The world's economies are out of sync -- just in time to give investors looking for a way to escape the anticipated 2007 slowdown in the U.S. economy a profitable place to park some money.
The economies of China, India, Europe and even Japan are set to outgrow the U.S. economy next year, and those stock markets are likely to outperform Wall Street.
But if you want a piece of that global action, you'll need to put some chips on the table -- global blue chips, that is. In 2007, at least, cyclical global commodity producers of coal, iron, copper, etc., and industrial-infrastructure plays in construction equipment or power plants, should take a back seat in your global portfolio to the shares of overseas companies with a global reach that do most of their business in the thriving domestic-consumer economies of China, India, Europe and Japan.
In this column, I'll name 10 global blue chips to own for 2007.
U.S. No Longer Drives
After years in which the U.S. powered the global economy, it's now the turn of the rest of the world to drive the pace while the U.S. economy takes a breather. Europe has trailed the U.S. in economic growth for as long as I can remember, but in the second and third quarters of 2006, growth in the European Union actually outpaced growth in the U.S. economy, and projections call for the European Union to do the same in 2007.
In 2006, Japan finally escaped the deflationary spiral that produced the "lost decade" of the 1990s. Japan's recovery is still fragile, but right now the Paris think tank Organization for Economic Co-operation and Development, or OECD, is projecting 2.2% growth in Japan for 2007, quite probably enough to outgrow that of the U.S., which may finish 2006 with a 2% growth rate.
It looks like the Indian and Chinese economies won't disappoint next year, either. India, according to the Asian Development Bank, will grow by 7.6% in 2006 and 7.8% in 2007. China's government projects that the nation's economy will grow by 10.5% in 2006, faster growth than the 10.2% in 2005, and then "slow" to 9.5% growth in the first half of 2007.
Markets Have Changed
This economic performance is likely to hold up even if the U.S. economy slows. There are two reasons: First, in the past five years, global export patterns have changed so that Europe is now as big a customer for China as the U.S. is, and intra-regional trade in Asia is more important than trade with either of those faraway markets. Second, the domestic economies of Asia have grown to the point where most growth in China and India -- and Japan -- now comes from spending by domestic consumers.
For those two reasons, I've emphasized companies that derive the bulk of their revenue not from exporting to the slowing U.S. economy but from the domestic markets of Europe and Asia. I've chosen to focus on big companies in this list because:
- The shares of big companies provide a little more safety in what is likely to be a volatile year.
- It's hard for U.S. investors to follow anything but the biggest overseas companies, and I'd prefer that you be able to do your own due diligence on as many of these as possible rather than take my recommendations on faith.
So here's my list of 10 global blue chips for 2007 (in alphabetical order):
: More economic growth in Europe means a need for more electricity in a region where building new power plants runs smack into caps on pollution and carbon emissions.
Iberdrola, Spain's second-largest utility, can provide the extra power without the emissions, thanks to its wind farms and nuclear power plants. The utility now owns all or part of six nuclear power plants in Spain. And Iberdrola, the world's largest operator of wind farms, projects better than 55% growth in renewable generating capacity by 2009.
The company, which has an 11% share of the electricity market in Brazil and is the largest independent generator in Mexico, has recently announced wind-farm deals in Turkey, Portugal and Eastern Europe.
: The company's slogan should be, "Bringing modern retail banking to a developing India." As of March 31, 2006, Icici Bank had a network of more than 614 branches and 2,200 ATMs across India. In the quarter that ended Sept. 30, savings deposits grew by 86% from the same quarter in 2005, and retail loans grew by 57%.
The growth wasn't limited to urban areas, either; rural credit grew by 75%. The company is busy adding new financial products such as life and general insurance to sell to this customer base. The company's life insurance venture saw 61% year-to-year growth and general insurance grew by 50%.
: Kookmin Bank is a safe way to buy China's growth -- if the company can complete its acquisition of Korea Exchange Bank in 2007. The deal would transform Kookmin, the largest retail bank and lender in Korea, into the country's dominant bank for foreign exchange and the financing of foreign trade.
Unfortunately, the deal is hung up in a government investigation into the seller of Korea Exchange Bank, Lone Star Funds, a Dallas-based buyout fund. Lone Star executives have been accused of manipulating stock prices as part of an acquisition involving Korea Exchange Bank. No one knows when the investigation will be over, but Kookmin Bank's deal to acquire Korea Exchange Bank is hung up until it is.
( LR): Build it and they will come -- if you've got enough cement for all those new buildings going up in the developing world. The French company Lafarge has been investing heavily to increase capacity in China and India.
With Asia representing just 10% of sales in 2005, that expansion won't be enough to stop sales growth at Lafarge from slowing from 14.9% in the first half of 2006 to 5.2% in the second half of the year, thanks to the slowdown in the U.S. housing market, according to projections by investment bank Natexis Bleichroeder.
But the company's cost-cutting efforts look successful enough -- with projected margins set to increase to 21.7% in 2006 and 22% in 2007 from 20.8% in 2005 -- that Natexis Bleichroeder projects a 10% increase in profit for the company in 2007.
: Lenovo Group, which bought the
PC business in 2005, is still struggling to contain costs and to get traction in the U.S. market. But this Chinese company, called Legend until it began the overseas expansion that has taken it to No. 3 in the PC market, is a force in Asia.
In the U.S. PC market, Lenovo Group recently dropped out of the top five, but the company's market share in Asia outside of Japan continues to climb, reaching 21% in the September 2006 quarter from 19.9% in the previous quarter. That's not all in China, either. The company has recently launched a major sales effort in India, the world's fastest-growing PC market, using Bollywood stars and cricket players.
: You may not know the Italian company, but you certainly know its brands. Luxottica sells glasses and sunglasses under its own brands (such as Ray-Ban) or licensed brands (such as Versace, Chanel and Prada) through a network of branded stores such as LensCrafters in the United States -- and as of Sept. 21 in China, too.
The Beijing store that opened that day is the first of a projected 90 LensCrafters stores in China. Add that to the company's recent acquisitions of Modern Sight Optics (28 stores in Shanghai), Minglong (113 stores in Guangdong) and Xueliang (79 stores in Beijing), and you're talking about some hefty penetration into the fast-growing Chinese market.
The company sees China, Central America and India as a new customer base for medium- to higher-priced sunglasses stamped with the kind of globally recognized brands in its portfolio of licenses.
Mitsubishi UFJ Financial Group
: As a result of Japan's decade-long economic stagnation in the 1990s, the country's banks pretty much missed out on the consumer-finance revolution that transformed banking in the U.S. during that period.
Now that bank balance sheets have been restored to health and consumers aren't worried about economic collapse, big banks like Mitsubishi UFJ are striving to make up for lost time. With credit card lending making up just 7.8% of gross profit at Mitsubishi UFJ in the year ended in March 2006 vs. 17% at
Bank of America
, there's a lot of lost ground -- and profit -- to make up.
: If you want to buy a stake in the changing eating habits of the world -- for good and ill -- Nestle is your stock. The Swiss company, the largest food company in the world, gets 21% of its revenue from Asia, Africa and Oceania and 37% from its European home market.
Asia, Africa and Oceania also compose the company's fastest growing market, with an organic (that means after correcting for the effect of acquisitions and sales of existing businesses) revenue increase of 7.4% in the first nine months of 2006 vs. 2.1% organic growth in Europe.
The company has also been on a margin drive of late, shedding underperforming businesses and driving down costs. The result: Operating margins climbed to 13.4% in 2006 from 13% in 2005 and are projected to reach 14% in 2008.
: In the past decade, San Miguel has grown from a company that dominates its Philippine home market (90% of the national beer market, 85% of the soft drink market, 70% of the processed meat market, etc.) into a conglomerate with big stakes in China and Australia. In the past eight years, the company has started or acquired 18 businesses on the way to a 266% increase in revenue.
The most-recent buys: National Foods, Australia's largest dairy manufacturer; Berri Limited, an Australian juice brand; and Philippine pineapple and tropical fruit producer Del Monte Pacific.
: It's quite possible that Toyota could ride out any slowdown in the U.S. auto market by simply taking more market share from Detroit automakers. But I'm adding Japan's Toyota to this list as a China play.
China is set to overtake Japan as the world's second-largest auto market in 2006, but Toyota, as a relative newcomer, badly trails No. 1
in China with just 3.5% of the market. The Japanese company certainly has the cash to remedy that.
I wouldn't rush right out and buy all of these today. Even blue chips cycle from too expensive to reasonable to cheap. I think you'd like to have a hunk of these 10 in your portfolio for the long run, but wait to buy until the stock you want is at the reasonable-to-cheap part of the scale.
Lenovo, for example, right now strikes me as too expensive on a run-up in price in anticipation of a bulge in PC sales after this month's launch of
new Vista operating system.
At the time of publication, Jim Jubak owned or controlled shares in Luxottica. He does not own short positions in any stock mentioned in this column.
At the time of publication, Jubak did not own or control any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.