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Financial and Economic Crisis Save Havens for Investors

Stock-Markets / Credit Crisis 2008 Oct 29, 2008 - 07:16 AM GMT

By: Money_Morning

Stock-Markets Best Financial Markets Analysis ArticleMartin Hutchinson writes: It must now be horribly clear to everybody with an investment portfolio – indeed, to anyone who watches the financial markets – that no country or sector is safe from a bear market of the magnitude of the one we're suffering through right now. When stocks get marked down en masse, as they have, literally everything drops. What's more, there may be very little rationale for which stocks drop — or how much they drop by: When the wave of selling meets very few buyers, good stocks can easily fall more than bad ones.


Does that mean it's a waste of time to search for a “ safe haven ?”

Absolutely not. Assuming you have the fortitude to avoid selling during the worst of this mess, the storm will eventually blow itself out. At that point, investors will look around at the wreckage, and start figuring out which stocks represent good value. Good stocks and countries without major economic problems will then bounce – and bounce big.

A few smart cookies that stayed out of the market until it bottomed will buy them and win big. The rest of us – who didn't see the storm coming, but who invested in “safe haven” stocks – will see the majority of our portfolio value restored fairly quickly, while other investments languish near the bottom, or even drop further, possibly even failing altogether.

It is difficult to assess which sectors will be best able to shrug off the storm (obviously housing and financial services remain highly vulnerable), but we can identify some alluring safe-haven countries by employing several rules. As you analyze markets around the world, look for a country that:

  • Hasn't had a major housing boom during the last few years. Housing-price declines of 30%, 40% or 50% make a huge mess of the country's mortgage system, and the fallout can reach far beyond the housing sector itself. Apart from the United States, countries like Britain and Spain are to be avoided. In Great Britain, London housing and related real estate became almost as overvalued as 1980s Tokyo property – far outstripping anything that happened here in the United States. And Spain experienced massive overbuilding in resort areas – most of it highly speculative.
  • Is competently run from a macroeconomic standpoint, without any great tendency toward huge bailouts or Keynesian deficit-spending projects. Japan qualified on these grounds until recently, but the new Prime Minister Taro Aso wants to increase the already-excessive budget deficit with infrastructure spending (thereby even further increasing Japan's already-excessive public debt). Deficits are a real problem in a recession: They are difficult to finance, choke off potential private-sector investments, increase interest rates and may require damagingly large tax increases to sort out.
  • Does not have a huge balance-of-payments deficit or large international debt – either of which becomes difficult to finance as capital flows decline.
  • Has interest rates that are close to – or are above – its rate of inflation. Very low interest rates distort an economy, and generally necessitate unpleasant deflationary action at some point in order to avoid rapidly rising inflation.

Of the major global economies in which a U.S. investor might reasonably buy stocks, the four that really meet these criteria are Canada, Brazil, South Korea and Germany. Let's take a close look at each one:

  • Canada has just re-elected a conservative government, increasing its parliamentary representation. It has low inflation of around 3%, short-term interest rates just above 2%, a modest payments surplus and a modest budget surplus. It had a moderate housing boom, with prices rising about 65% in the 2000-2007 time frame, but its bank bailout was a quarter the size of the U.S. bailout, if measured in terms of gross domestic product (GDP). Canada is a well-balanced economy between commodities and manufactured goods; it will suffer from the U.S. downturn, but represents sound value over the longer term. The TSX Composite Index is down about 42% from its June 2008 peak, about the same as the U.S. market, but the Canadian economic picture appears to be much more sound. One last point: Although this certainly isn't a make-or-break requirement, it is worth noting that investing icon Warren Buffett has made highly favorable comments about the Canadian economy.
  • Brazil has reduced its foreign debt to about 40% of GDP and kept inflation under control at around 6% by running an admirably tight monetary policy, with a short-term rate of 13.75%. Its economy is primarily commodity-based, with a broad range of exports, but it also has a substantial manufacturing sector. The Bovespa stock index is down 62% from its May peak, and Brazilian stocks are distinctly cheap. Provided Brazil avoids a debt default, the bounce here should be a healthy one. [ Editor's Note : As part of its weekly “ Buy, Sell or Hold ” feature, Money Morning on Monday published a special in-depth report on Brazil's economy and the iShares MSCI Brazil Index (NYSE: EWZ ), an exchange-traded fund that invests in Brazil. The report, written by emerging-markets specialist Horacio Marquez, is free of charge.]
  • South Korea elected a pro-business government in February. It is a major exporter of manufacturing goods and importer of commodities, which this year gave it a rare balance-of-payments deficit that should now reverse if commodity prices stay lower. Its banks avoided the U.S. subprime mortgage market, and are generally solid, although domestic lending is rather high. The country has an inflation rate of 5% and short-term interest rates – after an Oct. 27 cut – of 4.25%. Economic growth is around 4%, and the country boasts a budget surplus.  The stock market is down 55% from its October 2007 high, and should bounce significantly if commodity prices stay down.
  • Germany is growing slowly – at a slow-but-steady 1% to 2% – but it has a static population, meaning that represents real per-capita growth. It had no recent housing boom (so no major domestic debt problem), and has low inflation, Germany also has improved its cost position considerably relative to its Eurozone neighbors, with a substantial balance-of-payments surplus, and is currently benefiting from the decline in East German restructuring costs, which hampered the economy during the decade and a half between 1990 and 2005.  The DAX stock market index is down 46% from its December 2007 high, meaning many bargains may be available. The main negative: Germany's banks are quite heavily exposed to Eastern Europe, where several countries appear to have serious debt and balance-of-payment problems. If the problem is as big as some experts are starting to allege , this safe-haven candidate may need to be re-evaluated. But for now, Germany remains on our list.

[ Editor's Note : One of Money Morning's strength is ferreting out profit opportunities by observing global money flows. Whether its spotlighting safe-haven markets, or identifying which commodity class is poised for a run to record highs, money flows point the way. Our newest service – The Money Moves Alert – is designed to highlight profit plays for subscribers before they become obvious to the investing masses.

Click here
to check out our latest report on this profit phenomena .]

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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