Friday, November 5, 2010

How to profit more from emerging market economies with less volatility

I read somewhere that the BRIC countries are the economic growth engines of the coming recovery. They will leave us slow over-socialized western economies behind in the dust. Well it seems, everyone knows that. That is why investing in those countries is all the rage and earnings multiples on their stock markets are going higher and higher. 

Eh, wait a minute...  If those mulitples go higher and higher does that mean that those markets are priced for 'perfection' and that they are expensive? Then how are we to make big profits there? Well dear Reader, you hit the nail on the head. Research shows that stock market proftis in these popular hot emerging economies is often difficult to achieve and easy to lose. It is like investing in a high-tech stock of the late 1990s!

But there is another way... You the reader may shout, "old news, I already invest in Canadian oil and gas and in Canadian mining buddy! I am way ahead of you!" Hmmm, that is not bad, but that was not what I had in mind. I was more thinking in terms of using strong Canadian dollars to diversify in bluestock companies with a worldwide presence that pay nice dividends.

Read further... (whisper, whisper).  Every one knows the U.S. economy is in a deep hole, although there is now a bit improvement. But there is the high debt, the traumatized U.S. consumer and a ruinous real estate market and so on. So why invest there? I gave you the answer!  Many large U.S. corporations make significant profits overseas, think Apple, Microsoft, General Electric, Johnson and Johnson, Proctor and Gamble, even Berkshire Hathaway has started to invest in China. All of them you can right now buy at depressed U.S. stockmarket prices and they pay decent dividends. Mind you, the dividends typically don't qualify for the Canadian dividend tax credit.

So what is the easiest way to buy a set of major U.S. large cap companies paying good dividends?  Buy them all at once in one fell swoop or swell foop. Consider using your strong Canadian dollar to buy ETFs of the Dow Jones 30 industrial index. You get the world's most successful dividend paying companies for a bargain (30 - 40% off in Cdn dollars compared to a few years back) and you get a lot of exposure to emerging markets and even to a recovering U.S. economy. What is that for diversification?

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