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By Conor McCreery
Globe Investor Magazine Online, June 5, 2009
Sure, North American markets have been up the past three months, but you’re still not convinced you want to take any big risks with your money. You’re not alone.
“I think we’re going to trade sideways for a year, a year-and-a-half, and that would be a positive thing,” says Drummond Brodeur, a portfolio manager at CI Financial.
However, at the same time you don’t want to miss the growth boat entirely. Why not diversify into the “hidden blue chips?” These emerging market firms have steady businesses, nice yields, but still offer the chance to grow as the home country does. Mr. Brodeur feels that “the last 10 years of U.S. consumer-spending driven growth has to die” largely because of unsustainable personal debt levels.
He believes the middle class will continue to emerge in the BRIC nations (Brazil, Russia, India, China) and beyond, and that a smart investor can play that domestic growth fairly safely.
UBS also sees opportunities abroad, especially in Asia. A recent report from the brokerage says that “Asian profitability fundamentals are quite strong … making the region quite attractive.”
Antoine van Agtmael, the man who coined the term “emerging markets,” believes many companies in emerging markets are poised for growth. His argument is that many people analyzed the financial crisis incorrectly: “Typically we say because we had a problem here, they had a problem there, that’s wrong.” Mr. van Agtmael says the emerging markets actually got hit before the West, largely because as demand softened here, emerging markets – which export so much to the West – felt the effects before we did. While consumer demand may not be growing in the world’s largest economies, it has stabilized. And that means emerging markets are going to start producing again.
“Think of it as a case of first in [a recession], first out economics,” he said. “They make what we use, and you need to make goods before [we can] use them.”
Here are some blue-chip stocks from emerging markets:
Redecard (Sao Paulo Stock Exchange: RDCD $28.10 Brazilian Reals)
Redecard runs the platform for MasterCard and Diner’s Club in Brazil. When you use that plastic in Sao Paulo it’s a Redecard machine that allows the transaction to happen. “That means no credit risk, and they earn a fee per swipe,” said Mr. Brodeur. He likes the stock for its exposure to Brazil’s emerging middle class. In 2000, only 9 per cent of Brazilians used some form of credit. Last year it was 21 per cent. “There is extremely strong growth potential here,” he said, noting the dividend pays a yield of nearly 6 per cent. But does Redecard have a blue-chip like balance sheet? “Net cash and no debt,” said Mr. Brodeur. He has a target price of $35 Brazilian reals over the next 12 months.
Taiwan Semiconductor (NYSE ADR: TSM. $10.29 U.S.)
While Mr. Brodeur generally likes firms with limited exposure to the world economy now, he makes an exception for this “global leader” in the semiconductor foundry business.
“Nobody can compete with them on a global basis,” he said. That’s because of the firm’s ability to make chips cheaper than anyone else. That ability has allowed TSM to expand its contract manufacturing relationship with firms like Intel and Texas Instruments.
TSM is also the type of manufacturing company Mr. van Agtmael likes – a firm with low inventories that has no fear about ramping up production.
And Mr. Brodeur says that production is already needed. Major chip designers slashed their own inventories through the fourth quarter, and now they seem to be too low. “There have been reports of more rush orders in the past six weeks,” Mr. Brodeur says. While Brodeur only has a $10.50 (U.S.) 12-month target on TSM, he is also forecasting earnings to more than triple in 2010 and 2011 in comparison to his $1 per share estimate for 2009. With a 4.24-per-cent yield he sees as stable, Mr. Brodeur says he is happy “to get paid to wait.”
China Mobile (NYSE ADR: CHL. $50.683 U.S.)
China Mobile is a favourite of the portfolio managers at Barings. It fits into the four key areas Barings wants its customers to own in emerging markets: banking, infrastructure, energy and mobile telephony.
Agnes Deng at Barings Asset Management likes China Mobile because she sees it as cheap, trading at roughly 12 times earnings, near the very low end of its historical range and less than half of its high point.
With free-cash flow yield of between 12 and 15 per cent, Barings says it gives the firm the flexibility to use that cash to expand, buyback shares, or dole out a special dividend to shareholders. Currently, the firm has a dividend yield of 3.5 per cent. China Mobile has 70 per cent of the domestic market making it a 900-pound gorilla holding a cell phone. That gorilla can also put on some weight, as Barings says the most recent data shows that mobile penetration in China is less than 20 per cent.
Bharat Heavy Electric (National Stock Exchange of India: BHEL 2,179.05 Indian rupees)
This Indian infrastructure company is also well liked by Barings. The company sees Bharat as a good way to play the $100-billion (U.S.) in infrastructure spending expected from the Indian government over the next five years. Bharat specializes in the power sector and Barings is impressed by the company’s backlog which stands at close to $20-billion. Barings says that’s “equivalent to almost five years of revenue.” Barings also sees the Indian market as oversold.
While the NSI has bounced back from February’s all-time low price-to-earnings ratio of roughly 10-to-1, the index is still trading at just 14 – well below historical levels. With minimal debt – a debt-to-equity ratio of 0.01 per cent – and excellent revenue visibility BHEL is a buy for Barings.
Xinao Gas Holdings (Hong Kong Stock Exchange: 2688. $11.92 Hong Kong)
Mr. Brodeur like this Chinese utility which he says is hooking up 750,000 thousand homes a year. “It’s a play on housing, a play on the emerging Chinese middle class,” Mr. Brodeur said. Currently the stock yields about two per cent. When comparing Xinao to North American utilities, Mr. Brodeur, sees all the stability one expects from the business, but a much better growth profile. He forecasts annual EPS growth to be in the 15- to 20-per-cent range for the next five years. And Xinao is a little cheaper. It is trading around 14 times earnings; established North American utilities tend to trade at closer to 15 or 16 times earnings.
Xintao is “fairly valued in the short-term with good-value coming in the long-term,” he said, adding that he’d be “happy to buy and hold at this price.”
Special to The Globe and Mail
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