A guide to investing overseas with Canadian stocks
Emerging economies are the wave of the future, says a Canadian analyst, and you can invest in that growth right here in Canada.
We have a funny-looking atlas here.
It says that the best way for Canadians to earn future profits is to invest overseas.
And it says the best country to invest in is this huge sprawling expanse between the North Pole and the U.S.
Oh wait ... that’s Canada.
But it all makes perfect sense as far as Mr. John Stephenson is concerned.
This investment executive is convinced that enduring growth in the future will come from the emerging economies.
But you can get a healthy helping of that growth without leaving home, he tells readers of The MoneyLetter.
You can tap into the emerging economies with one investment that covers them all. Or you can invest in the resources those economies need — the ones they come to Canada to get. He has one big stock in mind.
First, Mr. Stephenson takes us on a tour of those fast-growing foreign markets. Not all of them are as attractive as they may appear to be from a distance, he warns.
A promised land
Pinning our hopes on our neighbour may not be the best policy today. “While positive economic numbers are always welcome news,” Mr. Stephenson says, “a jobless American recovery with a shell-shocked consumer is hardly the basis of a long-term investment strategy.”
Yet it’s a different story in China, he tells us. Recent manufacturing numbers suggest that the economic recovery is strengthening, and that the government can cut back on stimulus programs and let the wheels start turning on their own.
But does that mean the developing world will soon be calling the shots for the developed one? Not so fast, says Mr. Stephenson.
The BRIC countries — Brazil, Russia, India and China — are of uneven economic quality. The whole BRIC idea “evolved out of some pretty slick marketing by Goldman Sachs,” says the author.
Investors began to like the idea that “a promised land of economic opportunity awaited them.” A smorgasbord of BRIC funds popped up.
But peek behind the curtain, Mr. Stephenson injects, and you see a less rosy picture. China is the standout in the group, to be sure. And then there’s Russia ...
Well-connected thugs
From 2003 to 2008, soaring energy prices masked the flaws in the Russian system. The nation’s industrial infrastructure is rusting badly and its population is in decline. The average age is unusually high (at 37 years) and life expectancy is unusually low (at 64, and about a decade less than that for the male population).
Russia’s attempt at market reform turned into a free-for-all for “politically well-connected thugs,” Mr. Stephenson points out.
“Today Russia’s economy has slumped as the stock market has tanked and foreigners have yanked their investment dollars out of Russia.”
Big oil companies have been abandoning Russia, fearful that their assets could be expropriated. This in turn has pulled the rug out from under Russia’s oil and gas production, its one great advantage.
Its natural resources remain alluring, but Russia’s weakened economy and “gangster capitalism” may keep it from ever matching China. (Odd to think that of the two big Communist powers of yore, one has floundered in a half-baked “free” market system, while the other has built a dynamic economy in a Communist shell.)
So does the BRIC need a new brick?
Tied to global growth
“Already, foreign policy wonks and savvy investors are rushing to replace Russia in the group of major emerging-market economies,” says Mr. Stephenson.
Some like a BRICET that would include Turkey and Eastern Europe. This analyst thinks a better addition would be Indonesia, whose expanding middle class and relatively stable democratic politics have pushed its economy forward.
Then there is South Korea, which could practically be called a developed nation rather than an emerging one with its progressive economy and sophisticated products, many of which are household names in North America.
There are two ways to reap the benefits of these developing economies, the analyst says. One is with a big exchange-traded fund, iShares MSCI Emerging Market Fund (NYSE-EEM). Its top holdings are from China, Brazil, Korea and Taiwan.
Or you can stay right here. “One of the lowest risk ways to play the emerging market theme,” Mr. Stephenson tells his readers in The MoneyLetter, “is to buy shares in Canadian resource stocks whose profitability is tied to global rather than American growth.”
His personal pick is one of Canada’s biggest stocks, Potash Corp. of Saskatchewan (TSX-POT). It’s about as global as a Canadian stock can get. When demand for food rises, demand for fertilizer rises with it.
This giant is one of the world’s leading suppliers in the fastest-growing segment of the business. Potash is a critical plant nutrient.
The company keeps its production costs low, has 100 years’ worth of reserves and services over 75 per cent of the world’s excess capacity. The stock has a way of moving up and down dramatically. But it is “in the sweet spot of rising demand” in the years to come, says Mr. Stephenson, who has a 12-month target price of $130 a share. It’s $118 today.
As a Canadian investor, you can go out and buy the emerging economies in one big package. Or you can buy Canadian, confident that those emerging nations will be doing the same.
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