Commodity-wealthy countries can lay claim to the most vibrant markets in 2009. Here are just a handful of examples:
Chile has copper… lots of it. The iShares MSCI Chile Fund (ECH) is up 37% year-to-date.
Russia has oil... and controls quite a bit of it. The Market Vectors Russia ETF (RSX) is up an astonishing 58%.
Brazil has just about everything form iron ore to gold to coffee to soy. It's no wonder that the iShares Brazil Fund (EWZ) has appreciated 46% through 5/8/09.
There's a discernable bias forming in favor of producers. Granted, it's intriguing to see the developed ETFs in U.S. , Japan and Europe push into positive territory for the year. However, it's impossible to ignore resources-rich nations that have “stuff” (a.k.a. commodities) to sell the rest of the world.
Countries that understand this dynamic have acted quickly to bolster their resources base. China , for instance, owns large stakes in Australian and Brazilian metal producers. China recognizes its needs for iron, copper and steel. Not surprisingly, SPDR S&P China (GXC) is also up 27% YTD.
If you've got the stomach for some risk, your best investments may be foreign ones. And here's why:
1. Foreign stocks are cheaper than U.S. stocks . For instance, consider the price-to-book ratios for small-caps. U.S. small caps have P/Bs of roughly 1.25. In truth, that's well-below the historical average for small-cap U.S companies. Yet, P/B ratios for developed foreign small caps in the SPDR S&P International Small Cap Fund (GWX) and the SPDR S&P Emerging Market Small Cap Fund (EWX) are 0.94 and 1.02 respectively. They're trading at book value!
2. Foreign stocks are paying higher dividends . If you're going to jump in after a market correction, you might not mind getting a little more yield for the buck. Consider a hallmark total U.S. index like the Vanguard Total Market Index Fund (VTI). Its 3.0% annual yield is not too shabby. Yet the Vanguard Emerging Market Fund (VWO) has a more generous 5.0%.
Keep in mind, stock assets have already appreciated considerably. One should expect a correction in world markets. One's best method for putting cash to work is through “averaging in” over the course of the summertime.
Commodity Companies Are Yet another Way to Go
With a global economy on the verge of stabilizing, the emerging market growth story has resurfaced. We should expect timber companies, steel companies and natural gas companies to lead the way.
Indeed, the top global corporations engaged in these resources sub-segments are among the 1-month leaders (4/9/09-5/8/09). The Claymore Global Timber Fund (CUT) has actually jumped about 100% off of its March lows, and still yields approximately 4% annually. Moreover, it recently entered a long-term uptrend by climbing above its 200-day moving average.
Market Vectors Steel (SLX) tracks the price and yield of the NYSE Arca Steel Index, giving investors exposure to global companies involved in the operation of manufacturing mills, fabrication of steel products and/or the extraction of iron ore.
SLX is geographic diverse, with 60% non-U.S. exposure (25% Europe, 25% South America, 10% Asia). The exchange-traded fund also has a compelling fundamental picture such that the median price-to-book is below 1. It too has pushed above its 200-day moving average.
The First Trust Natural Gas Fund (FCG) tracks an equal-weighted index of corporations that derive significant revenue from natural gas production and exploration. FCG has catapulted nearly 75% off of 52-week lows, even as the price of the underyling commodity has lagged dramatically. That phenomenon is not dissimilar from many of the other resources ETFs, where the companies are outmuscling the commodity price.
Commodity Prices May Be More Speculative, But They Can Also Be Quite Lucrative
Still, with world governments working in lock-step to reflate the global economy, the prices on most commodities are ascending. Add in the trillions of U.S. dollars being spent to fix the U.S. financial crisis, and you have crude oil serving as a hedge against dollar devaluation.
In fact, it would seem that there's a point where crude oil doesn't worry folks too much... and that point may be $50 per barrel. Below $50 per barrel, a natural gas solution to rising energy prices doesn't seem to excite.
Now with oil creeping above $58 per barrel, natural gas commodity ETFs are the hottest movers over the last 5 days. iPath Natural Gas (GAZ) and United States Natural Gas Fund (UNG) have jumped more than 20% in 5 trading sessions.
It seems probable that if crude oil continues much higher, recession-weary Americans may begin to get antsy about the price at the pump. Moreover, alternative energy advocates could start speaking out. And it's not difficult to imagine a scenario where the United States Natural Gas Fund (UNG) heads significantly higher.