Long-Term Investing Strategies: Global Demographic Trends

[Editor's Note: Frequent Money Morning contributor Larry D. Spears - a noted options expert and published author - brings us a two-part story on eight global-investing trends. We'll cover the first four - and the accompanying stock picks - today (Monday). We'll bring you the second half of the story tomorrow (Tuesday).]

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If you've been an investor for more than a few months, you've almost certainly heard the adage "the trend is your friend."

This bit of wisdom has been proven correct so often that it has assumed a place as a universally accepted stock market "rule."

Most of us think of trends as market momentum – a shorter-term manifestation that lasts from a few hours to a few weeks. But there's another kind of trend – one that's both longstanding and quite powerful – that can deliver hefty profits to those who understand its value.

Investors interested in long-term investing strategies can take a close look at global demographic trends.


Eight Top Trends to Invest In

When we talk about "demographics," we're referring to the dominant characteristics of the human population in a given region, or of the world as a whole.

A precise listing of all the latest demographic trends is difficult – not because of a lack of research, but because many of the conclusions are skewed by the beliefs of the groups conducting the analyses. For example, environmental concerns often score higher marks in studies done by environmental advocates than in surveys taken by more independent-minded agencies.

In fact, this represents one of the few real risks of trend investing: In the rush to be "first" on a given trend, you may end up jumping aboard a hot new trend that really isn't a trend at all. Still, there are more than enough studies of shifting national and global demographics to crosscheck results and come up with a few emerging and strengthening trends that can't be disputed.

We looked at a variety of reports from government agencies like the U.S. Bureau of Economic Analysis (BEA) and the National Intelligence Council (NIC), quasi-governmental units like the U.N.'s World Health Organization (WHO) and the International Monetary Fund (IMF), several international banks and business groups and some independent institutions like the Pew Research Center, and came up with eight rising demographic waves on which they nearly all agree:

  1. 1. The world's population is growing faster than ever – in numerical, if not percentage, terms – and it's getting older.
  2. The geopolitical leadership of the world is shifting.
  3. The "middle class" is emerging in the developing nations, driving an unprecedented shift of wealth from the West to the East.
  4. The population growth and burgeoning middle class is creating a steady rise in demand for energy and consumer products, which will keep prices moving higher.
  5. Population growth is steadily magnifying the need for more food and water, which is already generating critical shortages of both in some parts of the world.
  6. Human beings continue to be messy creatures, with an ever-increasing need for sanitation and waste-disposal services.
  7. Despite major peace initiatives, conflict among the human race continues to persist.
  8. And a mushrooming global debt burden stands as a threat to both the world's currencies and its established trade systems.

The economic implications of all eight of these global demographic trends should be fairly obvious – or available in broad terms from other sources, many listed at the end of this story – so we won't go into a lot of detail in defining each trend.

Instead, we'll look at some of the quality stocks and exchange-traded funds (ETFs) that stand to capitalize on these trends and provide potentially solid longer-term results for you and other investors.

Be aware, however, that there are very few "pure plays" targeting just one of the major trends, most of which have implications for industries in a number of fields.

Top Profit Plays

Now that we've set the scene for you, let's now take a look at each of the demographic trends – and the accompanying investment recommendations – in detail.

1. Population Power: According to the U.S. Census Bureau, the world population stood at 6.896 billion at the end of 2010 – more than double the total of just 50 years ago. Although annual growth rates have slowed from 2.2% in 1963 to 1.1% in 2009, the human population is still expected to reach 9 billion by 2025. What's more, the median age of that population is moving steadily higher – topping 40 in much of the developed world (it's actually 44.6 in Japan, though just 36.8 in the United States).

The population growth rate is a driving factor in nearly all the major trends, but the increasing age has a particular impact on two industries – medical services and pharmaceuticals. With greater wealth and longevity comes a demand for better health care and more effective drugs, but at a lower cost.

While well-known healthcare giants will certainly benefit from these changes, they'll also face heavy pressure to cut costs, which could slow earnings and profit growth. It thus makes sense to focus on smaller, more-specialized companies that will help the majors be more efficient – one being Transcend Services Inc. (Nasdaq: TRCR), recent price $24.11. Atlanta-based Transcend provides a range of technologies to help hospitals, clinics and doctors collect and manage patient information, which should reduce errors and increase the speed and accuracy of treatment protocols. The company earned 87 cents a share in 2010, with growth to $1.35 projected by 2012. Transcend doesn't yet pay a dividend, but instead uses earnings to expand via acquisitions, with a move outside the U.S. market anticipated quite soon.

The best potential plays in the drug sector follow the same logic. While industry leaders face expiring patents and government cost-control mandates – for instance, Johnson & Johnson (NYSE: JNJ) recently had to agree to reimburse Britain's National Health Service (NHS) for each patient who didn't respond to its drug Velcade – generic drugmakers are on the cusp of a boom in sales.

A top choice in this sector is Teva Pharmaceutical Industries Ltd. (Nasdaq ADR: TEVA), recent price $49.12. With operations in 60 countries around the world, Israel-based Teva develops, produces and markets generic drugs in all treatment categories. The company earned $4.71 a share in 2010 on revenue of $16.1 billion, up from $3.77 and $13.89 billion, respectively, in 2009. The 78-cent dividend provides a yield of 1.58%.

In playing major demographic trends, it's also wise to keep an eye out for innovative sub-trends – and one to watch in healthcare is "medical tourism." Though there's no stock play associated with it yet, the Cayman Islands, long famed as a financial haven, just announced a $2 billion deal with renowned Indian heart surgeon Devi Shetty to build a 2,000-bed "healthcare city" to serve American patients and health-insurance companies at a discounted cost. More than 50 countries have now deemed medical tourism a national industry, so expect to see additional "offshore" facilities to follow, with some seeking investors.

2. Changing of the Guard: Ever since World War II, the United States has led the world both politically and economically, abetted by Japan and the major countries of Europe. Today, global geopolitical leadership is shifting, with China at the forefront and the other BRICs (Brazil, Russia and India) closing in. Investors seeking longer-term returns can no longer automatically assume the United States will get its way on important international issues, and should make stock selections accordingly – by employing a global perspective.

As Money Morning Chief Investment Strategist Keith Fitz-Gerald regularly points out, every investor today needs at least a few China stocks in his or her portfolio. And one stock that's clearly poised to capitalize on this trend (as well as the population-growth trend that we outlined above) is China Cord Blood Corp. (NYSE: CO), recent price $3.21.

Based in Hong Kong – and admittedly a bit speculative at this stage – China Cord collects, stores and tests umbilical cord blood stem cells, then supplies them to genetic research facilities and Chinese healthcare companies treating a variety of degenerative diseases and spinal injuries. The company is expected to report earnings of 18 cents a share for its 2011 fiscal year, which ends March 31, with growth to 23 cents in 2012. The stock recently hit a 52-week low, but is rated a "Buy" by several major analysts, who are predicting a return to the $6.50-a-share level it traded at in early 2010.

For those seeking a broader approach to shifting global leadership, the Industrial Select Sector SPDR ETF (NYSEArca: XLI), recent price $36.97, is a reasonable proxy for international growth. It focuses on a broad range of multinational corporations (MNCs) and conglomerates, with stocks that are listed in the "industrial" segment of the Standard & Poor's 500 Index. The fund listed earnings per share of $3.47 in fiscal 2010 and paid dividends of 59 cents, a yield of 1.60%.

3. Global Gluttony: The primary characteristic of an emerging middle class is that it simply wants more – of everything!

That's particularly true when the present lower class has so little, as is the case with the developing nations that are projected to account for 82% of global population growth between now and 2020. As such, the world is going to see a steadily rising demand for everything from consumer goods – such as cars, clothes, furniture and electronics – to infrastructure necessities such as housing, roads and municipal power and water systems.

New consumers also typically like to travel, and they often need guidance regarding what to do, which makes China Yida Holding Co. (Nasdaq: CNYD), recent price $7.80, a good choice for global-demographic-trend investors. The company, based in Hong Kong, provides advertising services for television and other Chinese media. It also operates tourism services. Those services target natural, cultural and historic sites and attractions. And for international visitors, China Yida operates the "Journey Through China on the Train program." China Yida had revenue of $54.5 million in 2010, with $1.27 a share falling to the bottom line, thanks to operating margins in the 55% to 60% range. The stock is also near a 52-week low, down from $16 a share in late 2009, so projected earnings increases in 2011 and 2012 should translate to quick price gains.

For those with more of a mainstream bent, the huge demand for new infrastructure projects around the globe should provide a steadily rising market for the products of Caterpillar Inc. (NYSE: CAT), recent price $108.37. The world's largest maker of heavy construction equipment, Cat has operations in North and South America, Europe and Asia, and is building new plants in Brazil and China, where it got nearly 20% of its 2010 revenue of $42.5 billion. (It was also one of the first Western companies to finance its expansion there by issuing Chinese yuan-denominated bonds.) Earnings per share were $4.18 in 2010, with earnings per share expected to grow into the $8-per-share to $10-per-share range by 2012, when revenue is expected to approach $60 billion. The $1.74 dividend equates to a yield of 1.61%.

4. Energized Earnings: As noted above, a larger middle class drives more cars, and has greater energy demands at home and at work. This can only push oil prices higher, opening the door for such alternative energy sources as wind, solar and even nuclear – despite the current problems in Japan.

China, for one, is unlikely to scale back its nuclear-power program, simply because its power needs are too great to meet any other way. Currently, it's planning to spend $511 billion on 245 reactors, with 40 complete and online by 2020. However, nuclear construction companies probably aren't the best way to play this trend at present, given the second-guessing (and liabilities) many face because of Japan. Better to go with a uranium mining company like Australia-based BHP Billiton Ltd. (NYSE ADR: BHP), recent price $91.26, which is best positioned to deliver ore to Asia. It earned $6.13 a share for the past 12 months, and the 92-cent dividend provides a yield of just over 1.0%.

Wind and solar-power suppliers and equipment manufacturers are generally too locally focused to provide really big trend-following opportunities, though Yingli Green Energy Holding Co. Ltd. (NYSE ADR: YGE), recent price $12.16, is worth another look (it's been recommended in several past Money Morning articles).

Most of the major oil stocks have already had significant runs, but a lesser-known one offers good long-term potential in a continued European economic recovery. Statoil (NYSE ADR: STO) is an integrated energy company based in Norway with operations in 40 other countries. At the end of 2009, the company had proven reserves of 2,174 million barrels (mmbbl) of oil and 18.1 trillion cubic feet (tcf) of natural gas. Statoil earned $2.16 a share in 2010, and the dividend of $1.10 provides a yield of 3.93%.

Fund investors seeking longer-term energy opportunities should consider the Direxion Daily Energy Bull 3X Shares ETF (NYSEArca: ERX), recent price $83.85, which uses leverage in a bid to produce returns equaling 300% of the performance of the Russell 1000 Energy Index.

[Editor's Note: There's a segment of the stock market whose investment returns are five times that of the typical stock.

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  1. Hai Quihuiz | April 24, 2011

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