Strike a balance between the downside risks of bad news and the upside possibilities if trends break in a favorable direction.
Let me suggest 10 stocks that offer a "solution" -- or at least part of one -- to this very difficult financial market. They're not perfect. They don't capture all of the upside potential and avoid all of the downside risks. But they offer the best trade-off of risk and reward that I can find today.
So how difficult is this market, and why?
First, there is the short-term difficult. This is the difficult that financial markets seem most focused on right now. In the short term, this is a difficult market because we don't know how the news will break in the next few weeks.
Will the Federal Reserve decide at its Sept. 18 meeting to begin tapering its $85 billion in monthly purchases of Treasurys and mortgage-backed assets? Will a bailout for Portugal roil the euro and the eurozone after the German elections on Sept. 22? Will the U.S. government shut down Sept. 30 when the current budget and its spending authority expire? Will the recent rally in the Indian rupee break down when the honeymoon for Raghuram Rajan, the new governor of India's central bank, ends after the government demonstrates it has no intention of tackling significant reforms before the 2014 elections? Will street protests in Brazil, which now appear to be moderating, hit a new flash point?
I've suggested that the short term looks so difficult that the best strategy for September and October is to raise some cash and wait for the possibility of excessive volatility to recede.
But short-term difficulties aren't the only ones investors face. In many ways the medium term -- the next six to nine months -- is likely to be even more difficult.
Why? Because the risks include not just the downside from bad news on current trends, but also the possibility of missing out on the upside if trends break in a more favorable direction.
In the medium term, the difficulty is deciding how long the current trends will last and when they will turn.
Those current trends? There are several: A strong dollar versus just about all of the world's trading currencies; falling Treasury prices and rising yields; a rally in emerging markets and currencies that seems to have stabilized the Indian rupee and that has actually produced a bull market in Brazilian stocks; and a seeming bottom to China's growth recession, with better-than-expected numbers for manufacturing activity and exports.
Jim Jubak
And, the strongest trend of all is the consensus, backed by recently revised forecasts from the International Monetary Fund and the Organisation for Economic Cooperation and Development that the world's developed economies will show stronger growth in the remainder of 2013 and 2014, and that the world's developing economies will show growth weaker than previously predicted.
This consensus is based on a belief that the withdrawal of Fed monetary stimulus will slow economic growth in the United States -- but slow economic growth in the world's developing economies even more.
The OECD last week forecast that the U.S. economy would grow by 1.7% in 2013, down from an April estimate of 1.9%, but that the dip would be more than made up for by faster growth from the world's other developed economies. According to the OECD, the United Kingdom is expected to grow at a 1.5% rate, rather than the 0.8% rate forecast in April; Germany will grow at a 0.7% rate and not 0.4%; and France will grow at a 0.3% rate, rather than contract by 0.3%. (The OECD left its forecast for Japan unchanged at 1.6%)
On the other hand, the OECD forecast for growth in developing economies has come down since April. To take one example, it now sees China growing by 7.4% in 2013, rather than 7.8%. Downward revisions for India, Brazil and Russia joined that for China in pushing growth projections lower for the world's developing economies.
This has led to some very strong recent trends:
U.S. pension funds and other institutions have put $65 billion into European equities in the first six months of 2013, according to Goldman Sachs.The Standard & Poor's 500 Index ($INX), which fell 4.6% from the record high on Aug. 2 to an Aug. 27 low, climbed 1.4% last week, even though we've moved into September, historically the worst performing month of the year. The index is now up 2.3% from that Aug 27 low.After dipping in early August, the U.S. dollar has resumed its upward trend against global currencies. The trend has been particularly strong for the dollar against emerging market currencies, with the U.S. currency climbing for four straight months relative to them.
My worry, of course, is how long these trends will stay strong.
For example, despite the recovery in Brazilian and Chinese stocks, emerging market analysts maintain that these markets haven't bottomed yet. Yes, the Shanghai Composite Index has moved up strongly in August and September, but at 2,213 on Sept. 9, it still was significantly below the 2013 high of 2,432 on Feb. 4.
In earlier posts I've said that I don't think we'll see growth forecasts for developing economies start to move up until 2014. So it's certainly legitimate to wonder if emerging markets have another leg down before investors can safely begin to anticipate improving economic growth.
Or, for another example, consider the U.S. market. A stock like Cummins (CMI) (a member of my long-term Jubak Picks 50 Portfolio), has been on a tear on strength in the U.S. manufacturing sector. The shares are up 22.2% from their June 24 low through Sept. 9. But Cummins is closing in on its all-time high of $129.50, set in 2012. Will current trends take the stock an additional 20% higher, or is Cummins (along with the rest of the U.S. market) vulnerable to factors like rising interest rates?
I don't think there's any way to definitively answer the question of how long current trends will last. But I think you can find stocks that give you the best exposure to profiting from current trends if they last, and that give you the best protection on the downside if current trends turn out to be vulnerable.
In essence, what I suggest you do in a difficult market like this is to identify stocks that have as many trends running in their favor as you can, so if one fails, your portfolio will still have some support from other trends.
I like European stocks that have seen their domestic revenue pounded by the slowdown in European economies -- giving them substantial upside if European economies recover -- and that have been hurt by slowing emerging market sales, but that have strong emerging market businesses.
In this category I'd put Dutch -- but also Asian, Latin American and African -- brewer Heineken (HEIA.NA in Amsterdam, or thinly traded as HEINY in New York), French and Chinese yogurt and dairy company Danone (BN.FP in Paris, or DANOY in New York), Finnish, Chinese and Latin American elevator maker Kone (KNEBV.FH in Helsinki) and U.K., French and Polish do-it-yourself retailer Kingfisher (KGF.LN in London, or thinly traded KGFHY in New York.)
I also like raw materials stocks -- if they pay a significant dividend. These shares should move up with a growth in demand from developed economies, with stabilization of growth in developing economies and any moderation of the dollar's strength.
I'd like a decent dividend for extra protection so I at least get paid something if I have to wait to see a growth recovery in developing economies. Suggestions here include Brazilian iron miner Vale (VALE), with a 2.4% dividend; Potash of Saskatchewan (POT), with a 4.4% dividend; and Norwegian fertilizer maker Yara International (YAR.NO in Oslo, or YARIY in New York), with a 5.4% dividend. (Vale and Potash of Saskatchewan are members of my long-term Jubak Picks 50 Portfolio.)
Finally, I like to get my U.S. exposure with a big chunk of insurance in the form of potential revenue growth from Europe and developing markets. This would include stocks such as Cummins, with its big exposure to China and Brazil and the upside potential for an improved heavy-duty truck market in North America; Schlumberger (SLB), which gets about 66% of its oil service revenue from outside North America and which has been hurt recently by slow growth in Brazil and Mexico; and Citigroup (C), which will continue to benefit as improved growth in United States allows the company to reduce reserves and which has big banking operations in Asia and Mexico. (Schlumberger is a member of my long-term Jubak Picks 50 portfolio and Citigroup is a member of my Jubak's Picks Portfolio, which focuses on a 12- to 18-month window.)
I'm inclined to be very cautious about market volatility in September and October. I wouldn't so much hold off on all buying -- if I see a good price I'd be willing to risk the volatility -- as buy with an eye on making sure that I have a pile of cash on the sidelines for picking up any big bargains that might pop up on a drop in the Fed taper, on yields on the 10-year Treasury rate rising above 3% or on a currency crisis in India -- to name just a few possibilities.
When in 2010, Jim Jubak started the mutual fund he manages, Jubak Global Equity (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund did own shares of Cummins, Danone and Yara International as of the end of March. Find a full list of the stocks in the fund as of the end of June here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
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