by Justin Dove, Investment U Executive Editor
Thursday, December 22, 2011: Issue # 1670
Taking some time to reflect is constructive in any part of your life. But it’s especially important for investors. If you can’t look yourself in the mirror and accept your previous errors and miscalculations, you’re doomed to make the same mistakes.
And if you don’t fully understand why you had success, future prosperity may escape you. Hopefully, with our reflections this week, we’ve inspired you to take some time to reflect on your own portfolio and take a toll of your own successes and failures throughout the year.
We end our series today with a look at our Emerging Markets Expert, Carl Delfeld.
In 2011, Carl has been a pioneer in exchange traded funds (ETFs) and sometimes pairs an ETF with a stock pick – a strategy he calls hunting big profits with “rifles and shotguns.”
“Core And Explore”
He also goes beyond picks to offer strategies to help investors capture growth and better manage risk. Several times this year he has highlighted how investors can get organized by using his “core and explore” portfolio strategy.
Here’s how it works. The money in your “core” portfolio is what you primarily want to protect. It should be, as he puts it, “four-wheel drive” – very well diversified, high quality and conservative. This frees an investor to next use his risk capital to build an “explore” portfolio – higher risk/reward with the primary goal of capital appreciation.
Getting to the picks, one “conservative” emerging market pick Carl recommended this spring was the PowerShares International Dividend Achiever ETF (NYSE: PID). PID is a basket of stocks with five consecutive years of increasing dividends. Although this ETF lost five percent, those results weren’t nearly as bad as emerging markets as a whole – which were down about 20 percent for the year.
In early May, Carl made a strong case why the strengths of the U.S. dollar were underappreciated. Additionally, he said that while adding some Swiss franc was fine, the dollar would snap back from its weakness. This is essentially what happened the rest of the year.
Carl’s early year pick of Brazil via the iShares MSCI Brazil Index (NYSE: EWZ) was a big disappointment as its Central Bank kept raising interest rates despite a very strong currency. Plus, commodities were down pretty much across the board.
But his Brazil sugarcane gambit – Cosan (NYSE: CZZ) – recommended in late August after the United States moved to end ethanol subsidies, has been up nicely in a tough market.
Earlier this year, Carl warned “China bull” investors who saw the country as a “one way bet” should be cautious. China’s economy and market were facing serious headwinds of slower economic growth, weaker exports, higher wages and increased competition. All this, plus diminishing returns on investments, which makes up more than 50 percent of its GDP.
Since April 1, the iShares FTSE China 25 Index Fund (NYSE: FXI) is down 25 percent. And while many of these challenges remain or have worsened, China stocks are cheap. While Carl remains a skeptic, he acknowledged that they could snap back – especially if the Chinese government launches another stimulus program. Like all emerging markets in 2012, wait for an upward trend before making a move.
Carl mentioned that he believes Mexico – via the iShares MSCI Mexico Index Fund (NYSE: EWW) – is replacing China as the lowest-cost global manufacturing platform for North and South America. This makes sense as higher labor costs in China coupled with higher transport costs lower its appeal.
Mexico, like almost all emerging markets, is unfortunately down 15 percent, as is his steel pick to play this trend: Grupo Simec (AMEX: SIM).
Carl is sticking to his guns on this major trend, though, and recommends picking up two bargains that are down around 50 percent for the year: construction giant Empresas ICA (NYSE: ICA) and cement king Cemex (NYSE: CX).
In November, Carl signaled that cracks in Cuba’s Soviet-style economy were appearing as private sales of homes were legalized with some restrictions. Tourism will be the first to take off and Carl still likes The Herzfeld Caribbean Basin Fund (Nasdaq: CUBA) as a play on this sector. It hasn’t done much over the last two months, but Carl insists CUBA will be a good one in 2012.
Indonesia in 2012
If there’s one country that Carl has been pounding the table on over the past year as a hidden gem, it’s Indonesia – and the Aberdeen Indonesia Fund, Inc. (AMEX: IF). It has:
- The fastest-growing middle class in the world
- The third-largest population
- It’s rich in oil, natural gas and palm oil
- And is the only country in the largest 20 economies in the world to have a budget surplus and declining public debt
Indonesia only has one stock trading on the NYSE, so the ETF is a good pick. It has outperformed emerging markets by a solid margin this year and is up 400 percent since its low during the financial crisis.
Last week was a great one for Indonesia – a country three times the size of Texas. Fitch’s raised its long-term debt rating to investment grade and passed a long-awaited land acquisition bill that’s critical for infrastructure development.
For 2012, Carl will continue to focus on what he calls “boom chip” stocks, which contrast with slower-moving blue chip stocks. According to Carl, boom chips offer investors the following characteristics:
- Much faster growth than blue chips
- Home-court advantage against foreign competitors
- Breakthrough products and services
- Big cost advantages and protected markets
- Still at an early stage of their growth cycle
- Off the radar screen of Wall Street analysts
Additionally, Carl will be publishing a new book, New World, New Boom, in which he outlines boom chip strategies, during the first quarter of next year.