Trip Around the World: Where are the Opportunities in Global Markets?

Now that 2011 is drawing to a close, it is time for investors to begin to think about their strategy for 2012. While the last year has been hardly fruitful for most, the markets, thus far, have avoided a complete meltdown. Given the state of the global economy and the intensifying European debt crisis, this in itself should evoke feelings of at least temporary relief. While a cautious approach in the New Year appears to be the prudent course of action, some of the dislocations in global financial markets that have occurred in 2011 may be offering up opportunities. In particular, it may be useful to look back on the performance of various global stock markets and attempt to draw some conclusions about which are attractive and which are not. The first stop is the United States. Year-to-date, the SPDR S&P 500 ETF SPY is down a little less than 2%. Frankly, this is a relief. It would not be hard to imagine a situation where the S&P was down 10% or even 15%. While it has not been a profitable year, it hasn't been a total disaster either. More losses may be on the horizon in 2012, however. The American economy is just not growing at a sufficient rate to make investing in domestic stocks appear wildly attractive - but it is important to juxtapose this view against the extremely low yields in the bond market. The 10-year yield on U.S. Treasuries is sitting at 1.98% and there just isn't much to get excited about in bonds. It's actually kind of frightening. If you are buying bonds today and turn out to be wrong with regard to the direction of inflation and economic growth it is going to be painful. Even if you are right, it is hard to imagine making much money in the current interest rate environment. If 2012 brings a stock market meltdown and recession in the United States, however, being in high-grade corporate bonds and Treasuries is going to look prescient. Against this backdrop, U.S. investors should have some exposure to U.S. stocks, but a cautious stance seems to be warranted. In the U.S., where more volatility and losses are a very real possibility, large cap, multinational, dividend paying names appear to be the most attractive. Despite some rather severe hiccups, China still has the best economy in terms of growth in the world. This fact, however, has provided little solace to investors in 2012 with the iShares FTSE/Xinhua China 25 Index ETF FXI falling more than 20% in 2011. Fears of a hard landing in China have hurt the country's stock market. Furthermore, falling Chinese stocks may be foreshadowing more losses in developed countries which rely to a large extent on Chinese demand. The long-term fundamentals in China, however, appear to be attractive relative to more developed economies which are struggling under a mountain of debt. Furthermore, the FXI has outperformed the S&P 500 by a wide margin over the last 5 years. At these levels, investors may want to increase exposure to Chinese equities through an ETF like the FXI - but only if you are in for the long haul. More market volatility will surely hit Chinese stocks hard, but the long-term outlook remains attractive relative to other regions. Europe has become the focal point of the investment world as the region's sovereign debt crisis has the potential to unleash a full-blown global meltdown which could eclipse the 2008 crisis in both scope and severity. It is that serious. Thus far, the Vanguard MSCI Europe ETF VGK has fallen 17.50% in 2011. Unless you have a penchant for very high risk investing, Europe is not the place to be right now. There could be great bargains down the road, but at this point it is just not worth the risk. Many top investors believe that much of the European banking system is essentially insolvent due to their exposure to distressed sovereign debt. Some notable hedge fund managers are even placing large bets on hard defaults in countries such as Greece and Portugal in 2012. If this occurs, European stocks will cascade much lower and likely take down other global markets with them. Europe is the epicenter of what could become a very large financial storm. The prudent action is to stay away. Brazilian stocks have been among the hardest hit in 2011 as the global economy has faltered. The iShares MSCI Brazil Index ETF EWZ is down more than 26% year-to-date. The ETF, however, is up more than 22% in the last 5 years versus a loss of 13% for the S&P. Given the pullback, the Brazil ETF looks attractive going forward on a risk/reward basis. It is important to remember, however, that it will be more volatile than the S&P 500, for example. If global financial markets are hit hard in 2012, it is very possible the EWZ could fall another 30% or more. Despite the risk, Brazil's fundamentals are attractive relative to other regions. The country is resource rich and has exposure to the current bull market in commodities and also has a much lower debt/GDP level than many developed economies. The EWZ also pays a very nice dividend which will make it easier to hold onto during a protracted sell-off. The Market Vector Russia ETF RSX has been devastated in 2011 falling nearly 29% with most of the losses coming since August. The ETF is currently sitting around $4 above its 52-week low. Russia is a tricky investment proposition due to the possibility of political turmoil. The country's debt and demographic outlook also does not inspire confidence. What is interesting about Russia, however, is its vast natural resources, particularly oil. For this reason, given the sell-off in the RSX in 2011, investors may want to add some exposure to Russian stocks. The bull market in commodities, while prone to severe volatility, is very real and global demand for resources could help propel the Russian economy in the coming years. The final two ETFs that investors may want to consider are the iShares MSCI Canada Index ETF EWC and the iShares MSCI Australia Index ETF EWA. Both have been hit hard in 2011, falling 17% and 16%, respectively. Both, however, have outperformed the S&P 500 over the last 5 years, with Canada beating the U.S. index by a wide margin. Similar to both Russia and Brazil, these countries have vast natural resources. They also are more fiscally sound than the United States or most European countries. Both ETFs also pay dividends with the EWA yielding over 5% right now. For these reasons, both Canada and Australia are attractive regions for investment capital and will provide portfolios with global diversification in 2012 and beyond. Get realtime market updates and profitable trading ideas with Benzinga's news feed, Benzinga Pro, here.