The World's Five Best 2011 Stock Markets

There's a globe's worth of opportunity to make money this year, and knowing where to invest is key. One of your best options is surprisingly close to home.

How did the stock market do in 2010? Depends.

Which stock market are you talking about?

Are you referring to the United States, where the Standard & Poor's 500 Index ($INX) climbed 15%, or Spain, which was down 19% for 2010? How about China, where the iShares FTSE 25 (NYSE: FXI) was up just 3.5% for the year, or India, up 21% for the year? Then there's Chile, which was up 47%, while Brazil was up only 8%.

Last year, like most years, how you did as an investor depended very much on where you did your investing.

Now that 2011 has arrived, what are you going to do next? Invest in the world's best stock markets, of course. But how do you find them?

Today, I'll give you my take on how to separate the best from the rest in 2011. Below you'll find my five picks for countries to overweight in your stock portfolio in 2011.

A World of Choices

Once upon a time, investors didn't have much choice about where they put their money; they invested in their home market. When my mom and uncle took me to buy my first shares, I put my money in the New York Stock Exchange. A friend's parents had bought him shares that traded on something that sounded kind of shady called the American Stock Exchange. The Nasdaq? Never heard of it.

Today, you've got a choice. You can buy an exchange traded fund (ETF) that gives you ownership of the Indian market—or Brazilian or South African. You can buy shares in hundreds of foreign companies that trade in US markets as American Depositary Receipts (ADRs). You can even buy shares directly on some foreign exchanges. (Although after running the Jubak Global Equity Fund (JUBAX) for the last six months, I can tell you that it's still not easy to buy direct from many of the world's stock exchanges.)

You've got a choice, and the choice matters.

First, here's what not to do when deciding what countries to buy: Forget about going with growth and simply plunking down your money in the markets that represent the world's fastest-growing economies. You see, everyone in the world has read those same growth forecasts. They know that 2011 economic growth rates in China, India, and Brazil, for example, are projected to be better than 9%, 8%, and 7%, respectively. That's why India's stock market is among the most expensive in the world right now, with China's not so far behind.

And, of course, what everyone thinks will be true in 2011 can turn out not to be when projections translate into real returns. That's why China's stock market was up just 3.5% last year, even though China's economy grew by more than 10% in 2010.

The US Makes My List

The stock markets you want to overweight in your portfolio are those where investors entertain lots of fears and doubts that you think are overblown. One of the reasons the US market did so well in 2010 is because most people were worried about a double dip and projecting end-of-the-year growth at just 1% or so. When expectations are that low, 2.5% or 2.7% growth in gross domestic product looks like Mount Olympus. And, surprise, US stocks delivered a 15% gain for the year.

What markets would I put in this category of likely overachievers this year?

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First on my list: I would include the United States again. Not so surprisingly, unemployment of almost 10% can dampen the spirits, especially when that rate refuses to go down. This has produced a classic Wall Street/Main Street piece of cognitive dissonance: Wall Street keeps pointing to signs that the economy is growing at a rate that might approach 3% a quarter or two into 2011. But everybody who lives on Main Street, which is most of us, can't quite believe it. Wall Street knows, though, that jobless growth is great for company profits and that 2011 is shaping up as another year when the US economy and US stocks outperform relatively modest expectations.

If you want to buy individual stocks in the US market for 2011, rather than an index, focus on the banking sector, where prices are still low and will outperform other stocks as the economic recovery accelerates. JPMorgan Chase (NYSE: JPM), U.S. Bancorp (NYSE: USB), and Citigroup (NYSE: C) are all members of my Jubak's Picks portfolio.

Where else do doubts litter the ground? Europe.

OK, OK. Most of the doubts about the European Union are absolutely justified. Most of the best economies in the group will grow by 2% this year if they're lucky. The euro is likely to lurch from crisis to crisis for much of the year, which is why even the stock markets of countries that weren't caught up in the debt crisis did so badly in 2010. French stocks, for example, fell by 3%.

But what's bad for the euro, within reason, is good for the export-driven German economy. As the euro sinks, German exports priced in euros get more competitive with goods from countries with strong currencies. So while the euro tanked in 2010, German stocks thrived, racking up a 20% gain.

A Polish ETF Could Be a Smart Buy This Year

There is no reason the German market shouldn't outperform again in 2011. Doubts about Europe haven't receded. The euro is likely to fall further. German exporters are just as efficient as they were in 2010. You can buy Siemens (NYSE: SI) to get broad exposure to German export strength in industries from energy to transportation to telecommunications.

If Germany is the engine of European exports, then Poland is the train. Polish companies have become the low-cost suppliers next door for many of Germany's export companies. Unless you can trade in Warsaw, I'd use an ETF for this market. The Market Vectors Poland ETF (NYSE: PLND) was up 12% in 2010. (But as with all emerging markets, check to be sure you'll be able to hang on through the market's extreme volatility to get any gain.)

Australia isn't an emerging market, it just supplies raw materials to them. Here, horrific floods in Queensland have put much of the country's big coal industry out of operation. That in turn has fed into a slowdown engineered by Australia's central bank, raising big doubts about the nation's economy. The Australian dollar, one of the world's natural-resources currencies, has even been in retreat against the US dollar.

If you want a one-stock package for the Australian market, I'd go with BHP Billiton (NYSE: BHP). You can find out more about the stock by checking out my long-term Jubak Picks 50 portfolio. If you want more leverage to Australia's coal industry, check out MacArthur Coal (OTC: MACDY). And for more on Australia’s coal industry, see my post "Flooded Mines Spell Coal Shortage"

Among true emerging stock markets, I'd pick Brazil. Stocks there underperformed in 2010, climbing just 8%, as a cocktail of worries negated the positive effects of an economy that appears to have grown by more than 7% for the year.

NEXT: How to Play Brazil and China in 2011

New President Makes Brazil a Likely Winner

Those worries haven't vanished, but I think they are receding faster than investors so far believe. Incoming Brazilian President Dilma Rousseff doesn't have any of the populist touch of her predecessor, Luiz Inácio Lula da Silva, but so far she's saying all the right things about reducing the rate of increase in government spending, taking steps to stem the rise of the Brazil's currency, the real, and reducing the country's extremely high interest rates by fighting inflation.

Dilma, as she's known in Brazil, has some important trends on her side, so she won't have to rely on words and her shaky legislative majority. The economy is growing fast enough that reducing government spending without hurting the poor should be easier. International investors and traders agree that the real is now overpriced, and that will reduce the speculative bets on a further rise in the currency. And the central bank has already moved to reduce inflation—by raising interest rates—so rate cuts sometime in 2011 are likely.
 
My recommendations for Brazilian stocks include banks such as Itau Unibanco (NYSE: ITUB) and Banco Bradesco (NYSE: BBD). The first is a member of my long-term Jubak Picks 50 portfolio; the second is a member of my Jubak's Picks 12-to-18-month portfolio.
 
Skip China for Now

The obvious omission from this list is China. Here's my logic: China seems committed to trying to finesse rising inflation (which hit 5.1% in November) without taking any big macroeconomic steps, such as raising benchmark interest rates by two percentage points or reducing its annual quota for new bank loans. Those large macroeconomic steps might actually slow the country's growth rate, but they could be risky for the Communist Party, which needs to deliver higher living standards to its vast population—plus continued wealth to the politically well-connected. To avoid political fallout, China looks like it will try a tamer mix of price controls, supply augmentation measures, and income boosts, such as another round of increases to the minimum wage. (For more on the minimum wage increase, see my post "Beijing moves to reduce the profitability of China's big export companies.")

My reason for omitting China from my list of best markets for 2011 is my belief that these baby steps won't work. I think that sometime in the second half of 2011—after the harvest has failed to stem rising prices for vegetables in China—Beijing will be forced to take those large, politically difficult macroeconomic steps that it is trying to avoid.
 
I'd rather own Chinese stocks after the market correction those steps will bring about. I don't think you need to dump all the Chinese stocks from your portfolio, but I would emphasize domestic consumer companies over state-owned export companies. And I wouldn't rush to add more Chinese stocks to a portfolio, unless you're prepared to sell at the first sign that the scenario I've outlined is coming to pass.

At the time of publication, Jim Jubak did not own shares of any of the companies mentioned in this post in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), owned shares of Banco Bradesco, BHP Billiton, Citigroup, Itau Unibanco, and MacArthur Coal as of the end of November. For a full list of the stocks in the fund as of the end of November, see the fund's portfolio here. The portfolio at the end of December will be posted in a few days.

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.