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By Jeremy Glaser | 08-08-2011 05:07 PM

Dividend Payers Better Positioned Today Than 2008

Strong corporate balance sheets should protect investors income streams even as stocks sell-off, says Pat Dorsey of Sanibel Captiva Trust

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I'm pleased to be joined today by Pat Dorsey. He's the former Director of Equity Research here at Morningstar. He's now the director of research at Sanibel Captiva Trust, and is still a great friend of Morningstar.

Pat, thanks for joining me today.

Pat Dorsey: Thanks for having me. Always happy to be here.

Glaser: So, the market took quick another beating today after a pretty rough week. There's a lot of talk of sovereign debt downgrade that really got the markets roiling. And there's also speculation of if it was the European sovereign debt crisis, or if it was an economic slowdown. What do you think is the big driver behind the sell-off?

Dorsey: I mean, to me it really is these signs we've gotten over the past few weeks that the global economy appears to be slowing down. Certainly, the European sovereign debt crisis plays into that somewhat, because as the public entities like the ECB commit more money to buying Spanish and Italian bonds, that's going to have an effect on economic confidence in business investment. So, it does look like Europe is slowing down some.

Importantly, China is also slowing down some. Inflation has been an issue there over the past year. You've seen the monetary authorities raising rates and trying to rein in growth a little bit. You've seen its PMI index of manufacturing come down. Construction orders for heavy construction equipment went negative year over year for the first time since the big crisis in 2008-09. So, overall, it's a huge issue because China added 25% of all incremental GDP over the past decade. So, if China slows, Europe slows, and looks like the U.S. is slowing down. It's not disaster, it's not Armageddon, but it certainly is going to cause the equity markets to re-price.

Glaser: So, it certainly doesn't look like 2008 again, but a big slowdown in China is going to have an impact on a lot of firms. Caterpillar is down a lot today. Are there other names that you think might be a little bit defensive and be able to hold up in the face of a slowing in emerging market or emerging economies.

Dorsey: Yeah, and I think a good thing to keep in mind is that people talk about emerging markets and China plays with its giant broad brush. And you kind of have to parse A from B, because, again, China is probably going to be slowing down, but we're talking about slowing down from 9% growth to 6% growth. So, let's not want to hide under a rock anytime soon, and that slowdown is most likely going to be felt in the heavily cyclical areas like construction, such as with infrastructure spending. I think it's one of the reasons why you saw Caterpillar, for example, off, today, about 9%-9.5%, about twice as much as the broader market.

If you think about a company like an AB InBev or Yum! Brands, that's selling more to Chinese consumers whether it'd be fried chicken or beer, they are probably going to be hold up a little better because it's not like the Chinese consumer is overlevered. The savings rate tends to be very high right there. So, I would expect, for example, consumer spending in emerging markets to hold up much better than say capital spending.

The one thing you would want to be careful of, especially if you happen to be a fund or an exchange-traded fund investor is that the indexes, especially like the MSCI emerging-markets index or the EAFE, which is the main sort of developed markets index, they are stuffed with big-cap companies that aren't really tied to their domestic markets. A Big chunk of the Brazilian stock market exchange, their index, the Bovespa, is tied to Petrobras which is an oil company. A big chunk of Korea's index is tied to Samsung, which is a huge exporter. So, if you are trying to get this defensive consumer aspect in emerging markets' holdings, know what you own because you may actually own sort of a global place, and not a place tied to the those domestic markets.

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