Big-picture risks dominated markets in 2011, and stocks across most markets and sectors tended to move as a herd in response to news events.
For example, when the yield on Italian debt spikes, European banks sell off because many have significant exposure to this market, both to the sovereign bonds as well as to companies based in Italy. The banking sell-off, in turn, raises fears of a credit freeze in the E.U. and hits European stocks more broadly, affecting sectors as diverse as retailers and energy.
U.S. banks don't have as much direct exposure to Italian debt as their European counterparts, but they do trade with the big E.U. banks. So trouble in Europe can spark a sell-off in financials as New York markets open. This, in turn, can drag down U.S. markets and spark concerns of a U.S. economic slowdown hitting Asian markets, as well.
On the flip side, rumors of an E.U. bank bailout could send global stocks up as a group, regardless of sector or fundamentals.
This phenomenon came to be known by many investors as "risk-on/risk-off." When investors were looking to add risk they bought stocks with abandon, and when the preferred trade was to reduce risk, most institutional traders would sell all stocks and buy U.S. Treasury bonds.
Luckily, you don't have to play that game.
In my High-Yield International advisory, I seek to identify pockets of stability that can withstand global markets' herd mentality. Generally, dividend-paying stocks have offered a measure of stability and have tended to outperform the broader markets. For example, in the U.S., the high-yielding utility sector was the S&P 500's top-performing group in 2011, gaining about 20%.
There's only one problem.
The average stock on the S&P 500 yields a paltry 2%. Meanwhile, you can find much higher yields abroad, without adding a high degree of risk.
Many of the High-Yield International holdings are relatively recession-resistant and can continue to pay dividends even if the current market storms persist in 2012.
For example two of my portfolio holdings are preferred shares. These securities provide a high level of income safety because they must continue to pay their full fixed dividends unless their parent company eliminates dividends paid to common shareholders. My portfolios also contain significant allocations to bond funds, which often act as a port in the storm when global stock markets are getting hit.
Health care stocks are another example of a safe haven. Even with the economy in recession, consumers still require access to pharmaceuticals and health care services. And in most developed countries, a large portion of consumers' health care bills are picked up by third parties -- typically some combination of the government and health insurers. While this leaves health care stocks vulnerable to government budget cuts at times, it insulates the sector from the much more volatile swings in discretionary spending that accompany economic downturns.
For pharmaceutical firms, the quality of a company's existing drugs and pipeline of new drugs in development are the key fundamentals to watch. Drugs are typically protected by patents for years after they're introduced, allowing the patent-holder to generate significant profits. Once those patents expire, generic competition quickly erodes pricing and reduces profit margins.
As you might expect, investors tend to prefer drug firms with less exposure to near-term patent expirations or drug companies that have a number of promising drugs in latter-stage clinical trials.
With these points in mind, I screened my vast database of stocks looking for foreign health care firms trading as American Depository Receipts (ADRs) with a yield of at least 4%.
Here's what I found...
Risks to Consider: Some of the firms in this list trade over the counter, meaning they are not listed on a major U.S. exchange. Given that these are global firms, that shouldn't scare you away from buying them, but you will need to check with your broker when you're ready to buy.
Action to Take --> While the any of the stocks in this list are worth further research, French drug giant Sanofi-Aventis (NYSE: SNY) is a good example of a well-positioned pharmaceutical firm. Many of the drug giants, including Sanofi, have experienced a wave of patent expirations in recent years. The good news is that the Sanofi has more than enough new drugs likely to be launched during the next few years to keep revenue growing. The list includes cancer drug Zaltrap, as well as Lyxumia, for diabetes. Even better, Sanofi acquired U.S.-based biotechnology giant Genzyme in April 2011, adding a host of potential new blockbuster drugs to its pipeline, including a treatment for multiple sclerosis and another for cholesterol.
The company's strong underlying fundamentals have allowed Sanofi to handily outperform broader European markets. While more than three-quarters of stocks listed in France declined in value in 2011, Sanofi soared more than 18%. In a volatile year for most stocks, the stock has handed investors a solid return with less volatility than the broader market and a 5% yield.