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Jim Jubak

Jubak's Journal3/25/2008 12:01 AM ET

Safer ports in the markets' storms

Continued from page 1

Where to find stability now

No one knows where U.S. interest rates or U.S. stock prices would have been if overseas investors hadn't been willing to pay up for that stability. But the financial market crisis of 2008 gives us some unpleasant hints.

A falling dollar has pushed up the prices of commodities, taking a bite out of share prices in industries such as airlines, and sent equity prices tumbling. Interest rates on even safe (and tax-exempt) municipal bonds have climbed, rising above yields on Treasury bonds for the first time in decades. Overseas investors continue to buy U.S. bonds and stocks, but in 2007 the pace of buying slowed to $596 billion, down from $722 billion in 2006, according to the U.S. Treasury.

The result isn't an absolute end in the stability premium awarded to the developed economies over the past 60 years. But we are seeing the beginning of a redistribution of stability premiums around the world.

So what do you do as an investor? You try to reap as much as you can of any continued stability premium that will remain with specific developed economies -- and companies. You try to collect as much as you can of any increase in stability premium that is headed toward specific developing economies and companies. And if those stable assets should increase in value because the world as a whole is getting older and more people are willing to pay up a bit for a stable asset, then more power to your portfolio.

I'd target the following four economies and then look for specific stocks in each market that offer the potential for an especially large stability premium:

No. 1: the U.S. Surprised? Well, you shouldn't be if you can look beyond the financial meltdown that began in 2007. The U.S. financial markets are still the deepest and, in most years, the most liquid in the world. The U.S. economy is still the world's largest. The U.S. consumer is still the world's richest, even when you look at debt and net assets. And the U.S. population is aging less rapidly than any other in the developed world. Certainly, the last round of financial monkeyshines will cost the U.S. a good bit of its traditional stability premium, but what remains is substantial.

The debacle that has destroyed the AAA or AA rating of so many U.S. companies actually works to make more valuable the stocks and bonds of those companies savvy (or lucky) enough to escape with reputations intact. In the financial sector, for example, the debacle at Citigroup (C, news, msgs), Wachovia (WB, news, msgs) and Washington Mutual (WM, news, msgs) sure makes the strategy and execution of U.S. Bancorp (USB, news, msgs) more valuable to investors. Same with companies such as PepsiCo (PEP, news, msgs), DuPont (DD, news, msgs) and Cisco Systems (CSCO, news, msgs), which have managed to keep earnings growth chugging along at double-digit rates.

No. 2: Canada. I can't think of a better place to stash part of a long-term retirement nest egg than in Canadian stocks. The biggest edge comes from the nature of the Canadian economy. Canada's economy is export-driven. In 2006, Canada's $404 billion in exports added up to 32% of the country's $1.3 trillion economy, the eighth-largest in the world. In the U.S., by comparison, exports accounted for just 8% of a $13.2 trillion economy in 2006. That makes Canada one of the leading beneficiaries of soaring global commodity prices.

No wonder Canada has run a trade surplus every year since 2002. All this is enough to make the country one giant hedge against a falling dollar and rising global inflation. That hedge grows in value the more global financial conditions deteriorate.

No. 3: Australia. Think of Canada with fewer people -- 33 million in Canada versus 20 million in Australia as of July 2007 -- and with kangaroos instead of moose. This is another fast-growing, commodity-based economy that's an ideal hedge against a falling dollar and rising global inflation. The farming and mining sectors account for 30% of Australia's gross domestic product but 65% of the country's exports.

The country's economy is growing so fast -- a projected 3.5% for 2008 -- that even as those in most of the rest of the world showed signs of slowing, its central bank continued to raise interest rates in 2007 and 2008.

No. 4: Brazil. What's the poster child for fiscal irresponsibility and hyperinflation doing on this list? Well, if any country in the developing world has the potential for stability over the next decade or two, it's a commodities superpower like Brazil. Fears that the populist government of Luiz Inácio Lula da Silva would return the country to the bad old days of fiscal irresponsibility have proved baseless.

Video on MSN Money

Commodities © SuperStock
Commodities price drop
As oil drops below $100 per barrel and gold below $1,000 an ounce, people are wondering what’s going on with commodities. MSN Money's Jim Jubak says some investors are simply taking profits, but the underlying issue may be a slowdown in global economic growth.

The economy is forecast to grow by 4% annually on average from 2008-12, a big improvement from its post-World War II average of just 2.2%. Inflation in 2006 came in at just 3%, below the 4.5% target set by the central bank. And a booming sugar-cane-based ethanol industry combined with new oil discoveries have turned Brazil into a net oil exporter.

In the years ahead, stability will increasingly be something that you have to search for and buy -- like earnings growth -- in sectors of the global economy and corners of national stock markets. But stability is out there to be found by the diligent. (By the way, there's an exchange-traded fund (ETF) for each of the non-U.S. markets I've recommended:

Continued: Developments on a past column

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