Investing in Emerging Market Multinationals
As a student in Tokyo, I played on a talented U.S. Embassy basketball team full of Marine embassy guards.
While we were mowing down every opponent, I noticed that the Japanese referees tried very hard to even things out by calling fouls on us every chance they got.
For example, a blocked shot was always a foul.
This is called home-court advantage.
American multinational executives, trying to grow in emerging markets like India, must feel just like we did, as regulators do everything possible to keep them off balance by favoring domestic companies.
This is just one reason you should invest in emerging market multinational stocks.
I call these stocks "boom chips." The best way to describe a boom chip is to contrast it with, what is in many ways its opposite, a blue-chip stock.
Blue-chip companies are large, stable, mature companies with slow but steady sales and profit growth, and dependable dividends.
A good example is Kraft (NYSE: KFT) - a bundle of blockbuster brands including Jell-O, Maxwell House, Tang, Miracle Whip and Oreos. Kraft has 12 brands, generating $1 billion each year, and Tang is the most recent addition to this exclusive club. With all of these killer brands aimed at emerging growth, Kraft is expected to grow revenue around 4% a year over the next three years. Not bad for a food giant.
But while a stock like Kraft is a great way to protect wealth, you need to think a bit more boldly to put some sizzle into your portfolio and build real wealth.
You do this by following John Train's advice in his book Preserving Capital:
"Be an adventurer; like the American of a century ago, not his clerkish descendant of today. You must think as a builder, a conqueror."
You do this with boom chips, which offer:
- Much faster growth than blue chips.
- Home-court advantage against foreign competitors.
- Breakthrough products and services.
- Big cost advantages and protected markets.
- Still at an early stage of their growth cycle.
- Off the radar screen of Wall Street analysts.
- Big upside potential – 10 times growth over three years.
What Are Boom Chips?
Boom chips are oftentimes multinationals based in emerging markets.
The Economist projects that 39 of the 45 fastest-growing economies over the next five years will be emerging markets.
Emerging market countries make up nearly 40% of the value of the world's stock markets and 35% of global consumer spending, plus account for a staggering 83% of the world's population.
According to the World Bank's projections, the global middle class will rise from 400 million in 2000 to 1.2 billion by 2030, making up 93% of the world's middle class and controlling over $6 trillion in spending power.
Two Great Boom Chips
I would now like to highlight two food boom chips that are growing much faster than Kraft.
Brasil Foods (NYSE: BRFS) is a market leader in meats and dairy with two-thirds of its sales in Brazil. It's the world's largest poultry exporter, Brazil's largest maker of frozen microwave dinners and meats, and supplies McDonalds, Pizza Hut and Burger King restaurants. During a recent quarter, its net earnings rocketed 73% and its three-year average annual total return reached 35.6%.
Here's the clincher for me: Studies show that as incomes rise in emerging markets, diets change rapidly to include less rice and vegetables and more meat and dairy. This is a growth sweet spot and Brasil Foods is at the bull's-eye.
And so is today's Investment U Plus pick. It's a leading poultry and animal feed company that grew net profits 15% on an annualized basis over the past 10 years. Its stock was up 20% in 2011 while emerging markets were down 20%.
Its CEO took over his family's small grain-seed business when he was 30, and grew it into a leading poultry provider, and one of the largest animal feed distributors in the world. It has $33 billion in revenue and operations in more than 17 countries (including the United States).
It's currently ramping up growth by pushing into Vietnam and China.
So blend some boom chips with traditional blue-chip stocks and supercharge your global portfolio.
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[wptabtitle]Today's Stock Picks[/wptabtitle]
[wptabcontent]Brasil Foods (BRFS) is an emerging market multinational company that produces and sells poultry, meats, milk, and dairy products. The stock has risen around 50% since November 2009, outpacing the S&P 500 by over 20%.
To discover another "boom" chip stock that has grown net profits by 15% per year throughout the past decade, sign up for Investment U Plus today.[/wptabcontent]
[wptabcontent]There's more information coming out to give more credence to the talk that global wealth and growth will stem from emerging rather mature markets for the next few years.
Morgan Stanley is reporting that emerging-market stocks may rise 39 percent by year's end 2012. They see a "soft landing" for China's economy, earnings growth and cheap valuations as the main reasoning behind the assessment.
21 Emerging Country Indices
The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
According to Jonathan Garner, Morgan Stanley's chief emerging market and Asia strategist, the MSCI Emerging Markets Index may jump to 1,355 by the end of next year - up from the 976.86 it closed at this Monday. Morgan Stanley is now in agreement with UBS AG (NYSE: UBS) in favoring Chinese stocks for next year founded in the confidence the government will loosen monetary policies to support Asia's biggest economy.
Garner, who's based in Hong Kong, went on to say, "Inflation is probably going to fall going forward and we hope for a soft landing in growth... We should be in a better environment for the stock market."
Why all the optimism?
The MSCI developing nation index has rallied 17 percent from this year's low early last month. Policymakers from China to Indonesia and across the rest of Asia have moved to bolster economic growth by not raising borrowing costs or even lowering them. Garner suspects the rally has already begun from the low in early October.
As you expect, Morgan Stanley favors China most among emerging markets in Asia and its consumer companies. The Shanghai Composite Index has risen more than nine percent from this year's low on October 21 as inflation slowed and the government announced measures to help small businesses attain easier access to bank loans. The Hang Seng China Enterprises Index of Chinese companies - listed in Hong Kong - climbed 15 percent since its year's low.
As far as inflation is concerned, China's consumer price gains slowed to 5.5 percent in October from a three-year high of 6.5 percent in July. The slowdown in inflation gives the Chinese government more flexibility with monetary policy, which will help as the ever-looming European sovereign debt problem will hurt exports.
"We expect a soft landing in China and earnings growth should hold up very well in this environment, we think the market is too cheap," said Garner. China may cut interest rates in the first half of 2012, he told Bloomberg.
UBS also prefers China, along with India and Brazil, among emerging markets for 2012. With such a broad investment spectrum, this would probably be a good time to go with a fund such as the Templeton Emerging Markets Fund (NYSE: EMF) or the Vanguard Emerging Markets Stock Index (VEIEX) to have across the board exposure. For direct exposure to the MSCI Emerging Markets Index, there's a fund - the MSCI Emerging Markets Index Fund (NYSE: EEM).
[wptabcontent]Many countries outside the United States operate state-controlled companies. Most are giant behemoths, employing millions of people between them.
These companies - among the world's largest corporations - are primarily in the banking and energy sectors. Some, like the giant oil and gas company, Saudi Aramco, aren't open to investors at all. But many are.
Some fund managers shun these companies. With the governments that control them wielding various degrees of power over their daily operations, shareholder interests aren't always viewed as a top priority.
But some managers view them as proxies for the growth of the emerging market countries in which they operate. Many are huge "cash cows," throwing off billions in profits each year. Some emerging market funds have some of these companies as core holdings in their portfolios.
Let's take a look at five you might want to consider adding to yours. Not too surprisingly, at least to me, four of them are energy companies.
The largest is PetroChina Company Limited (NYSE: PTR). It's the publicly listed arm of China's state-owned oil monolith. It's the biggest of the Chinese oil companies, and it employs over 500,000 workers.
It's the classic state puppet, with 86 percent of it owned by China National Petroleum Corporation (CNPC). CNPC controls its management, elects its board of directors, and decides on the amount and timing of any dividend payments.
But PetroChina is widely viewed as the proxy for China's oil and natural gas sector. It holds sixth place in the Forbes listing of the world's largest listed companies.
PetroChina is expanding rapidly, and is actively seeking acquisitions and investments in oil around the globe. There's plenty of upside here, especially as car sales continue to explode in China.
Our second state-owned monster is a bank. But not just any bank: it's the Industrial and Commercial Bank of China (HKG: 1398). Traded on the Hong Kong and Shanghai exchanges, ICBC is more commonly known is the largest of the four big Chinese banks.
Holding down the seventh spot on Forbes' list, ICBC employs 387,000 people. It has a staggering 440 million holders of credit and debit cards.
Investment managers are split when it comes to investing in Chinese Banks. Jim Chanos, the billionaire short-seller, told Bloomberg News a few weeks ago that: “The Chinese banking system is built on quicksand, and that's the one thing a lot of people don't realize. The banking system in China is extremely fragile.”
Chanos is shorting the Agricultural Bank of China. Others aren't as bearish as Chanos, and ICBC, China Construction Bank Corporation (HKG: 0939) and other large Chinese Banks are held in a number of mutual funds.
From the subhead, you've probably guessed the third company is Petroleo Brasileiro SA (NYSE: PBR), more commonly known as Petrobras. This giant South American oil and gas exploration and production company is the world's deep-water expert.
It has to be, since that's where most of its oil and natural gas deposits are located. Last year, Petrobras launched the biggest stock issuance in the history of the world, raising $70 billion in the process.
It plans to use the capital to fund its $250-billion offshore oil and natural gas exploration and development program. The company employs about 77,000 and by value represents about 10 percent of the Brazilian Stock exchange (the Bovespa). It clocks in at number nine on the Forbes list.
The true extent of its offshore reserves are really an unknown, but are estimated somewhere between 50 and 500 billion barrels. While the Brazilian government owns 48 percent of the Brazilian giant's common stock, it retains 64 percent of the company's voting stock.
Petrobras' profits have suffered in recent years, primarily due to currency volatility. Despite the “managerial autonomy” the government insists that Petrobras has, it's sued to generate jobs and to control energy prices within Brazil.
Nonetheless, Petrobras could eventually rival Saudi Arabia in overall oil output in as little as 10 to 15 years. It bears watching.
The King of Natural Gas
This company has often been described as a "state unto itself." It's Russia's Gazprom OAO (PINK: OGZPY), the largest company in the country.
This state-run monopoly owns the largest gas transportation system in the world, supplying natural gas to Russia. European countries have become increasingly reliant on it, too.
Employing over 400,000 workers, Gazprom accounts for over 80 percent of Russia's natural gas production, and about 10 percent of its economic growth.
Given its gas monopoly status, and its 50.002 percent control by the Russian government, Gazprom has been the focus of political concern of the countries it sells to. The central government, through its “representatives” controls investments, financial plans, and cash flows.
They also control the valves that supply gas to Europe. Back on January 1, 2006 in one of the numerous natural gas price disputes with the Ukraine, Europe was shut off from Russian gas for three days.
Gazprom is 15 on the Forbes list, and is a mainstay of funds that focus on the BRIC nations, emerging market countries (particularly European ones), and Russia. Gazprom will figure prominently in the world's supply of natural gas, and will soon be one of the largest exporters of liquefied natural gas (LNG).
China and Energy... Again
The fifth company on our list is another Chinese energy giant. Sinopec Shanghai Petrochemical Co. (NYSE: SHI) is also engaged in the petroleum and chemical industries.
The company owns and operates over 30,000 gas stations in China. That's more than BP plc (NYSE: BP) has worldwide. It's 55 percent owned by the state-owned Sinopec Group.
Employing over 400,000 people, Sinopec owns China's best oil and petrochemical assets. It - like PetroChina - is seen as a great play on China's seemingly endlessly growing demand for energy.
The company is also branching out across the globe. Its most recent play was taking a 30-percent stake in the Brazilian arm of Galp, a Portuguese oil company.
So there you have five of the largest state-owned companies in the world. If you have an appetite for risk, and believe oil is going up (it is and will continue to do so), then four of them are companies you could consider taking a small stake in.
I'm with Jim Chanos though, in steering clear on ICBC. Time will tell, but China's banking system could be the next domino to fall.