Morningstar Advisor - April/May 2010 - 40

Spotlight

Dominant China
How it could happen: Rebounding developed markets resume consumption of Chinese products. Meanwhile, the country takes steps to diversify its economy, including boosting domestic consumption, developing its own credit markets, and becoming the leader in new technologies. What investors can do: Buy the firms in China that will benefit from local consumer growth and that have the least government involvement: small caps (via Claymore/ AlphaShares China Small Cap HAO). U.S.-based high-quality companies that do business in China, such as Yum Brands YUM, Coca-Cola KO, McDonalds MCD, and Colgate-Palmolive CL, would also benefit. Unconventional approach: Avoid commodity funds. China has shown itself to be a very savvy buyer in the past few years (look at its import levels versus spot and futures prices through 2008–2009), so don’t expect China to drive up the commodity futures prices to staggering new highs. And the contango issue would be considerable as speculators who can’t take physical delivery pile in to try to get a piece of the China story.

Jones Oil & Gas Exploration & Production IEO; low-cost electricity providers, such as Exelon EXC and Enexus (the upcoming spinoff from Entergy ETR); and alternative-energy firms, which would be more competitive, via an ETF such as Market Vectors Global Alternative Energy GEX. Also, consider companies that enable efficient transportation of people and goods (see Berkshire Hathway’s BRK.B purchase of Burlington Northern Santa Fe BNI).
Unconventional approach: Telecommunica-

Unsustainable U.S. Deficit
How it could happen: A slumbering economy and an unwillingness by the government to either cut spending or raise revenue keeps deficits above 3% of the GDP—and at rates greater than the growth of the economy. Investors become skittish about the sustainability of the United States’ fiscal actions and stop buying debt at low interest rates. The U.S. government is forced to raise rates, setting off a chain of events including a decline of the dollar, inflation, and higher taxes. What investors can do: Rates elsewhere in the developed world and stable emerging markets would likely fall as reserve dollars and other low-risk investors flee the U.S. Treasuries market. This means that investors would not just want to own foreign bonds, but would want a longer duration as well (consider iShares S&P/Citi International Treasury Bond IGOV). The euro especially would be likely to benefit, as the excellent fiscal condition of core countries like Germany help keep overall deficits for the eurozone under control. Buy international companies not reliant on the United States, or high-quality, multinational domestic firms (such as Colgate-Palmolive CL, Coca-Cola KO, and Proctor & Gamble PG). Unconventional approach: Buy casino-gaming

tions firms. More and more information and entertainment will be delivered electronically, and telecommuting would gain in popularity to save travel costs.

Major Energy Innovation
How it could happen: New forms of energy— wind, solar, biofuel, geothermal, tide capturing—will be developed and made economically feasible as oil supplies decline and environmental concerns rise. What investors can do: Major innovation equals major disruption. Will an existing firm be the one that cracks the nut of cheap alternative energy? Maybe, maybe not. If not, nearly any energy-dependent or utilities stock would have a chance at being a big loser (except probably incumbent low-cost nuclear producers). Alternative energy companies currently lack moats, and most are overpriced. A better bet might be ultra-energyintensive industries, such as smelting, that would see their costs plummet with the new cheap energy source; consider Market Vectors Steel ETF SLX. Or look at travel and leisure names and consumer discretionary companies as nondiscretionary energy expenses fall. Unconventional approach: Buy small-cap energy tech firms, in case one becomes an innovation leader. Concentrate on the really small firms to get a bit more leverage.

Sky-High Energy Costs
How it could happen: World economies rebound, creating greater energy demand. Oil production declines because of the cost and difficulty of tapping into new reservoirs, tightening supply as demand rises. What investors can do: Buy exploration and production companies of all stripes or an ETF that does so, such as iShares Dow

companies. Expansion of gambling and associated taxes would be a politically palatable way for governments to raise money quickly.

Sovereign Debt Crisis
How it could happen: Crushing debt loads wreak havoc on developed countries around the world. Greece, Italy, Ireland, and Spain in the eurozone face a real risk of default, because they don’t control their own

40 Morningstar Advisor April/May 2010



Morningstar Advisor - April/May 2010

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2010

Morningstar Advisor - April/May 2010
Contents
New On MorningstarAdvisor.com
Contributors
Letter from the Editor
Our Job: Building Better Investors
What’s Your Biggest Long-term Concern for the Economy?
An Early Start
Women’s Work
Investment Briefs
Markowitz 2.0
Asset Allocation Is King
A Decade of Riskier Assets ...
... but with plenty of Silver Linings
Be Prepared
Facing up to the Economy’s Problems
Levelheaded
Surviving on Conviction
Four Picks for the Present
Pharmaceutical Firms Get the Urge to Merge
Funds That Look Cheaper Than the Market
Finding Dividend Leaders
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks with Wide Moats
VAs: Assets Rise as New Sales Slip
New at Morningstar
When You Wish Upon a Star
Morningstar Advisor - April/May 2010 - Morningstar Advisor - April/May 2010
Morningstar Advisor - April/May 2010 - Cover2
Morningstar Advisor - April/May 2010 - 1
Morningstar Advisor - April/May 2010 - 2
Morningstar Advisor - April/May 2010 - Contents
Morningstar Advisor - April/May 2010 - 4
Morningstar Advisor - April/May 2010 - 5
Morningstar Advisor - April/May 2010 - New On MorningstarAdvisor.com
Morningstar Advisor - April/May 2010 - 7
Morningstar Advisor - April/May 2010 - Contributors
Morningstar Advisor - April/May 2010 - Letter from the Editor
Morningstar Advisor - April/May 2010 - 10
Morningstar Advisor - April/May 2010 - Our Job: Building Better Investors
Morningstar Advisor - April/May 2010 - 12
Morningstar Advisor - April/May 2010 - 13
Morningstar Advisor - April/May 2010 - What’s Your Biggest Long-term Concern for the Economy?
Morningstar Advisor - April/May 2010 - 15
Morningstar Advisor - April/May 2010 - An Early Start
Morningstar Advisor - April/May 2010 - 17
Morningstar Advisor - April/May 2010 - Women’s Work
Morningstar Advisor - April/May 2010 - 19
Morningstar Advisor - April/May 2010 - Investment Briefs
Morningstar Advisor - April/May 2010 - 21
Morningstar Advisor - April/May 2010 - Markowitz 2.0
Morningstar Advisor - April/May 2010 - 23
Morningstar Advisor - April/May 2010 - 24
Morningstar Advisor - April/May 2010 - 25
Morningstar Advisor - April/May 2010 - 26
Morningstar Advisor - April/May 2010 - 27
Morningstar Advisor - April/May 2010 - Asset Allocation Is King
Morningstar Advisor - April/May 2010 - 29
Morningstar Advisor - April/May 2010 - 30
Morningstar Advisor - April/May 2010 - 31
Morningstar Advisor - April/May 2010 - 32
Morningstar Advisor - April/May 2010 - 33
Morningstar Advisor - April/May 2010 - A Decade of Riskier Assets ...
Morningstar Advisor - April/May 2010 - ... but with plenty of Silver Linings
Morningstar Advisor - April/May 2010 - 36
Morningstar Advisor - April/May 2010 - Be Prepared
Morningstar Advisor - April/May 2010 - 38
Morningstar Advisor - April/May 2010 - 39
Morningstar Advisor - April/May 2010 - 40
Morningstar Advisor - April/May 2010 - 41
Morningstar Advisor - April/May 2010 - 42
Morningstar Advisor - April/May 2010 - 43
Morningstar Advisor - April/May 2010 - Facing up to the Economy’s Problems
Morningstar Advisor - April/May 2010 - 45
Morningstar Advisor - April/May 2010 - 46
Morningstar Advisor - April/May 2010 - 47
Morningstar Advisor - April/May 2010 - 48
Morningstar Advisor - April/May 2010 - 49
Morningstar Advisor - April/May 2010 - Levelheaded
Morningstar Advisor - April/May 2010 - 51
Morningstar Advisor - April/May 2010 - 52
Morningstar Advisor - April/May 2010 - 53
Morningstar Advisor - April/May 2010 - Surviving on Conviction
Morningstar Advisor - April/May 2010 - 55
Morningstar Advisor - April/May 2010 - 56
Morningstar Advisor - April/May 2010 - 57
Morningstar Advisor - April/May 2010 - Four Picks for the Present
Morningstar Advisor - April/May 2010 - 59
Morningstar Advisor - April/May 2010 - 60
Morningstar Advisor - April/May 2010 - Pharmaceutical Firms Get the Urge to Merge
Morningstar Advisor - April/May 2010 - 62
Morningstar Advisor - April/May 2010 - 63
Morningstar Advisor - April/May 2010 - Funds That Look Cheaper Than the Market
Morningstar Advisor - April/May 2010 - 65
Morningstar Advisor - April/May 2010 - Finding Dividend Leaders
Morningstar Advisor - April/May 2010 - 67
Morningstar Advisor - April/May 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - April/May 2010 - 69
Morningstar Advisor - April/May 2010 - 70
Morningstar Advisor - April/May 2010 - 71
Morningstar Advisor - April/May 2010 - 50 Most Popular ETFs
Morningstar Advisor - April/May 2010 - 73
Morningstar Advisor - April/May 2010 - Undervalued Stocks with Wide Moats
Morningstar Advisor - April/May 2010 - 75
Morningstar Advisor - April/May 2010 - VAs: Assets Rise as New Sales Slip
Morningstar Advisor - April/May 2010 - 77
Morningstar Advisor - April/May 2010 - 78
Morningstar Advisor - April/May 2010 - New at Morningstar
Morningstar Advisor - April/May 2010 - When You Wish Upon a Star
Morningstar Advisor - April/May 2010 - Cover3
Morningstar Advisor - April/May 2010 - Cover4
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