What a difference a week makes…
After having its best week in five years at the end of January, the S&P 500 dropped 3.2% yesterday after reports that the U.S. service sector shrank last month for the first time since March 2003. That was its worst day since February 27, 2007, and brought its losses so far this year to nearly 9% — its worst start ever. Nor have global stocks been immune. The Eurofirst 300 — a broad European index — fell 3.15%, while the United Kingdom’s FTSE 100 index lost 2.63% in yesterday’s trading. Asian markets also plunged overnight in sympathy.
Yet, take a step back, and you see that prior to yesterday’s sharp sell off, many of your Global Stock Investor picks were holding up nicely — with some picks even up for the week. But as I have noted, this see-saw behavior is typical for a bear market. You can expect sharp sell offs on every bit of bad news, followed by equally sharp gains on “relief rallies.”
What else makes these kinds of markets so tough psychologically? As Guillaume Rambourg, manager of the top-performing $3 billion AlphaGen hedge fund, noted at the London Junto last week, in a bull market, 65 out of 100 days are “up days” — that is, heading in the general direction of the market. But in a bear market, only 45 days — that is, fewer than half — are “down days.” These head fakes, combined with increased volatility, make for a vertigo-inducing ride.
Yesterday, your position in British retailer Tesco (TSCDY), which I had already moved to a HOLD, hit its stop price. Look to reallocate funds from the sale of your Tesco shares to defensive positions such as Barrick Gold (ABX) or exceptionally strong-growth stories like Potash (POT) or Millicom (MICC). But if your objective is to preserve your capital in the short term, at the cost of more limited upside on any rallies, you might consider increasing your position in CurrencyShares Japanese Yen Trust (FXY).
PORTFOLIO UPDATE
Barrick Gold (ABX) fell sharply this week, along with the price of gold. With the secular bull market in gold intact, and the stock substantially below Citigroup’s $62 target price for the stock, ABX remains a BUY.
Coca-Cola Hellenic Bottling (CCH) had a strong week and had been up until yesterday’s sell off. That makes it an even bigger bargain — and a BUY.
iShares MSCI Brazil Index ETF (EWZ) also was sharply up this week, until yesterday. Brazil is a barometer of global investment sentiment and a BUY.
CurrencyShares Japanese Yen Trust (FXY) continues to be immune from market mood swings and remains a BUY.
ICICI Bank (IBN) announced that it was looking to grow its small and medium enterprises (SME) customers portfolio by 30% on a year-on-year basis. This remains a powerful fundamental story. Ignore the volatility and BUY ICICI Bank.
Millicom International (MICC) held up surprisingly well this week, despite yesterday’s sharp sell off. There continues to be strong buy support among mutual funds for Millicom, which is a BUY.
ArcelorMittal (MT) announced that it has been awarded a license to construct a steel plant in Egypt. With a forward P/E of only 8.2, this stock is a bargain and a BUY.
Potash (POT) was upgraded by Citigroup to a BUY with a price target of $178. Citibank expects contract potash prices to China and India to rise by $150 per metric ton in 2008, versus prior expectations of around $100 per metric ton. With China not expected to be able to increase domestic potash production before 2010, and thus remaining 70% to 80% reliant on imports to satisfy the domestic demand, Potash’s prospects remain exceptional.
Veolia Environnement (VE) announced that sales rose 14% last year, helped by new contracts in China and the Middle East, along with waste-management acquisitions. Sales increased to 32.6 billion euros ($48.3 billion) from 28.6 billion euros in 2006. Veolia is focusing on China as a growth area for the company and has already signed 23 service contracts with Chinese cities for water and waste treatment, including a September agreement valued at 2.65 billion euros to supply drinking water to Tianjin for 30 years. The stock has substantial upside and it remains a BUY.
