Welcome back DrH.  Good job on the post.  As you get settled in from your trip to South Africa, I hope you will give us your imprssions of that country... and if you liked it, how best to invest there?

I have been morphing my portfolio to the El-Erian asset allocation.  I guess that tells more than anything I could say about his book.  Before applying it, though, I decided how much cash (CD's, MM's, etc) that I wanted in my retirement portfolio... then I applied something close to the El-Erain AA to it.  Actually, El-Erain recomended ranges in each AA class that could be adjusted based on market conditions.

I also recently got back from abroad.  I had an opportunity (all too briefly) to discuss the world scene with an older Israeli couple.  They said that we should understand the importance of the US in the world... e.g., the whole world economy catches a (bad) cold when the US has problems like the mortgage crisis.  He asked me how it could have happened?  How could so many be walking away from their debt and homes?  I don't think that he could understand how so many bad loans could be written, but I tried to explain... it is pretty unbelievable... we also talked politics, which was fun to hear a different perspective of the world.  I could really appreciate not having to fear (yet anyway) how we travel or where we go (like Jews do).  We were a lot more alike than different... and I could say the same for the Muslims I met in Turkey.  The secular state of Turkey should be an example for other Muslims... us Americans claim a belief in the separation of church and state... I'm a believer and Turkey has made it work!

When it came to moving toward the El-Erian model, I was further off from the fixed income weightings than the equity weightings (and I still am).  I have added FNMIX, MERKX, and PFBDX to my portfolio.  While there would be times when hedged foreign bonds would do better (like in the period of strong dollar in the 90's), I would think that the global thinking of his portfolio would dictate that at least most of the foreign bond weighting be unhedged.  I would certainly be there until the long term trend in the dollar goes bullish... probably not soon with our current accounts deficit.  TIPs have come down a lot lately from awfully high prices.  I still struggle with the low real rate that probably doesn't cover the under estimate of inflation.  I have been looking at the chart of WIP (a foreign version of TIP) to find a place to buy it.  Inflation has been higher in Europe and I believe their inflation numbers better reflect actual inflation.

In the last week, Brazil's sovereign debt credit rating has been raised to triple-A.  I must say that I always considered emerging market debt to be on a par with junk bonds when it came to credit risk... I think that I might have compared the risk of EM bonds comparable to US equities.  WRONG!!!!  El-Erain made me see how that has changed at least in the emerging markets that have large account surpluses.

A foreign investment that you don't hear a lot about, because it has been such a weak stock market for so long - Japan.  I read the other day that Japanese exports to the rest of Asia now equal the exports to the United States.  The growth is all in Asia... I think that a lot of the stagnation in Japan was a saturation of their markets in the US and Europe... now they have a new and much larger market for their goods...I don't think that it would be a good idea to be under weighted Japan in your portfolio.  I own EWJ...

Thanks, DrH... I hope that you and others will take this thread forward.  Good luck to that.

erryl

These are individual foreign stocks that I own.  Most are ADR's and all are traded on US exchanges.  I would be intersted in stocks that others own.

Developed Foreign
DEO - global spirits producer

Emerging Market Foreign
WMMVF - Walmart Mexico 

Commodities
PBR - Petrobras Brazil
EGLE - bulk shipper
NAT - tanker shipper

Infrastructure 
CX - CEMEX (global cement company headquartered in Mexico)
RIO - Brazilian steel/iron supplier

erryl

I just discovered this thread; thanks for the heads-up, Erryl.  (By the way I also bought some more CX yesterday at $20.15.)

I'll try to check in and contribute something if I can.    In the past two months I had a chance to make a couple of trips, one to Poland and Russia, another to Brazil and Mexico.   The growth in infrastructure, energy and housing is simply amazing.   Retail franchises are sprouting up on every street corner of Moscow, from Bally's to Baskin Robbins.   In Brazil, Odebrecht has a big contract to modernize a slum ("favella").

In my new job in Dubai, I'll be travelling around the Middle East, Mediterranean, North Africa and South Asia.   (Saudi and Pakistan are the only countries I refuse to go to for safety reasons.)   But I am exposed daily to investments in energy and infrastructure, and it's impressive, especially in the U.A.E.

It will take a lot more than a credit crisis in the U.S. to halt the "global growth" story that I am seeing.

Thanks, Chang--maybe you'd like to do a starting post sometime in the next few months, focused on the UAE?  There's nothing like the "on the ground" observation.

I completely agree that we aren't the engine driving the world any more.  Johannesburg is booming--I stayed in a conference hotel in the Fourways area;had been at the same place four years ago.  The area, and the hotel, are booming--the hotel was full, the area much more built up, lots of construction. What was striking to me was that the other groups using the hotel (it has a big campus and can accommodate several major conferences) were businesses, not the usual development suspects like  USAID and DFID.

Erryl--there's your answer.  SA is growing, credit is still available to start and grow businesses, and there is a sense of enthusiasm and energy.  Risks include pretty high interest rates, the possibility of instability after the next general election and the possibility of a boom/bust cycle in Johannesburg as a result of the World Cup in 2010.   Zuma is another sort of African than Mbecki--very populist and originally scary to the business community--but he certainly talks a better story on the big issues like Zimbabwe and business seems happier with him than they were. I heard for the first time the fear than when Mandela dies the country will fall apart--but that seems unlikely to me.  

Here's a test: watch the road carefully for the first five miles out of a major airport.  If that was all you knew about the US (NY, Kennedy) and South Africa you'd pick South Africa as the stronger economy.

Good suggestions on the chart, Kerryvan; I need to join stock charts and polish it up but there's room for another index or two; will repost in a week or two.  

I want to dig further into the concept that the economies that will begin driving the world are those that are making good use of the credit markets and aren't overextended. Any thoughts on where I can get the data?

DrH   

Chang,
I think your view will assist the forum concerning the view of these 'emerging and frontier' markets from abroad. The USA view of these is that they are very risky.  Any traveler abroad realizes how similar the world has become in the past 4 yrs. What once was a risky country is now looking more modern than the developed cities of the world.  Some of these areas are more 'wired' for technology than places in the USA.  They definitely have an advantage of leap frogging into a modern age, while the developed nations have an aging infrastructure that is difficult and expensive to update. For example, water, sewer, roads in the older cities is decaying and difficult to replace, refurbish a section at a time is expensive.  It is the urban renovation story for developed countries, and build fresh in the Global Growth areas.

With China getting some attention due to the Olympics, it will be a view of enormous growth, and pollution due to the heavy industry and power generation. Recently Russia and Putin had some bad press due to corruption in oil contracts.  In general I think the average US investor is a 'not knower' concerning the real story of the turn around that is happening in the world.  The US press does not due justice to represent a balanced view, let alone how investors can participate in this opportunity of a life time.  In 5 to 10 yrs all of these opportunities will be past the rapid expansion phase. Then the demographics of the region may dictate the growth in these markets.

The frontier markets offer some interesting challenges.  As these other emerging markets mature, they will out source labor intensive items to the frontier markets.  The frontier countries that have natural resources will be exploited, corrupt governments will become more stable,  and the trend continues...

Another view that would be enlightening is how the middle class in the areas you visit are spending their money.  Pacific rim is heavy on investments, saving at a higher rate than the USA.  As they attain more disposable income are they becoming more credit savvy or gadget crazy like some of the developed areas of the world?  I realize some of this can be driven by the local economy, such as your current play ground of Mid east, and Hummers are common due to low gas prices.

Upon reading about Toyota setting up manufacturing in Russia and Brazil, what other foreign companies are aggressively going into the emerging markets as local producers?  My model of Japan has shifted over the past few yrs, trying to understand how they continue to grow yet there economy has been flat lined for 5+ yrs.  If you follow the adoption methodology that these companies utilize in introducing products (another discussion), they are more concerned about dominating markets than making large profits. 

Chang, your views of India would be beneficial.  I know France has some interesting laws concerning India, trying to protect the France jobs. Is there more international growth to the India story or do they have a significant organic growth?  Besides IT and chemical companies, is there a play on energy companies in India?  I don't get the impression of a lot of hard goods being produced in India, just soft goods and services..

Will the global growth economies become more decoupled over the next 6-9 months? Where are the developed nations investing?  I was surprised to learn a number of US pension plans investing in Russia.  Where are Europeans investing for long term investments?  China continues to receive large inflows of capital, western banks, insurance..

There are many different ways this discussion thread can go as a ongoing effort.  One concept I've been toying with is if you are a newbie to global investments, how would you invest 50K, 200K, 500K etc...  My strategic view changes based on the size of $ invested.  I know Kevindow is interested in the frontier markets, Aalan is into stocks, DrH is looking at Global bonds...  I have a number of portfolios in the sharing section as tests and a listing of erryl's initial post. The El-Erian port needs a lot of work. 

What other portfolios would be useful?

Hi Dr. H,

I feel like we're watching an unstoppable object (Global Growth) colliding with an unmovable object (US economic wall). I see no consensus opinion on where it's going.

Not everyone is optimistic.  Morgan Stanley just wrote this on Friday:

Global trade patterns are changing, due to both a cyclical change (reflecting varying strengths of economies) together with a structural shift (reflecting the impact of higher oil prices).   First, so far, trade regionalisation has helped the world to de-couple from a slowing US.  However, we believe that sustained weakness in the US will eventually lead to a global slowdown, which in turn will boomerang back to undermine US growth.  The trade patterns in the world help to explain why the global slowdown has occurred in such slow-motion.

While the GG story is amazing, one view says that it has come too far too fast, out pacing the ability of the planet to provide the necessary fossil fuels for energy and to absorb with the related CO2 emissions. 

Meanwhile major markets are seeing a continued increase in credit costs.  El-Erian compares financial liquidity to the oil in a car; when the oil level get too low, the car can't run.  Read Pimco's August Investment Outlook HERE. Be afraid, be very afraid.

My opinion is that things are indeed very dicey.  I think the next major bull market will develop as technology is able to compensate for expensive fossil fuels with new sources of energy and the infrastructure to put it all together.  That requires leadership and investment; more engineers and fewer bankers.

But, I digress.

Sure, AxJ is looking a lot cheaper than it did nine months ago.  This CBOE China Index is typical . HERE.  Note that the long-term trend is intact, but that we have a nasty medium-term "lower highs" pattern.  These two patterns are in the process of forming a triangle.  I don't know how it will be resolved.  But given the fact that all of the so-called "Developed" world indexes have broken trend, it's a tricky situation. 

If anyone sees it differently, I'd be very happy to learn why.