After a record year of fund inflows into emerging markets last year, 2011 started with a sell-off in most of the stellar performers from 2010. It may be the Egyptian riots or the surge in commodity prices that have raised inflation fears (or both), but the possibility of a strong central bank response has caused investors to book a big part of the gains they saw in emerging markets last year.
While I am expecting the markets to trade in a sideways pattern in the very short term, there are four global stocks that I expect to do well in this market — and six global stocks you should sell now.
Let’s take a closer look at each.
Global Stock #1 – Lukoil
Lukoil (OTC: LUKOY) was a big laggard last year as Conoco first decided to sell 10% of Lukoil, then later reconsidered and sold the whole 20% it owned. This $9 billion of persistent supply of stock created overhang over the share price, causing it to underperform other major oil stocks. We have news this week that the sale of the entire 20% stake that started last year has been completed.
Due to this share overhang last year, the stock traded at one point at a PE of 5. Now it has not gotten much more expensive, as the PE has reached the “gargantuan” level of 6, after both the share price and earnings recovered.
Some Lukoil highlights:
- 1.1% of global oil reserves and 2.3% of global oil production.
- 19% of Russian oil production and 19% of Russian oil refining.
- The 3rd-largest non-state publicly traded oil company worldwide by proven reserves of hydrocarbons.
- The only private Russian oil company whose share capital is dominated by minority stakeholders.
I expect 2010’s underperformance to spring-load the performance this year.
Global Stocks #2 & #3 – ICICI Bank and HDFC
The Indian market is the worst-performing of the BRICs in 2011, down 13% in January based on the country MSCI index. This is because the market fears that the central bank is behind the curve and may get aggressive with tightening in 2011. While that may be true, it this is a sell-off to buy, and I am quite optimistic for the second part of 2011.
India is the only BRIC economy that is growing based on domestic consumption and by the investments that are taking place, rather than exports of manufactured products (like China) or commodities (Brazil and Russia). As GDP grows by 9 percent per year, it is conceivable that well-run Indian banks can grow at 25 percent per year.
A good way to play this is via ICICI Bank (NYSE: IBN), the second-largest lender in the country. The bank trades at 2.1 times book value on a forward PE of 15, which is very reasonable after the January correction in the stock. I view this as a bull market correction and a buying opportunity for investors who are willing to hold at least a year.
There is another spectacularly run Indian bank — HDFC Bank (NYSE: HDB) — which has also corrected quite a bit, but the valuation is customarily more expensive at 4.5 times book and a forward PE of 19. While HDFC banks customarily hold the record in India for the lowest amount of non performing loans, the more expensive valuation may in turn cause it to underperform while the correction lasts. But, if you are looking to hold it for more than a year, this should not stop you.
Global Stock #4 – British Petroleum
British Petroleum (NYSE: BP) is a comeback play for 2011, after a disastrous 2010 where at one point a fire sale of company’s assets was feared in order to pay for the Gulf oil spill. There was a fire sale, but of a smaller number of company assets than the market originally feared, and BP already completely recovered its lost reserves — at less than half the fire-sale price!
British Petroleum is not necessarily a Russia play only — the reinstating of the previous level of dividends will certainly give a boost to the share price — but after Conoco sold its Lukoil stake, it becomes the major Western oil company with big Russian exposure. BP now owns 10% of Rosneft, the largest Russian oil producer, 50% of the BP-TNK joint venture, and has a likely privileged status as to the development of new fields. PM Putin is in the news this week prodding parliament and his government to speed up the introduction of new tax breaks in the energy sector. This should give a boost to all energy companies with big Russian exposure.
6 Global Stocks to Sell
Although I’m bullish on emerging market stocks, I do believe that there are certain global stocks that are not worth hanging on to.
In the immediate-term, I think we could continue seeing a wider sell-off in select markets as traders take profits and rotate capital into what they perceive to be less-risky assets. Today, I’d like to share six global stocks to sell before the February correction.