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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
Investing In Aussie Agriculture
28 AUG 2013 Matt Woodington It may have been a pretty dull spectacle in general but for those in the business of agriculture, the first election debate between Kevin Rudd and Tony Abbott was exciting for the mere mention of their industry. For Australian agribusinesses, Asia’s rising middle classes and their growing appetite for better, or simply different, foods is a tantalising opportunity but investment in the sector is needed. Indonesia is currently the biggest importer of Australian agricultural products, with Japan, South Korea and parts of the Middle East not far behind, but demand is on the increase throughout Asia, as more wealth leads to a taste for the kind of grains and proteins Australia produces in droves. Meanwhile, as the mining boom subsides, plenty of questions linger around how the hole it leaves behind in the Australian economy will be filled. Just like Australia can’t feed Asia by itself, agriculture won’t replace mining but it could certainly play its part. “It’s coming back into focus, I think the fact that it even gets a mention in the first debate between the leader of the opposition and the prime minister, shows the rejuvenation and increasing interest in agriculture and agribusinesses generally,” says Tim Burrow, a director at the Agribusiness Association of Australia. Australia’s export pedigree Although it’s a relatively small food producer on a global scale, Australia punches above its weight as an exporter, because it only uses roughly a third of its produce. “We export a lot of protein, whether it be animal protein in the form of beef or vegetable protein in the form of good quality wheat,” says Burrow. “There will be particular types of grain, meat or sugar that Asian people wish to have, just like we import quite a lot of food because it’s what we want and other countries or farmers are better at producing it.” Chinese demand for wheat and dairy products is growing fastest, as its middle class expands and mistrust of local food sources remains an issue. According to CBA analysts, China has contributed 33% to the growth of global fresh milk consumption since 2010 and 80% to whole milk powder growth, often used for infant formula. However, Chinese dairy demand still lags that of comparable developed-Asian countries. “For example, Chinese per capita cheese consumption grows as incomes grow. If China’s rate of per capita dairy consumption matched the developed-Asia average, Chinese cheese consumption would surge 8.4 times to 3 million tonnes, equivalent to a 16% uplift in global demand,” according to a CBA analyst note. “Despite Chinese investment in dairy genetics and infrastructure, recent local feed shortages – evidenced by swelling imports for corn, wheat and soybeans – supports CBA Commodities’ view that future growth in Chinese dairy consumption will be largely satisfied by imports. “The New Zealand and Australian dairy sectors have an opportunity to satisfy Chinese demand.” Agricultural consolidation New Zealand has stepped ahead of Australia with its free trade agreement with China, but CBA believes demand will continue to outstrip supply. New Zealand is the lowest cost dairy producer in the world, with Victoria in second place. Costs are much higher even in places like North America where farmers rely more on grain fed cattle yards, rather than good old fashioned grass. The world’s biggest dairy exporter, Fonterra of New Zealand, was recently forced to assure China and other importers over the safety of its milk following a botulism scare after bacteria was found in whey powder used in its infant formula. One of Australia’s biggest infant formula producers is Bega Cheese, which derives around half its earnings from exports. Bega, whose earnings increased 13% in the 2013 financial year, also owns around 18% of Warrnambool Cheese and Butter Factory, in which Murray Goulburn also has a 14.5% stake. Reports suggest the two shareholders could be positioning themselves for a takeover approach and while another domestic tie-up could stem from Ruralco’s interest in Elders, what’s causing more of a stir at the moment is the continuing trend of overseas buyers picking off Australia’s biggest agribusinesses. ABB Grain was bought by Canada’s Viterra in 2009, which is now part of Glencore, while AWB was sold to another Canadian company Agrium a year later. The major deal currently on the table is a $3.4bn offer for GrainCorp from US company Archer Daniels Midlands, which would see another of Australia’s biggest grain companies fall into foreign hands. The proposed deal, which is due to be resolved by November, has caused controversy and frustration among those that fear Australia is losing control of too much of its agricultural real estate. “What we haven’t really seen in the agricultural sector unfortunately is a merger of two big Australian companies to become a global player,” said Burrow. “We simply don’t have enough investors in Australia to grow the agricultural sector fast enough to meet the opportunity demand out there. So we need international investors, whether it comes from the UK, US, China, the Middle East or wherever it might be. “At a corporate level they are very open to international investment, at an individual personal level, we all get a bit concerned about who’s going to own our own food chain.” Understanding the investment challenges One of the big challenges for individual investors is getting to grips with the short-term volatility of agribusiness, which is considered a highly cyclical sector due to its pronounced ups and downs. Weather plays an important part and not just the weather in Australia either. Dairy farmers were hit hard by the periods of drought between 2001 and 2009, particularly in Northern Victoria. The struggles of Australian farmers may have helped their northern hemisphere counterparts, however, as demand for their goods would have gone up due to the fall in global supply. Likewise, if conditions for growing wheat are perfect everywhere in the world at any given time, then the lavish supply would cause prices and therefore the earnings of producers to fall. With those variations at play, keeping costs to a minimum is a priority for agribusinesses, which is why some have moved to mechanical harvesting, used for grapes for example, and more dairy farmers are employing robots in the milking shed. Agribusinesses will have been relieved to see the value of the Australian dollar fall, which should have a broadly positive impact on the industry. A lower dollar makes Australian goods cheaper for overseas buyers and gives the companies a chance to increase margins. Tasmanian Salmon farmer Tassal is one company to have put its export business on hold until the dollar reached a more palatable level, although it has done rather well from its domestic operations. Burrow believes that agribusinesses are best suited to long term investors, while the possibility of more takeover activity in the sector could be an attraction. The offer for GrainCorp represented a 49% mark up on its closing share price the previous day. The broader industry faces plenty of other challenges; the need for more investment in infrastructure to access remote regions and facilitate more export traffic, and fixing the shortage of qualified agricultural people coming through Australia’s universities are among them. “Agriculture needs focus, it needs a political statement on it because it requires the space to develop rapidly to meet the demands,” said Burrow. “I just think it’s good that the political platform at the moment is recognising the importance of agriculture.” Continue reading
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