How to Play the Global Markets

 | Dec 21, 2012 | 4:00 PM EST  | Comments
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Next week, I shall move into the annual dreaded year-ahead predictions and picks columns. I will have a hard time beating last year's suggestions to buy European, financial, small banks, homebuilder and small bank stocks, but I will give it the old Melvin try. This week, we have been having discussions about opportunities outside the U.S. and what the future might hold in some of the European and Latin markets that are experiencing economic difficulties.

My view of the foreign markets is much like my view on the economic future of the U.S.:  It is not going to be pretty, mistakes will be made, the markets will gyrate and, eventually, we will somehow find a way through it all. The European Union (EU) may or may not collapse, the larger South American economies will track China and to a lesser degree the U.S. Politicians and central bankers all over the globe will bluster, bluff, inflate, print and just generally make a mess of things. The markets will probably be quite volatile and very much driven by headlines and sound bites.

In the midst of it all, most people will get up and go to work. They will care for their loved ones, buy food, call their moms, go the doctor, try to take vacations and generally go about their lives. These folks will eventually pull us out of the current mess -- as long as the governments do not screw up their jobs too badly. The world will not end and the global economy will slowly and painfully recover.

If I am right, then the package of foreign banks I outlined last week should do very well. But that's a ride many people will find too volatile and risky. Some long-time market participants have suggested that a better path is the foreign utilities and telecoms. I think utilities have their own special set of issues in many countries, so I looked at the telecom companies in some of the more battered nations and to see if there were any opportunities for reasonably aggressive and patient long-term investors.

Spain has been of the nations in the headlines for the past year as a result of their ongoing fiscal problems. Many observers think that Spain will have to approach the EU for some form of fiscal bailout in 2013. The difficulties are reflected in the price of Telefonica SA (TEF), the leading Spanish telecom company's stock price. The shares trade at about half of the 2008 highs. The shares have rallied up to challenge those highs twice in the last five ears and both times retreated in the wake of ongoing fiscal pressures.

Long-term investors could find much to like here. The company has very attractive assets in Latin America and these could be monetized to help pay down the debt load in the next few years. On any news that the market perceives as favorable the shares could stage a substantial rally.

Telecom Italia (TI) appears a little better positioned than some of its European peers. They Italian operation are struggling with excess regulation, a weak economy and intense competition but the company Latin American operations are growing at a decent rate. The company owns almost 70% of TIM Brazil (TIM) a wireless telecom provider with a 26% share in that nation. Italy has one of the lowest broad band usage rates in Europe and that also offers some long term opportunities for the company. If the shares were to recover half of the 7 year highs it would be a huge gain for patient investors.

One of my favorite global picks is the old Brasil Telecom. In February, the company changed its name to OI SA (OIBR) and the stock has fallen off everybody's radar screen. There is very little news from the company and analyst coverage is almost nonexistent. The company is one of the largest land line companies in Latin America and is seeing the same run off of the business that every other fixed line telephone company is seeing. However, they are seeing some signs of stabilization in that business as residential fixed line subscribers actually increased slightly in the third quarter of the year. They are seeing decent growth in the mobile and broadband business and beginning to gain market share in both of these faster growing segments.

I am becoming moderately bullish on Brazil as there are a lot of cheap stocks and the government is working feverishly to get the economy back on track before the 2016 Olympic Games in Rio. Patient investors could see some strong gains out of this sleeper stock.

 When evaluating foreign Telecom stocks be careful valuing on yield as you might AT&T (T) or Verizon (VZ). Many of them pay annual dividends and have already sent checks to shareholders this year, so you do not get the regular quarterly flow of cash you do from domestic telecom companies. In addition, these markets are going to be very volatile, so make Mr. Market your friend and buy the meltdowns and selloffs that we will surely see until the global economy actually recovers.

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