Invest In: India: Tata Motors (TTM); HDFC Bank (HDB); Wipro (WIT). China: PetroChina (PTR); Tencent (0700.HK).
Avoid or Short: Petrobras (NYSE: PBR) Vale (NYSE: VALE)
Investors looking for international or emerging markets tend to stick to international funds or ADRs from the so-called “BRIC’ nations of Brazil, Russia, India and China. But not all BRICs are created equal. China and Russia have impressive growth rates. But you have to be more selective in these markets. China is probably too reliant on stimulus money to boost its economy and there’s evidence of a growing Chinese bubble. Russia requires you to put your faith in a corrupt oligarchy. Sooner or later, China and Russia are more likely to suffer from these excesses than their BRIC colleagues, Brazil and India.
You can trade in international or emerging market stocks through the use of ADRs (American Depositary Receipts). ADRs prices are in U.S. dollars, pay dividends in U.S. dollars and can be traded like the shares of U.S.-based companies.
India is Asia’s 3rd largest economy and our favorite emerging market. They have maintained strong economic growth through the global financial meltdown, managing to post an impressive growth of 6.7% in 2008-2009. The IMF projects 2009-2010 growth at 6.75-7.5%%. This is a fall from the 10% growth rates India enjoyed before the global financial meltdown, but India remains one of the fastest-growing economies in Asia. Just compare this with estimates of 2010 U.S. GDP growth of only 1.5%. The best way to capitalize on growth in India is by investing in Indian banks. Although its economy doesn’t grow as fast as China’s, the banking system operates independently of the government so the loans are higher quality and there’s no forced lending.
India ADR picks: Tata Motors (NYSE: TTM): India’s biggest car manufacturer, maker of the Tata Nano, the cheapest car in the world. Has been one of our top investments the past six months and we expect the growth to continue. This stock is a real winner so if you haven’t taken advantage of it already, make sure to now. The next two stocks have both been hit hard as of late but we see that as a strong buying opportunity getting in on strong brands and companies at discount prices. HDFC Bank (NYSE: HDB): One of India’s better-managed banks, this stock’s enjoyed a tenfold gain since 2002. Wipro (NYSE: WIT): leading tech services group with strong earnings surprise history, recently opened in Brazil.
I continue to be positive on China in spite of increasing talk of a jittery China bubble. Many portfolios are now underweight on China. China’s mid-to-long-term outlook is bright and it will enjoy higher growth than India, but expect more volatility, so you need to be very selective and/or perhaps more speculative with your picks.
China ADR picks: PetroChina (NYSE: PTR): China’s largest listed oil company, is expected to continue to grow, benefiting from higher crude prices & rising energy demand. Plus the recent fall in stock price has opened nice entry points for new investors. Tencent Holding (HKSE: 0700.HK): biggest Internet company most people outside China have never heard of, hundreds of millions users for its IM service, market cap of $38 billion bigger than Yahoo & twice the size of Baidu. Likely to benefit from Google’s China departure, but beware: This is a volatile speculative play but has done quite well for us the past year. We spoke further on one of Tencent’s biggest holdings, “The World’s Largest Social Network QQ, Facebook but Bigger“
What use to be my personal BRIC favorite is Brazil, the world’s 8th largest economy has been slowly falling due to what I call too much government intervention. As the U.S. sinks deeper into public-sector debt and federal bureaucracy, Brazil has had huge success in reducing public debt and the level of bureaucratic control. Brazil restructured its finances years ago and is now in far better shape in terms of debt than the U.S., Japan and most of Europe. Brazil also has huge oil reserves and a fast-growing domestic market – which means it’s less dependent on exports to declining markets in the U.S. and Europe. We are no longer fans of Brazil and advise investors to stay away from any Brazilian investments.
While we use to be huge fans of both PBR & VALE from 2003-2009 these stocks are now our favorite shorts as the government has been working hard to destroy any value they still have. Petrobras is an ATM for the Socialist Worker’s Party while poor earnings have proven that the company is unable to sell gas at seven dollars a gallon as the government heavily taxes oil along with setting the price. National content rules for presalt buildout bleed Petrobras with massive cost, as evidenced at the Pernambuco and Rio refineries. Real is overvalued as Brazilians buy condos in Miamii not shares of PBR. While staying away from these two investments, take a look at EZTEC and Brasil Insurance 100% private companies with incredible growing rate. But as nothing is perfect they do not trade ADR’s.
So as it goes for investors looking to capitalize on the emerging markets potential, focus in on both China and India. Specifically we really like all five stocks listed below as we believe they all have strong fundamentals, growth potential, and the intangibles to be strong long-term investments.
India: Tata Motors (TTM); HDFC Bank (HDB); Wipro (WIT). China: PetroChina (PTR); Tencent (0700.HK).