Jobs outlook is tepid, but investors don't have to be glum

Job growth is subdued and could stay that way well into 2013, but that doesn't mean investors can't profit by choosing stocks wisely. J.P. Morgan is introducing a new Nifty Fifty for the world's emerging markets.

Bobby Yip/Reuters/File
Tencent headquarters is seen at Nanshan Hi-Tech Industrial Park in the southern Chinese city of Shenzhen in this 2011 file photo. China's biggest Internet company by revenue, Tencent Holdings is one of J.P. Morgan's Nifty Fifty of emerging markets – a collection of fast-growing stocks that should deliver strong earnings despite a weak global economy.

The global economy has its doomsayers, who point to the threat of a European meltdown, a “hard landing” in China, and America’s fiscal cliff. There are a few optimists, who point to a resilient stock market and stable consumer demand, among other things.

But what if they’re both wrong? What if the tepid recovery, evidenced by Friday’s disappointing jobs report in the United States and continued weakness abroad, just keeps dragging along?

That’s the forecast from at least one investment house. And if turns out to be true, then many central bankers, businesses, and investors – not to mention politicians and voters – are going to be awfully disappointed. And they’ll have to adjust their expectations. The tepid outlook would seem to bolster Mitt Romney’s election prospects and dim President Obama’s, give Fed Chairman Ben Bernanke more reason to try a third round of bond-buying in an attempt to lower interest rates, and make it more difficult for politicians to make hard choices on the government budget once the election is over.

For investors, however, the outlook doesn’t have to be bad, if they know where to put their money. According to J.P. Morgan, one place to park funds is the Nifty Fifty.

The Nifty Fifty was a popular idea back in the late 1960s and early ‘70s, when economic growth slowed and much of the stock market did very little. (The Dow lost 100 points between 1966 and 1973). But a group of high-powered growth stocks – including IBM, Disney, McDonald's, and Xerox – outperformed the market. Although they were expensive to own, with sky-high price-to-earnings (P/E) ratios of 49 to 91, investors believed they had to own them because the companies delivered consistent growth in an environment where very few investment sectors were doing well.

In the early ‘90s, growth stocks again did well against a slow-growth environment.

Then last month, J.P. Morgan introduced an emerging markets Nifty Fifty: a collection of 66 stocks (the ’60s version didn’t have 50 stocks either) from Mexico, Brazil, China India, Thailand, and so on, that are growing rapidly despite the ho-hum world economic environment. Their P/E ratios are more reasonable than the 1960s-era American stocks, and they've outperformed the MSCI’s emerging market index by 120 percent in the past three years.

 “I feel a lot more optimistic about my growth asset class today than I have in the last 18 months," says Adrian Mowat, J.P. Morgan’s chief emerging market and Asian equity strategist.

Among the stocks on the list are Mexican bottling company Arca Continental and supermarket chains Pick n Pay (South Africa) and Bim Birlesik (Turkey). Even in countries where Mr. Mowat is underweight, individual stocks could soar, such as toll-road operator CCR in Brazil and Internet service provider Tencent in China.

 The investment company is now working on a Nifty Fifty for the developed world.

Of course, these opportunities look particularly good because most other investment opportunities don't. Interest rates are so low that investors can't make any money on low-risk bonds. With Europe in recession, the US economy anemic, and China not yet rebounding, the global economy doesn’t show signs of rocketing ahead.

"We are in a bottoming phase," says Bruce Kasman, J.P. Morgan’s chief economist. "The optimism is that it's not going to get worse."

These [J.P. Morgan's??] projections assume that Europe will find a way to save the euro. Continued growth in the US, tepid though it may be, is another key to this so-so outlook.

"We call the US the little engine that must." says Mr. Kasman. He does not foresee growth improving until well into 2013 at the earliest.

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