Every week, a professional investor tells MoneyWeek where she’d put her money now. This week: Joanna Terrett, emerging markets investment director, SWIP
While the turmoil of the latter part of 2007 has certainly had some impact on emerging markets, it’s fair to say that they are currently seen as ‘safe havens’. Their economies are generally healthy and domestic demand growth is likely to take over from export-led growth as the key economic driver.
As bottom-up stock-pickers, we look for companies with good earnings growth potential, competent management, a promising position in the marketplace and healthy balance sheets. We invest on a three-year view. Here are three stocks we like the look of now.
Gafisa (US:GFA) is one of Brazil’s top homebuilders, focusing on top-end apartments as well as more affordable housing. Just now, many of the listed firms aim at the top end of the market in terms of affordability, but future demand is likely to be sustained from middle and lower-income segments of the population. Demographic trends, economic stability and falling interest rates are fuelling demand for property. Of Brazil’s 170 million population, 41% are younger than 20 years old.
Meanwhile, interest rates have fallen fast, from almost 25% at the start of the decade to nearer 10% today, and look likely to continue downwards. This has had a positive effect on the domestic economy and the housing market, making homes more affordable and prompting a surge in mortgage lending. The sector has been volatile (in terms of stockmarket performance) over the last year, but this is an area of long-term growth. Gafisa has a flexible and proven business model, run by a management team with a good track record.
A second Brazilian firm that we invest in is emerging-market oil giant Petrobras (US:PBR). The group boosted its oil reserves by 50% in November with a significant oil find. Better yet, this was not the heavy crude associated with Brazil, but light oil, which is more valuable to Petrobras. The discovery is the world’s second-largest field to be found in the last 20 years, an increasingly rare event, following other emerging-market discoveries such as Kazakhstan’s Kashagan field in 2000.
It is estimated to produce between five billion and eight billion barrels of oil, not far off the entire oil reserves of Norway, and production could begin properly in 2011. This catapults Brazil into the ‘senior league’ at a time when the oil price has rocketed to around $100 a barrel. It changes the outlook for Petrobras, and indeed Brazil, dramatically.
Russia is the ‘R’ of the Brics (Brazil, Russia, India and China). These countries have driven 25% of global growth in recent years and will continue to do so over the coming decade. Politically and economically, Russia has become an increasingly important player on the global stage. Domestically, it is redeveloping to meet the demands of a rapidly-growing economy, and for the first time since the end of the communist era, people have money in their pockets and are starting to spend. There are many investment opportunities to benefit from this increased spending power.
For example, rewind a decade and the image of Russian retail is one of empty shelves and long queues. Not so now. Food retail is a dynamic sector, which is operating extremely successfully, and one company leading the race to capitalise on this is X5 Retail (FIVE), a modern multi-format chain with hypermarkets, supermarkets, convenience stores and discount stores. It has a firm hold on the Moscow and St Petersburg markets and plans to aggressively roll-out stores to grow its market share further.
The stocks Joanna Terrett likes
Stock, 12mth high, 12mth low, Now
Gafisa, US$42.74, US$20.67, US$34.47
Petrobras, US$119.16, US$41.38, US$108.66
X5 Retail, US$38.0, US$24.50, US$36.91