Jeffrey Saut: International Exposure Critical, Especially Emerging and Frontier Markets

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (May 11th):

...[W]e are still avoiding the marquee Financials since we believe many of them still have problems. Moreover, if this does indeed turn out to be a new bull market (we are letting Dow Theory make that “call”), history suggests the leading group of the last bull market typically is not the leading group of the new bull market. Therefore, we think it doubtful the Financials will lead the next bull market. As of this point, we believe the leaders of any new bull market will be the international markets, particularly the emerging and frontier markets.

To this international point, I was traveling with Thomas Melendez last week. Thomas is the portfolio manager of the MFS International Diversification Fund (MDIDX/$9.61), which “checks” ALL of the investing style boxes. In our joint presentations to investors Thomas began his comments by stating, “The world is changing; and, at a very rapid pace.” He then went on to note that China was able to grow its 1Q09 GDP at a 6% rate as the rest of the world struggled.

Unsurprisingly, China is estimated to grow GDP at an 8% clip in 2009. Shockingly, China and India graduated 975,000 scientists and engineers last year while our country graduated only 70,000. And consider this, China has 1.3 billion people. If only 20% of them move into the middle class, which historically is a small percentage for a developed country, it totals to 260 million people. That’s almost as big as the entire population of the U.S.

The implication is that China and India are creating a middle class at a very rapid rate; and, the middle class consumes “things.” One of the first “things” a newly emerging middle class wants is better food and clean water. The investment impact for agriculture should be obvious. Interestingly, 80% of the women in China have never used cosmetics. Clearly, that will change as the middle class expands with attendant investment implications.

Yes, the world is definitely changing and the question about whether you should have international exposure in your portfolio, or not, totally misses the point. The question should be how much international exposure you should have? Thomas concludes that if you are conservative you should likely have 7% - 13%. However, if you are a moderate investor that percentage should expand to somewhere between 17% - 24%, while an aggressive investor should target 27% - 35%. In addition to Thomas’ fund, we also favor the MFS International Discovery Fund (MIDAX/$13.88).

...Consequently, while we don’t think the old stock market “saw” of “sell in May and go away” is going to play in 2009, we do believe the trick from here is to harvest trading profits and hedge some of your investment positions for a downside correction. That said, we are buyers of select thematic investment positions, preferably ones with a dividend yield, on weakness.

Comments

[John Christy:]

Great article. Jeff is right on the money with most these observations. Only 2 minor critiques:

1. There's nothing "aggressive" about putting 27-35% in international stocks. I'd call that moderate, if not conservative. The US market is only 40-odd % of the MSCI All Country World Index. If you have 65% in the US, the only "aggressive" bet your making is being excessively bullish on the US.

2. A fund that "checks ALL of the investing style boxes" is known as an index fund. If you pay MFS to manage it for you, it's a very expensive index fund. Why not go with ishares MSCI ACWI Index Fund (ticker: ACWI) instead?

May 12 09:01 AM

[Alphameister:]

Good article by Jeff and even better comments by John! Thanks

May 12 09:19 AM

[Living4Divi...:]

Good article, Jeff. I agree that most investors need to up their exposure to international and emerging markets. As for Frontier Markets, while I haven't looked at their fundamentals for a year, back when I looked at the new ETFs, many of them are overpriced in terms of fundamentals. Also, the ETFs that give FM exposure are pricey in terms of E.R.

May 12 10:37 AM

[Larry House:]

Sound advice. There will be better economic growth outside the U.S. for some years to come.

May 12 02:23 PM