Dow Jones Index Plunge! Global Economic and Financial Market Inversion!
Stock-Markets / Emerging Markets Jul 27, 2007 - 10:42 AM GMT
With yesterday's big plunge, the Dow is down nearly 600 points this week. Yet, at the same time, key foreign markets have been mostly rising.
This market action makes two things increasingly evident:
- The U.S. economy is being hampered by a worsening housing crisis, while …
- Most global economies continue to expand at a strong pace.
So Money and Markets editors felt that this would be an opportune time to interview global strategist Steve Chapman to find out how he's handling this unique situation — where he's putting his clients' money and why.
Steve Chapman is Vice-President of Weiss Group's separate advisory subsidiary, Weiss Capital Management, Inc., where he manages their All-World Strategic Growth Program, formerly the Weiss All-Star Growth Program. Here's an edited transcript of the interview …
Global Inversion
with Steve Chapman
Money and Markets: Welcome back! During our last interview, in August 2006 , you stressed the opportunities in Asia, Latin America and Eastern Europe.
You told us you liked global funds like Eaton Vance Asian Small Companies (EVASX) and Fidelity Select Energy (FSENX).
And you were very bullish on their future growth.
Now, here we are, one year later, and most of these countries and funds have come a long way, greatly outperforming the U.S. averages. So this begs the question: Is it too late for investors to begin globalizing their portfolios today? Should they slap themselves for missing it, and just stay out for now?
Steve Chapman: I don't think so. Quite to the contrary, whether you're in global markets already or not, I feel you are privileged to be living through one of the most exciting investment periods in modern history, certainly the most exciting I've personally witnessed in my 33-year career.
There are risks. Don't ever forget them. And there are times when you may want to tread lightly or even back off. But overall, I believe the global expansion unfolding today is revolutionary.
Money and Markets: In what sense?
Chapman: In the sense that the world economy is undergoing a phenomenon I call "Global Inversion."
Global Inversion means that the world as we know it — or used to know it — is being turned upside down. The U.S. and even Japan, which were at the top of the charts, are starting to sink toward the bottom. The so-called "Third World" countries, which used to be at the bottom of the charts, are not third world any more. Many are rising toward the top.
Money and Markets: There are many kinds of charts. Can you be more specific?
Chapman: I mean rankings. Rank them by their GDP growth rates. Rank them by the performance of their blue-chip stock indexes. Rank them by the appreciation — or depreciation — of their currencies.
Instead of the U.S. or Japan at the top, you'll see countries like China, India, Vietnam, South Korea … Poland, Hungary, the Czech Republic, or the Baltic States … Brazil, Chile or Peru … Australia or New Zealand … and more recently, Canada.
I don't believe this is a flash in the pan. It's deep, broad, and, from everything I can tell, long term.
Money and Markets: Some investors know how to invest in this situation. But many are overwhelmed by it. What do you tell them?
Chapman: First, get yourself into the mindset of the American pioneer — the same spirit that inspired us to go looking for riches in California, to join the land rush in Oklahoma, to build new cities and a new nation.
Second, get off the "shoulda-woulda-coulda" track. We all have heard those stories: "I should have bought that choice morsel of land in Orlando before they built Disney World" … or "I could have bought Google when they IPO-ed" … or "I could have been a multi-millionaire, if only I had done this or that."
Everyone I know tells me these stories. And what I tell them is that we're fortunate to live in an era in which we have an abundance of opportunities right in front of us now. I tell them that, in this environment, you don't have to pick the next Google and shouldn't even try. You can look at a broader range of international opportunities and aim for more reasonable returns.
Third, if you're still skittish, look around you. Look at brands like Hawaiian Punch, Ben & Jerry's ice cream, Shell gasoline, Michelin tires, Bic pens, Bayer aspirin, Dannon yogurt, Lipton tea, even Alpo dog food. 1 Care to guess which ones are foreign owned?
Money and Markets: Tell us.
Chapman: Every single one of them! Or care to guess how much of the world's investment markets is outside the U.S.? It used to be a tiny share. Now it's more than half — 55%! Also …
Nine of the ten largest metals and mining companies are listed on foreign exchanges.
Eight of the ten largest electronic equipment and instrument companies are listed on foreign exchanges.
Also listed on foreign exchanges are seven of the ten largest automobile companies, seven of the ten largest household durable companies and seven of the largest telecoms. 2
See what you could be missing if you don't invest globally?
Money and Markets: You seem to have a strong feeling about the Global Inversion. What would you say are the main factors behind it?
Chapman: The overwhelming weight of the demographics and the overwhelming shift in consumption patterns.
If we were talking about certain groups of consumers shifting from, say, a fast computer to a faster computer, or from a cool gismo to cooler gismo, I'd be the first to tell you the Global Inversion may not be an enduring phenomenon.
But we're talking about billions of people shifting from bicycles to automobiles, from dirty water to clean water, from a low standard of living to a higher standard of living. That's what I believe is driving the Global Inversion.
Ours is a mature economy. We already had our Industrial Revolution in the 19th century. We already had our era of vast growth in the half century following World War II. So on our side of the world, there's not nearly as much room for new pioneers.
Now it's their turn — in the East and in the southern hemisphere. Now they're the ones undergoing the equivalent of our Industrial Revolution, or the equivalent of our postwar boom, or even both at the same time.
Money and Markets: How do you avoid jumping into those markets at the wrong time or in the wrong place?
Chapman: First and foremost, you have to recognize the reality that you can never avoid that risk with all investments all of the time. That's why I try to invest in as many different global opportunities as I reasonably can, and why I try to trade as infrequently as the circumstances will allow.
I have an ongoing concern about any global market that goes up too quickly. But I have much less concern about their general direction, which, while I can't guarantee it, I believe should continue to be upward.
Right now, I'm seeing more opportunities than ever before. So my view is: Why not take advantage of that? Instead of a top-heavy portfolio with just a few names, why not a broadly diversified portfolio with many names?
Money and Markets: For example?
Chapman: My heaviest weighted holdings are in Southeast Asia, Canada, Eastern Europe and Latin America. But they're not the only ones.
Money and Markets: What funds do you like for Asia?
Chapman: One we own is Fidelity Southeast Asia. Unlike most other Fidelity funds, which change managers every few years, this one has had the same manager since 1993. So he's got 14 years of experience in the region.
The fund is in countries like Taiwan, Malaysia, Singapore and also South Korea. South Korea has some especially strong prospects right now, thanks to the reduction of its trade barriers with China and Japan.
In fact, I think the new trade arrangements could do for them what NAFTA did for Canada and Mexico. And I think South Korea's giants — Samsung, Hyundai and others — are going to be among the biggest beneficiaries.
Keep in mind that all the funds I mention are investments in our managed program. But that doesn't mean they are the right investments to buy separately, and I'm not recommending you do that.
I also like a load fund, Eaton Vance Asian Small Companies. The good news is that we're in it. The bad news is that the fund is closed, and I can't buy any more. But I'm looking at a couple of alternatives.
Money and Markets: What about China?
Chapman: I like the Dreyfus Premier Greater China Fund (DPCAX). It's also a load fund. But it's open. Based on Morningstar, it's the best-performing China fund in recent years. 3
Closer to home, I'm also thrilled with Canada. Canadians are our friends. They share a similar culture. They share with us the longest international border in the world. And they also have two things we don't have: A growing trade surplus — including a big surplus with China — and a rising currency. 4
Money and Markets: The Canadian dollar is at a 30-year high. And each of the other countries you've mentioned has a currency that's rising against the U.S. dollar. How much of a factor do you feel that's going to be going forward?
Chapman: It's what's behind the new all-time lows in the dollar, according to the Fed's Major World Currency Index. It's one of the underpinnings of the entire Global Inversion story.
You have what used to be peripheral currencies — the Thai baht, the Singapore dollar, the Malaysian ringgit, the Indonesian rupiah, or the South Korean won … and all of them have been rising against the dollar.
Money and Markets: How do you take advantage of that?
Chapman: I see rising currencies as a potential profit booster for the global funds we own. Plus, I see it as a form of protection. There's going to come a time when global stock markets pause or correct. If you have the tailwind of stronger foreign currencies behind you, I believe that can help ease you through the rougher seas.
Money and Markets: We recognize that past performance is no indication of future results. But overall, how are you doing with your global portfolio so far?
Chapman: We introduced our All-Star Growth Program, now called All-World Strategic Growth Program on August 6, 2004.
Through June 30, 2007, net of all fees and commissions, the portfolio is up 81.75% since its inception.
That's an annualized return of 22.89% per year.
Money and Markets: You mentioned a couple of load funds you like. But many analysts recommend only no-load funds so investors can avoid the sales loads, which can hurt their net performance or lock them in to investments they may not want to hold. Why do you use load funds?
Chapman: Because clients in our program participate in a "no-transaction fee" mutual-fund platform. They still have to pay costs and other fees. But they gain access to these funds without paying the loads . So that gives me the freedom to choose what I feel are the most promising of all, including the load funds with the best track records.
Money and Markets: Steve, thank you for your thoughts. For investors interested in an individually managed account, how can they contact you?
Chapman: The number to call for more information and to talk with one of our financial advisers is 1-800-814-3045. Or just click here to send us an email.
If you invest $100,000 before Labor Day week, if suitable, you can permanently lock in our 1.50% management fee. After September 7, it will be higher.*
Best wishes,
Steve Chapman
Vice President, Weiss Capital Management, Inc.
Portfolio Manager, Weiss All-World Strategic Growth Program
P.S. For sources and important disclaimers, please click here.
*New or additional investments only
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