Sunday, June 24

Week 51 - International Stocks

Situation: In last week’s blog, Lifeboat Stocks Revisited (Week 50), we described unexpected changes in 3 iconic Lifeboat Stocks (KO, PEP, PG) that occurred during the 2007-09 bear market. Losses to investors (i.e., the total return from dividends and sale) were greater than 20%. While this loss is better than the more than 40% loss for investors in the S&P 500 Index, it is still a shock. How did this happen? Well, those companies had come to a point where half or more of their profits were generated outside the US, and those profits couldn’t be repatriated because of US tax laws. This required Coca-Cola, PepsiCo, and Procter & Gamble to invest those profits in their countries of origin, mainly China. In other words, KO, PEP and PG have become international companies, like 3M, VFC and MCD. Unfortunately, international stock markets were especially hard hit by the 2007-09 recession. Typical returns are shown in the accompanying Table (as represented by Artisan International Fund).

Our advice at ITR is that 1/6th of your equity holdings should consist of stock in companies whose focus is on international sales. And, we also advise investing in US companies that sell products aggressively in emerging markets like Brazil, Russia, Mexico, China and India. Why not invest in foreign companies, in case the dollar loses value relative to international currencies? That might be a good idea someday but for the current situation the dollar is regarded as a safe haven. We recommend that you hedge that “currency risk” by investing 1/3rd of your bond holdings in an international bond fund like T. Rowe Price International Bond Fund (RPIBX). That fund tracks the value of a trade-weighted basket of non-dollar currencies but has more volatility than a comparable investment-grade US bond fund like T. Rowe Price New Income Fund (see the attached Table).

Overseas markets are going to outperform, ultimately. Think about it. “There are 270 cities with a population of 1 million in Asia today that don’t have an airport. Emerging Asia is clearly where the opportunities are in the next 20 or 30 years.” (Mr. D. Lavigne of Frost & Sullivan, as quoted in the NYT on 6/13/12.) The same article noted that the Asia-Pacific segment of the airline industry will earn $2B in 2012, i.e., twice the airline industry’s earnings from the rest of the world combined. This means we need to take the long-term view of events in Asia and make a point of regularly adding to a dividend re-investment plan (DRIP) for one or two of the 6 International Stocks in the ITR Master List (Week 39) that earn most of their profits there: KO, PEP, PG, MCD, VFC, MMM (see the attached Table). McDonald’s (MCD) looks like a good candidate for a “starter” DRIP for those investors who are new to DRIP investing.

Bottom Line: This will be Asia’s Century. Make sure you invest some money there and reap some of the rewards that will be found.

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