Up by the Bootstraps


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Nicholas Kaiser, manager of Sextant International (SSIFX, 800-728-8762) , has one of the best track records in the business. But he didn't achieve this success by taking on high levels of risk; Kaiser is a value investor who no qualms about increasing the fund's cash position when the market is overbought. The fund ranks in the top 2 percent of its category on a trailing three-year basis and is at the top of the pack for the past five years. We spoke to him about his investment outlook for 2011, parts of which may surprise you. -Benjamin Shepherd

What's your outlook for the US economy in 2011?

I have an optimistic outlook for the US economy in 2011. Our forecast calls for 10 to 15 percent growth in the broader market.

We expect US corporations to continue to post high earnings as the US economy shakes off the after effects of the recession. Unemployment should fall to about 8 percent by the end of the year, leading to generally more positive sentiment in most regions of the country.

That being said, don't expect widespread euphoria in the markets or valuations to rise to the levels we saw in 2006 and 2007. Much of the US economy is based around the construction and real estate sectors, both of which we suspect will recover slowly.

But export-focused companies will continue to grow at a decent pace.

Overall, we're optimistic that this will be a good year for the US.

The global economy has bolstered the performance of the US economy, and that trend will continue. This is a different situation than what we've experienced in the past; we're accustomed to the US being the world's leader.

Today we have stronger economies overseas, especially in emerging markets, which have benefited dramatically from lower debt and faster growth. This means their consumer markets are strong and their citizens are making purchases and investing. That has helped US and European exports, which are quite strong.

International investing is largely a currency game, so the main question is how the currencies of our major trading partners will perform. The risk is that the dollar will depreciate. But given the favorable outlook for the US economy, we think the dollar will perform reasonably well in 2011 so the risk incurred by holding cash is relatively low.

The dollar has some strength, and we're pretty optimistic about domestic political events over the last few months. We see the government working together a little better than before, and that should boost confidence that our leadership has what it takes to solve the problems facing the country.

We just might have the right people in place to come up with interesting solutions to the host of issues that threaten the health of our country and its economy.

A number of Republicans were elected to Congress in November, and without even taking office, they appear on course to pass their tax bill. It's amazing that they have already pretty much won their agenda. Of course it required some compromise, but they did it.

Regarding the bigger problems, such as what to do with Fannie Mae and Freddie Mac, I look forward to a vigorous debate. But there's a better opportunity to solve these problems now that there's a balance of power in Washington. Both sides will be heard, and reasonable compromise is possible.

Many have predicted that the midterm elections would result in political gridlock in Washington. That won't be the case because President Obama has demonstrated a willingness to make deals, even if he hasn't been particularly happy about them. He's recently brought in a new team of business advisors and his original team has shuffled out with their tails between their legs.

President Obama is a smart guy who seems to understand that it's better to get along and listen to both sides. In this respect, he's taken a lot of lessons from the Clinton presidency. President Clinton was reelected because he changed course after his party's shellacking in the 1994 midterm elections. President Obama realizes that he also needs to change.

What steps could the government take to help turn around the economy?

We have a huge problem with Fannie and Freddie. At the heart of the issue is whether the government will continue to subsidize mortgages and housing the way it has for over 50 years. I think we can all agree that we don't need to continue this practice. If we can reach that consensus, we can then start to resolve a bevy of other issues.

We can put Fannie and Freddie out of their misery and put all the debt on the government's balance sheet. After all, who really cares if the final debt is $13 trillion or $20 trillion? But once this clearly flawed practice has come to an end we could see things turn around. Then after six months or so passes, people will start looking for places in which to invest their cash and turn to this pool of mortgages that's suddenly worth something.

But before any of this can happen there has to be an initial consensus that subsidizing mortgages isn't such a great idea--after all, no other country has ever done it to the extent that we have. We could then adopt five-year mortgages accompanied by a 20 percent down payment, as is the case in Canada and much of the rest of the world. If we solve this problem, everything else can fall into place over the next 12 to 24 months.

What will be the most attractive markets this year?

Because we're value investors, we stay away from higher-risk markets. That limits our exposure to high-growth markets such as China and increases our exposure to countries such as Japan.

The same holds true for some parts of Europe where countries such as Germany and some of its neighbors are going to perform reasonably well. We're also looking into Eastern Europe.

Even though inflation has risen in India we see opportunities there. Brazil will continue to be strong, though the market is getting overpriced. We like Latin American countries such as Peru and Chile and we're seeing some good opportunities in the rest of the continent.

A number of smaller European economies such as Denmark and Norway are doing fine; there's nothing like oil prices at $90 per barrel to help out a country like Norway.

Japan's export business is strong. Take a company like Canon ( CAJ ). The firm produces high-quality products and has the ability to meet its customers' demands for increasingly advanced technology. Meanwhile, the yen has been quite strong, making the country's exports more expensive. But the quality of Canon's products has meant that the stronger yen hasn't slowed the company's sales. Besides, we want to buy into stronger currencies through bets Canon and other companies that can sell to emerging markets such as China and India.

When choosing companies in which to invest, we look for strong balance sheets and transparent businesses. There are still issues in the developing world with transparency, corruption and weak accounting standards. This makes investing in these countries too risky in many cases. We view the markets of major Organization for Economic Cooperation and Development (OECD) member states and second- and first-world countries as solid and safe.

We'd rather buy shares of a resource company in Canada or Australia that's selling to China than purchase stock of an importing business in China. It's a lower-risk strategy.

What are your thoughts on the best and worst sector bets for this year?

We've been overweight resources. That will continue to be a good place to invest internationally. We will continue to invest in energy-related sectors because the price of oil is attractive at $90 per barrel.

There are good profits to be found in many transportation companies, particularly foreign airlines that run themselves in a conservative manner. There will be some decent financials in the strong economies; several international banks and insurance companies are very attractive right now. But by and large we'll try to avoid highly leveraged companies. That being said, there's a lot of cash on corporate balance sheets and I suspect there will be a wave of mergers and acquisitions activity.

I would avoid companies that rely on government subsidies to sustain operations, particularly clean-energy firms. The fact is that many clean-energy sources such as wind power simply aren't economical at this stage. This means that the world, particularly the US, will continue to rely on coal for most of its power generation needs for some time to come.

What's your best piece of advice for investors this year?

Be conservative but stay fully invested. Risks still lurk in the markets, but you'll find good protection in strong companies with good earnings.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Article Republished with permission from <a href="http://www.KCIinvesting.com" rel="nofollow">www.KCIinvesting.com</a> and <a href="http://www.rukeyser.com" rel="nofollow">www.rukeyser.com</a>

This article appears in: Investing Stocks
Referenced Stocks: CAJ

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