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Investing Sensibly in China and Its BRIC Buddies
By David Smith August 28, 2013 It was a dozen years ago that Jim O’Neill, the recently retired head of Goldman Sachs ‘ money management arm, coined the term BRICs. It was simply an acronym for Brazil, Russia, India, and China, the four developing nations that were then expected to lead the world’s economic growth well into the future. But the foursome has fallen far short of those expectations. As The Wall Street Journal noted just last week, O’Neill says now that only China has come close to meeting the once heady expectations for the group. Still going strong? Assuming the big country meets the 7.5% growth rate that’s generally expected of it in 2013 — major slippage from prior years, but far better than the 1.5% improvement that’s likely to be coaxed out of the U.S. — it could nudge the combined BRIC growth rate toward intermediate-term expansion of about 6.6%. That’s well below the 8.5% for the past decade, but hardly chopped liver. A key consideration then becomes the existence of meaningful investment opportunities in the countries. India is the most economically downtrodden right now. Indeed, as Derick Irwin of Wells Fargo Advantage Funds was quoted by the Journal as saying not long ago, “India is not an investible economy right now.” Battered Brazil And while my druthers for playing the BRICs lie in the energy sector — several big public companies have sallied forth from the countries to ply their trade internationally, thereby spreading their geographic and geologic exposure — I’d eliminate Brazil’s once beloved Petrobras for now. The Brazilian economy is a shadow of its former self, with likely growth of 2% for the next couple of years providing a meager contrast to the 7.5% the country achieved in 2010. And while discoveries in the pre-salt Santos Basin had the world atwitter not long ago, the realities of sky-high production costs tied to the technologically challenging venue have played a big role in the pummeling of Petrobras’s shares during the past 18 months. A Chinese threesome Turning to China, my inclination is to examine the trio of CNOOC ( NYSE: CEO ) , PetroChina ( NYSE: PTR ) , and Sinopec ( NYSE: SNP ) , in that order. CNOOC is China’s largest offshore producer, with core operations in Bohai Bay off the country’s coast, the China Sea, and the East China Sea. It also works in Australia, Nigeria, Uganda, Argentina, Canada, and the U.S. In February, it spent $15.1 billion to buy Canada’s Nexen, then that country’s second-largest oil company. In the process, it gained operations in the North Sea, the U.S. Gulf of Mexico, and West Africa. It earlier had formed a partnership with Chesapeake for a one-third interests in the Oklahoma City company’s sizable positions in the Niobrara play of Colorado and Wyoming and the prolific Eagle Ford. Despite its broad international swath, a healthy 3.70% forward annual yield, and a 32% operating margin, CNOOC’s forward P/E multiple is just 7.4 times. PetroChina is the largest of the lot, with a $205 billion market capitalization. It’s more operationally diverse than CNOOC, with segments that span exploration and production, refining and chemicals, marketing, and pipelines. PetroChina is acquiring more than half of ExxonMobil ‘s interests in Iraq’s West Qurna-1 field , which may or may not be a good thing. And, in a joint venture with Royal Dutch Shell, its considering constructing an LNG facility in Australia. The company provides a 3.50% forward dividend yield. But while its operating margin is barely a quarter of CNOOC’s, it’s forward P/E is 8.6%. That said, I’d rather own the Hong Kong-based offshore company. My conclusion is similar vis-a-vis a comparison between Sinopec and CNOOC. The former on Monday reported a more than 24% year-over-year earnings increase for the first half of 2013. And while its forward yield is a compelling 5.90%, its operating margin, at 3.6%, is about a ninth of CNOOC’s. In part for that reason, its forward P/E is just 6.2%. A Russian play in London As to Russia, I’ll keep it short but surprising: I’d invest in Rosneft , the country’s giant oil company. But I’d do so through BP ( NYSE: BP ) . As my Foolish colleague Tyler Crowe noted last weekend, BP owns just under a 20% interest in the big Rusky producer. That stake arriveded through the sale of its half interest in TNK-BP, formerly Russia’s third-largest oil company, to Rosneft. The result for BP? A hefty $460 million in annual after-tax dividends. And for investors? A means to participate in Rosneft’s massive expansion with something of a filter from Russian shenanigans . A Foolish takeaway So there you have it: CNOOC and BP appear to be the best vehicles for BRIC energy investing. That conclusion is subject to change for a host of reasons, including geopolitics. Nevertheless, it provides a starting point for analyzing the investment opportunities that still exist among the BRICs. With the energy sector holding steady in the midst of market volatility, one company makes especially good sense for the addition to Foolish portfolios. Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 2.19 million shares . An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare . Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits! Fool contributor David Smith owns shares of Chesapeake Energy and BP p.l.c. (ADR). The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). The Motley Fool has the following options: long January 2014 $30 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy . Continue reading
Africa To Establish Free Trade Area By 2015: Zuma
JOHANNESBURG, (Xinhua) — African countries are expected to establish a free trade area by 2015, combining the markets of 26 countries with a population of nearly 600 million people and a combined GDP of 1 trillion U.S. dollars, South African President Jacob Zuma said on Tuesday. “Importantly, this will form the basis for an Africa-wide Free Trade Area, which could create a single market of 2.6 trillion U.S. dollars,” Zuma told delegates attending the first meeting of the BRICS Business Council in Johannesburg. This will enable African countries to further promote intra- African trade, Zuma said, adding that under the auspices of the African Union, African countries are launching an ambitious Tripartite free trade area, bringing together countries of Eastern and Southern Africa. “Africa is becoming a remarkable success story which augurs well for the BRICS partnership,” Zuma said. BRICS is an acronym for the powerful grouping of the world’s leading emerging markets, namely Brazil, Russia, India, China and South Africa. At the 5 th BRICS Durban summit in March, special focus was put on BRICS’ cooperation with Africa. The BRICS-Africa engagement and dialogue signals a new departure and a new avenue to take forward the continent’s development agenda. The ongoing meeting of the BRICS Business Council, which was set up at the Durban summit, will address three key issues—investment opportunities, value-added trade and the BRICS Development Bank. Zuma devoted much of his speech to the potentials of Africa. Africa’s output, he said, is expected to expand by 50 percent by 2015, resulting in a 30 percent rise in the continent’s spending power. “It is becoming well-known as well that the rate of return on foreign investment in Africa is higher than in any other region in the world. This is not surprising given the competitive edge of the continent,” Zuma noted. Africa’s advantages include its extraordinary mineral wealth and agricultural potential. South Africa’s own mineral wealth is estimated at 2.5 trillion U.S. dollars. In addition, the continent has a young working population and a growing middle class with considerable and growing purchasing power. In moves to promote intra-African trade, South Africa will play its own part to promoting investments within the continent, Zuma said. Over the last few years, the South African Reserve Bank approved nearly 1,000 large investments into 36 African countries. These mutually beneficial investments generate tax revenue, dividends and jobs between countries. “While we appreciate that our intra-African trade is still marginal, real barriers are not tariffs, but include other factors such as under-developed production structures and inadequate infrastructure,” Zuma said. He said Africa is poised to make further progress given the focus on improving systems and policies. JOHANNESBURG, (Xinhua) — African countries are expected to establish a free trade area by 2015, combining the markets of 26 countries with a population of nearly 600 million people and a combined GDP of 1 trillion U.S. dollars, South African President Jacob Zuma said on Tuesday. “Importantly, this will form the basis for an Africa-wide Free Trade Area, which could create a single market of 2.6 trillion U.S. dollars,” Zuma told delegates attending the first meeting of the BRICS Business Council in Johannesburg. This will enable African countries to further promote intra- African trade, Zuma said, adding that under the auspices of the African Union, African countries are launching an ambitious Tripartite free trade area, bringing together countries of Eastern and Southern Africa. “Africa is becoming a remarkable success story which augurs well for the BRICS partnership,” Zuma said. BRICS is an acronym for the powerful grouping of the world’s leading emerging markets, namely Brazil, Russia, India, China and South Africa. At the 5 th BRICS Durban summit in March, special focus was put on BRICS’ cooperation with Africa. The BRICS-Africa engagement and dialogue signals a new departure and a new avenue to take forward the continent’s development agenda. The ongoing meeting of the BRICS Business Council, which was set up at the Durban summit, will address three key issues—investment opportunities, value-added trade and the BRICS Development Bank. Zuma devoted much of his speech to the potentials of Africa. Africa’s output, he said, is expected to expand by 50 percent by 2015, resulting in a 30 percent rise in the continent’s spending power. “It is becoming well-known as well that the rate of return on foreign investment in Africa is higher than in any other region in the world. This is not surprising given the competitive edge of the continent,” Zuma noted. Africa’s advantages include its extraordinary mineral wealth and agricultural potential. South Africa’s own mineral wealth is estimated at 2.5 trillion U.S. dollars. In addition, the continent has a young working population and a growing middle class with considerable and growing purchasing power. In moves to promote intra-African trade, South Africa will play its own part to promoting investments within the continent, Zuma said. Over the last few years, the South African Reserve Bank approved nearly 1,000 large investments into 36 African countries. These mutually beneficial investments generate tax revenue, dividends and jobs between countries. “While we appreciate that our intra-African trade is still marginal, real barriers are not tariffs, but include other factors such as under-developed production structures and inadequate infrastructure,” Zuma said. He said Africa is poised to make further progress given the focus on improving systems and policies. Continue reading
Emerging Market Sell-Off Sets Scene For Long-Haul Returns
By Fiona Hamilton (Money Observer) | Fri, 23rd August 2013 Emerging market sell-off sets scene for long-haul returns Steep setbacks in a number of emerging and Asian stockmarkets have attracted the attention of global and regional investment company managers. Stockmarkets in the BRIC countries have been relatively disappointing for some time, but other emerging markets – in Mexico, Thailand and the Philippines, for example – had a fantastic run prior to the June sell-off. As a result, the shares of many consumer-oriented and higher-yielding companies reached levels that persuaded leading emerging market managers to take profits. They were well advised, as some of the most highly rated companies, such as Mexican restaurant group Alsea, have fallen by more than 30%, even though their businesses seem unlikely to be materially affected by macroeconomic events. Tense times If confidence continues to be undermined by fear that central banks will reduce quantitative easing in the West and credit conditions will tighten in China, emerging stockmarkets are likely to remain out of favour, as Western money tends to fly home when nerves are jangling. Riots in Brazil and Turkey have not helped, and nor have the Syrian bloodbath, the increasingly authoritarian tone of the Russian government, or a series of interventionist or confiscatory moves by Latin American leaders. Despite all this, the long-term outlook for many emerging market and Asian companies remains far more exciting than it is for their counterparts in the West, and investors who buy when the worst of the setback is over should be well rewarded. Mark Mobius has managed the £1.6 billion Templeton Emerging Markets Investment Trust (TEMIT) since its 1989 debut, and has achieved net asset value total returns averaging close to 20% a year over the past decade. He believes emerging markets continue to offer potential for superior long-term returns, primarily because their economies are, on average, growing much faster than developed economies. “We believe this growth has become increasingly self-sustaining, as levels of trade with emerging markets start to dominate overall trading patterns, and rising consumer wealth in emerging market economies stimulates domestic demand. The finances of emerging market countries as a group, as measured by factors such as foreign reserves and debt-to-GDP levels, appear stronger than those of many developed markets, while demographic factors in emerging nations today are also much more favourable,” he says. Matthew Dobbs, who has achieved highly competitive returns for Schroder Oriental Income and Schroder Asia Pacific, makes a similarly positive case for Asia, which dominates the emerging market indices, and particularly for the 10 countries that make up the ASEAN region. Dobbs says political conditions seem encouragingly stable in the key countries of Thailand, Indonesia and the Philippines, which have a combined population of around 400 million. Urbanisation is continuing to increase, which boosts productivity and growth, while intraregional trade is growing, helped by improved infrastructure. He believes the Asian economies have become much less vulnerable to problems in the West because most are now well financed, with sturdier current account balances, robust foreign exchange reserves and less US dollar-denominated debt. Although such positive fundamental measures were priced in before the June correction, he says valuations have started to look interesting again, especially in areas such as property development, banking and healthcare. Investor options Investors wanting to venture into emerging markets have a variety of options among closed-end investment companies. The most indirect choice would be a developed market trust holding a lot of companies exploiting emerging market opportunities, such as Jupiter European Opportunities or Henderson Smaller Companies. They invest in companies with higher levels of corporate governance, their liquidity tends to be better and it is easier to keep close tabs on what a company’s management is up to. They can get plenty of exposure to some sectors of emerging market demand – consumer goods, industrial equipment, tobacco, luxury goods, aerospace and pharmaceuticals, for example. However, investors will be unable to tap into many other sectors through Western companies, so their emerging market exposure will be partial. Also, Western companies are more comprehensively followed, so it becomes harder to spot valuation anomalies. Some trusts in global sectors offer a more direct but still flexible exposure. Murray International is the stand-out option. It has roughly half its portfolio invested in Asian and emerging market companies and boasts a fantastic long-term record. Its net asset value fell sharply in June. If this brings the premium down to earth, it could offer a buying opportunity. British Empire Securities & General has about a quarter of its portfolio in Asia, largely through well-managed conglomerates selling at deep discounts to their asset values. Scottish Mortgage Investment Trust has just under a quarter of its assets in emerging markets and Asia, but its high-conviction portfolio and high gearing means it is not for the fainthearted. Scottish Investment Trust reduced its emerging market and Asian exposure to around 22% before the setback, but lead manager John Kennedy is keen to rebuild it. Global emerging market trusts, such as TEMIT, JPMorgan Global Emerging Markets Income and JPMorgan Emerging Markets, require a more wholehearted commitment, as they cannot swing the balance elsewhere when times are tough. Regional specialists in Latin America, eastern Europe and Asia Pacific are even more circumscribed. Single-country trusts have a narrower selection of equities and nowhere to hide if their market falls out of favour, but they may offer deeper exposure. The portfolio of VinaCapital Vietnam Opportunity, for example, includes private equity and real estate as well as equities. Antony Bolton’s difficulties managing Fidelity China Special Situations Investment Trust have underscored the importance of picking specialist managers with a lot of relevant local knowledge and contacts. Schroders, Aberdeen and First State Stewart are all strong in Asia and emerging markets, and offer a variety of trusts and offshore funds. Green tinge First State’s Pacific Assets Trust is a carefully-run trust that does not use gearing and steers clear of overvalued consumer companies. It looks to buy quality companies on modest valuations, but manager David Gait is also committed to finding companies that directly or indirectly address the enormous sustainable development challenges confronting Asia, such as sourcing clean water. Fund Data Name 1 Year (%) 3 Years (%) 5 Years (%) Rating Brit Emp Sec&Gen Tst plc 15.43 22.41 22.41 2 star(s) Fidelity China Spec Sits Plc 29.28 -8.10 – 1 star(s) Henderson Sm Cos 63.29 120.63 140.59 3 star(s) JP Morgan Emg Mkts IT plc 2.30 7.20 37.16 4 star(s) JPM GblEM Inc Tst plc 5.53 22.69 – N/A star(s) Jupiter European Opps 41.59 105.52 147.07 5 star(s) Murray Intl Tst PLC 15.05 50.78 96.78 3 star(s) Pacific Assets Trust plc 25.94 50.16 74.00 3 star(s) Schroder Asia Pacific 6.22 29.59 83.20 4 star(s) Schroder Oriental Inc 14.57 51.20 133.58 4 star(s) Scottish Investment Trust PLC 24.38 51.30 42.71 3 star(s) Scottish Mortgage IT 32.45 67.64 72.15 3 star(s) Templeton Emerging Markets 1.31 4.56 47.98 3 star(s) VinaCapital Vietnam Opp 31.55 43.41 -11.99 Continue reading
