Brazil Surpasses China as World’s Largest Emerging Market

Years ago, when my wife and I were still living a life of genteel poverty as academics, we just about despaired of ever owning a house. Despite our luck in finding very cheap apartments, our university income, even augmented by extra classes and small speaking engagements, wouldn’t support both our contributions to TIAA-CREF and saving for a down payment, much less what seemed like a back-breaking mortgage payment.

Suddenly — in one of those changes of fortune that seems quick in retrospect but played out like the death of a thousand cuts as we were living through it — we found ourselves out of academia and living like ordinary civilians. After a fairly rough period of adjustment (if you know what I mean), we were in better shape financially and we bought the house that we still live in today.

But the experience I want to write about happened before the big change, while we were still doing the extensive research that characterizes most academics’ approach to any big decision.

Moving On Up

We went to a seminar put on by a local post-and-beam housing builder who had a plan for owning your dream house. Their system, boiled down to its essence, was to buy the cheapest lot in a new subdivision, build a house (post-and-beam, naturally), live in it for a year or two while the neighborhood filled in and became more desirable, then sell out and roll the profit into another new home, but a bigger one this time.

According to these people, if you did this four or five times–choosing your properties well and working on the interior finishing and landscaping that increases salability–you would have made enough to buy your dream house for cash and own it free and clear.

It was an interesting concept, and probably worked for the people who jumped on the idea. Housing was hot 15 years ago, and it stayed hot for a long time.

But what really fascinated me was the evangelical zeal of the sales people, and the strong brand of capitalism they were preaching. People make money, they said, not by saving, but by making capital investments.

Saving Versus Investing

Over the years, I’ve come to appreciate what they were saying. Capitalism is about putting money to work and making it grow. If you have some capital and you’re willing to take the risk, you can grow it like crazy. You can also go broke, but that’s implicit in the idea of risk.

I think about this idea when I see stories bemoaning the pathetic savings rates of Americans. Experts (especially those who run savings banks) advise people to save at least 10% of their income … but only 28% of Americans do.

Tsk, tsk. Shame on you, Americans.

On the other hand, people who think that saving money is the key to a secure future are fooling themselves, at least if they’re putting that money into a savings account.

The stock market makes a habit of punishing optimistic people who get in without proper preparation and don’t exercise caution. But saving generally keeps you crawling ahead while inflation nibbles relentlessly at your net worth.

Saving is what you do to stay where you are. Investing, that is buying capital goods like stocks, is what you do to get ahead. What we do at Cabot is to give advice that helps people buy stocks without getting fleeced by the vagaries of the market. Capitalists–even small-time capitalists–need good advice, and we’re here to provide it.

Trip to China Almost Here

It’s less than two weeks before my trip to China begins, and I’m already discouraged about all the things I’m not going to be able to see. With most of my time in Shanghai and one side trip to Beijing and another to Hsian, that’s pretty much the ballgame. I’m also eager to see the Yellow Mountains and taste real Hunanese food in Hunan. I’d also like to get a chance to use my Cantonese after all these years.

My main goal, however, is to see how Chinese people live. I want to find one of the few remaining hutongs and drink in the sights and smells. I’d also like to visit a village somewhere, if there are any left. High rises and traffic and neon and shopping I can get anywhere. The modern architecture I can appreciate in pictures. I want to know what makes China different.

To do this, my wife and I will probably do what we do everywhere we go. We find an interesting area that doesn’t look like downtown Chicago and we start walking. By the end of the day, we’re exhausted, but we’ve picked up some information about the texture of life that isn’t available where the tourist buses congregate. I hope it works this time, too. I’ll let you know.

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The news is out: Brazil is now the largest emerging market in the world by market capitalization of its stocks, and Petrobras, the Brazilian oil giant, is the largest company in the emerging markets by market cap. Brazilian stocks now make up about 15% of the MSCI Global Emerging Markets Index, compared with China’s 14%.

The South American giant has surpassed China, in part, because the Chinese stock market is in the middle of a pullback that has given its stocks a significant haircut. That’s the way it is with emerging markets; they go up faster than developed markets and come down faster, too.

This news doesn’t make a lot of difference to the way I will pick stocks for the Cabot China & Emerging Markets Report, or manage its portfolio. The most important thing will still be the stories, numbers and charts of the stocks themselves. Being blind to the momentum of countries has its advantages, especially when emerging markets stocks are acting skittish.

Parexel Passes CANSLIM Screen

Accordingly, with emerging markets in a bit of an uproar, I have an investment idea that makes sense right now. It’s a U.S. company called Parexel (PRXL), a specialist in helping pharmaceutical companies develop new drugs, and it’s been in a determined uptrend for a long time … which is a good thing.

The bulk of Parexel’s revenue comes from its clinical research services, which involves recruiting and enrolling patients for clinical trials, designing the trial protocols, managing the trials themselves and reporting the results. The company’s worldwide facilities allow access to the necessary resources at lower cost.

That’s just the beginning, however, as Parexel is prepared to work with drug companies through the entire commercialization process. The company’s Web site offers the interesting tidbit of information that Parexel has been involved in the development of 45 of the 50 top-selling drugs on the market today. That’s impressive.

It’s also impressive that the stock passes the CANSLIM screen that looks for issues with both fundamental and technical characteristics that point to future growth. The stock is moving out to new highs, but in a calm way that doesn’t indicate increased volatility. It has also been picked up by a record number of institutional investors.

The company has announced that the stock will split two-for-one in the near future, which sometimes marks a temporary peak for a stock. But for a stable growth stock in a chaotic market (and with positive earnings results already on the books), Parexel has a lot going for it.

Editor’s Note: Parexel may never be mentioned here again, but the stocks in the Cabot China & Emerging Markets Report are followed closely and subscribers receive advice on buys and sells and other stocks of interest. If a walk on the emerging markets side of things sounds interesting, you can try a no-risk trial subscription by clicking here.


Paul Goodwin For Cabot Wealth Advisory

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