It’s no secret that the slowdown in global stock growth has been the key factor driving market performance in the past two months. Just last week, investors were surprised by weaker-than-expected data from three of the most important engines of the world economy: China, Germany and the United States.
That means now may be the time to buy the dip in global stocks and ETFs, particularly in strong emerging markets companies like Tata Motors (NYSE:TTM), Treasury-trouncing funds like the ProShares UltraShort Lehman 20+ Year Treasury ETF (NYSE: TBT) and global blue chips like Mosaic (NYSE:MOS).
Although the drop-off in growth in global stocks and emerging markets certainly bears close watching, it also represents a concern that has been weighing on the market for eight weeks now. With so many stocks having fallen well off of their previous highs, this might be the time to look for investments that already have discounted a worst-case scenario — indicating meaningful upside potential if global growth does not, in fact, fall off a cliff.
Three ideas stand out as being compelling opportunities:
ProShares UltraShort Treasury ETF
TBT is designed to deliver a daily return twice the inverse of the Barclays Capital 20+ Year U.S. Treasury Bond Index. The ETF has been hit hard thus far in 2011, falling from its Feb. 8 closing high of $41.24 to $32.50 on June 24. With the yield on the 10-year note now sitting at about 2.9% versus 3.6% just two months ago, it appears that a contrarian strategy is in order.
Investors can win with this ETF in three scenarios: a reversal of the flight-to-safety trade that has accompanied the Greek debt crisis, a renewal of fears about the U.S. fiscal situation and signs of rising inflation pressure. While concerns about inflation have moved to the back burner as of late, the May consumer price index came in at 3.6% – its highest year-over-year increase since September 2008.
Notably, TBT can stage large moves when rates rise: from Dec. 19, 2008-June 10, 2009, the ETF rose 63.3%; from Aug. 31, 2010-Feb. 10, 2011, it gained 37.6%.
Mosaic
Shares of the world’s second-largest fertilizer producer have fallen approximately 40% from their Feb. 14 high, compared to a decline of 4.7% for the S&P 500 Index in the same time frame:
On a longer-term basis, Mosaic is positioned to capitalize on farmers’ need to boost crop yields to meet rising global food demand. In the near term, however, its stock price has been pressured by falling agricultural prices and the overhang created by Cargill selling its 64% stake in Mosaic throughout the first half of 2011.
The Cargill sale has played a role in Mosaic’s stock underperforming virtually all of its rivals in the fertilizer space thus far this year, including Potash Corp. (NYSE: POT), Agrium (NYSE: AGU), CF Industries (NYSE: CF), and Compass Minerals International (NYSE: CMP).
The result is an opportunity to establish a position in a fast-growing, debt-free company trading at just 11.4 times 2012 earnings estimates – a wide discount to the broader agricultural sector.
Tata Motors
India’s largest automaker has had a rough go so far in 2011, as a slowdown in global auto sales has weighed heavily on the global auto sector in general and on Tata in particular. From a short-lived high of $36 in late November, the stock slid to $21.33 on June 24 — a loss of more than 40%. At this level, investors may be well-served by turning their attention to the company’s longer-term outlook. JD Power & Associates reports that India became the world’s sixth-largest auto market in 2010 and is on track to become the third-largest by 2020.
Tata, as India’s largest automaker, is uniquely positioned to capitalize on this trend. Despite estimates of five-year annualized earnings growth in the range of 35%, the stock trades for just six times 2012 earnings estimates.
While the outlook for economic growth remains murky at best, the market’s two-month decline might spell opportunity for those willing to buck the trend in investments — such as TBT, MOS and TTM — that offer an attractive combination of upside potential and limited downside risk.
As of this writing, Daniel Putnam owned TBT but did not own Mosaic or Tata.
