs took a bite.

This wouldn’t be much of an issue except that AmBev is everybody’s favorite emerging market beer stock and it trades at 23.4 times projected 2012 earnings. That’s not a recipe for a big decline in shares, but the already high valuation does make a tough for me to see rapid share price appreciation from current levels.

And it does leave the stock vulnerable to what is a very uncertain Brazilian economy.

For those reasons—a low dividend yield after a big run up in price and a relatively weak case for share price appreciation—I sold the stock out of my dividend income portfolio on July 3. The stock closed at $37.93 on September 6.

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 http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of AmBev as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Gerdau (GGB)

Brazilian steelmaker Gerdau (GGB) turned in a great performance in the first quarter—a 23.90% gain–against considerable headwinds. I see those headwinds falling in velocity for the remainder of 2012—which suggests good things for the stock. With the ADRs trading at $9.95 today as of 2 p.m. New York time, I’ll continue to hold these shares in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . I am cutting my target price for the end of 2012, however, to $14.80 from $16.80 on the relatively slow recovery in Brazil from the growth slump engineered in 2011 by the country’s central bank in order to fight inflation.

Gerdau’s first quarter gain came despite fourth quarter results—reported on February 15—that reflected the typical seasonal weakness in steel sales. Shipments fell by 2.9% from the previous quarter although thanks to a price increase revenue climbed by 1.1%. For the year, though, sales volumes climbed 4.3% and revenue rose 16%.

The higher prices that Gerdau did realize during the quarter weren’t enough to totally offset higher raw materials costs. EBITDA (earnings before interest, taxes, depreciation, and amortization) margins fell to 11.3% in the fourth quarter from 13.5% in the third quarter. But that margin is still better than the 10.6% that the company achieved in the fourth quarter of 2010.

Looking ahead here’s what investors can anticipate. Read more