Winnipeg Free Press - PRINT EDITION

Global investing starts at home

Emerging markets key -- and they're hungry for our resources

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Not so long ago, the developed world was on top of its game, although one could argue it was the rigged game of post-colonialism.

The world's big economic players -- the United States, Japan and western Europe -- used to run the show. But they have been in slow decline for some time now, and that slide has accelerated over the last few years.

Banking systems have crumbled. Governments are bathing in red. And we're collectively getting older, the result of declining birth rates.

Economic growth is three per cent in a good year, but our oracles of finance will be happy if we can eke out even a little positive growth for the next few years.

All along, Canada has been like a squire to the leading knights of capitalism. We had, and still have, the resources to make the engines of advanced economies purr. And this bounty has allowed us to ride the coattails of economic power.

But today, it seems the world is turned upside down. The nations that were once spliced and diced for profit by old imperial powers are quickly becoming the Titan economies of the world.

China, Brazil, India and Indonesia, to name a few, are growing at a pace developed nations can only drool over.

Of course, the investment communities of the developed nations haven't skipped a beat. They've been foreseeing this for some time now, and many are predicting the economic ascension of the developing world is about to kick into high gear.

"We're operating right now under the expectation that we have a two-speed global economy," says Bill Horton, chief investment officer with MD Physician Services, which manages -- as you might have guessed -- doctors' money.

"The two speeds of it is the idea that the advanced and developed economies are projected to grow 2.3 per cent and the emerging and developing economies at over six per cent."

It all comes down to demographics, says Nevin Markwart, president and CEO of Canoe Financial.

"If you look around the world, there are on the order of a billion people looking to increase their standard of living," he says.

In China, about 40,000 people are moving from the country to the city every day. That is indeed salient for investors because these migrants shift from living largely as subsistence producers with little disposable income to consumers who want better homes, cars and computers.

"As this migration of 20 to 30 million people moving from the farm to the city every year goes on, they start to demand services and become consumers," Markwart says.

For the forward-thinking investor, developing nations appear to be fertile ground in which to plant their cash and see it grow, but that is a tough proposition. While the western world may be on the decline, one thing we have is generally responsible, democratic governments, rule of law and relatively transparent corporate governance.

"In advanced economies, we have established property rights, so there are some rules of law that give you certain rights to own property and operate," Horton says.

"In China, right now it looks really good, but the government could decide at any time it's going to expropriate."

But investors can indirectly get a piece of the rapid growth of the developing world's middle class. They can invest strategically in companies headquartered in developed nations.

"In our view, it's more prudent to look at active management that invests in U.S.-based, Japan-based or European-based companies that have a strong base of management and a more diversified portfolio that's taking advantage of emerging- and developing-country opportunities," he says.

These are the Apples, General Electrics and Wal-Marts of the world. They produce goods and services universally used and desired by not just us, but by a consumer base that will grow to several times the size of ours.

"A good example is Nestle," says Hardev Bains, president of Lionridge Capital in Winnipeg.

"They have years of experience in distributing their products in developing countries, and now these markets account for around a third of their sales."

Investing in an established firm based in the developed world is often a better option than buying individual Chinese or Indian companies that may or may not be the next big thing. Not to mention corporate transparency can be an issue.

Even exchange-traded funds that invest in developing-world stock markets can be challenging.

"From an investment point of view, I think there is a big danger in rushing into funds or ETFs (exchange-traded funds) that specialize in these regions, as the market infrastructures and indigenous companies are often not well-developed," Bains says.

Managed mutual funds, which bring to bear the expertise of analysts and researchers who study these markets, may be a better option than ETFs in developing markets.

But Markwart says Canadians should really look to their own backyard to reap the rewards of the growing global economy.

What was once the chief complaint about Canada's economy -- that we're all natural resources -- is now a trait that makes us a desirable place to invest. The world may not respect us for our big brains, but they certainly love us for our fulsome body.

"From the perspective of a Canadian, we have the unique opportunity over the next decades to be the fuel -- literally -- of China, India and Brazil," he says. "Whether it is our oil and gas, fertilizers and uranium, the natural resources of Canada are in demand and will continue to be in high demand from these developing nations."

To boot, we have good, stable banks that bankroll a lot of resource development, we have plenty of arable land and fresh water, and the Toronto Stock Exchange is the place to do business for mining, especially for gold.

And the beauty of it is this resource-sector profitability seeps into other sectors.

"The wealth effect that gets created in the natural-resource sector spills over in the economy of the entire country," Markwart says. "It allows our housing market to be one of the strongest in the world."

It's what will keep our banks strong and even our auto industry humming along.

That doesn't mean the next couple of years will be all bull market all of the time. In fact, the next five years or so could be quite bearish. The risks are certainly real: A potential Chinese real estate bubble may burst, the European Union might collapse, and the United States' economy may fail to get traction and sink into an even deeper funk.

But Markwart says in the long run -- about two decades or so -- equity investors who buy shares in profitable and growing companies with exposure to the 'new world' eventually will be rewarded, providing these firms are able to adjust.

"The key to winning from the standpoint of an equity holder of a company is innovation," he says. "Innovation allows companies to get things done more cheaply and bring new products to new markets -- that's what creates profits."

giganticsmile@gmail.com

They want us... they really want to buy us

Canadians certainly aren't the only investors wanting to buy a piece of the nation. Canada has been drawing a lot of foreign investment of late. Besides the recent announcement of the China National Offshore Oil Company's intention to buy Calgary energy firm Nexen for $18.5 billion, many other foreign companies have purchased Canadian resource firms or bought stakes in firms extracting Canadian resources. Here are some of the largest buyouts, mergers and purchases in the last decade involving Canadian natural resources:

-- Glencore International PLC is in the process of a $6.1-billion buyout of Saskatchewan-based Viterra.

-- PetroChina bought a $1.89-billion stake in Athabasca Oil Sands Corp.

-- Sinopec purchased nine per cent of Syncrude Canada's oilsands project for $4.6 billion.

-- Brazilian mining firm Vale purchased Inco, a nickel producer, for $15 billion.

-- Swiss mining firm Xstrata bought Toronto-based Falconbridge for $16.1 billion.

-- Montreal-based Alcan, an aluminum producer, was purchased by Rio Tinto, a British-Australian aluminum giant, for $38 billion.

-- source: Bloomberg

Can the world stand a few billion more consumers just like us?

While investment experts predict the massive populations of the developing world will fuel the global economy over the next few decades, one might question whether the Earth can handle all of that consumption.

The Global Footprint Network, a scientific non-profit organization monitoring the planet's sustainability, states on its website it presently takes 1.5 Earths to support our consumption patterns. That means it takes the Earth one year and six months to replenish used resources and absorb our waste. By 2030, that's expected to increase to two planets, and three planets by 2050. This consumption rate will largely be driven by population growth and increased consumption as standards of living rise, the result of growing middle classes in developing nations.

While this may bode well for Canadian natural resource firms because of the heightened demand for increasingly scarce resources, it's obviously problematic, too. Our ecosystem, or life-support, is likely to be severely strained, to put it mildly. Canoe Financial's president Nevin Markwart says the pressure on the environment can't be ignored, and innovation will become more and more important to sustain our civilization.

"We have got to come up with innovative technologies to feed ourselves and develop the energy we need to sustain ourselves, and I'm fairly certain that the state of today's agri-technology and today's carbon-based petro-economy are going to have to be different in 100 years from now," he says.

"The key driver to business success is innovation, and it's going to be the exact same thing to allow the ability for this incredibly large planet of ours to sustain seven, eight or nine billion people."

Republished from the Winnipeg Free Press print edition July 28, 2012 B12

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