Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Joanna Terrett, investment director, Global Emerging Markets Equities, Scottish Widows Investment Partnership.
Emerging-market economies have not escaped the global downturn and 2009 won’t be easy. But there are several long-term trends that will continue to support economic growth in these regions. Rising populations and urbanisation, for example, will continue to drive spending on infrastructure. So which stocks do we believe will benefit?
First, a look at China. Along with many other countries China announced a huge economic stimulus package towards the end of 2008. So far the signs are good, with recent data suggesting that domestic growth is holding up. This includes strong figures for bank lending, retail sales, industrial production, and auto sales.
One clear beneficiary is China Railway Group (HK: 390), the largest integrated construction group in China and Asia. Its main activity is the design and construction of railways and highways, where its market share is around 40%. It also enjoys earnings from property development, a previously weak area that has been responding to government incentives – at least on the residential side.
Beijing has also helped by accelerating the approval process for big projects, with the already overloaded railways a key focus. Priority is being given not just to the ordinary rail network, but also to the major intercity high-speed train links that are vital to reducing journey times. For the firms involved in the construction process, the high-speed network in particular offers high contract prices and hence stronger margins. The railway network reached 82,000 km at the end of 2008, with a government target of 91,400 km by the end of next year and 120,00 km by 2015. So China Railway Group is a compelling stock.
Next, a Mexican infrastructure firm. ICA (NYSE: ICA) is one of Mexico’s leading engineering and construction companies, with activities across a range of sectors from train systems and highway concessions to water distribution and civil and industrial construction. The majority of its projects are public works and so are government funded. In our view this government backing gives a higher degree of cash-flow predictability. This in turn gives ICA decent earnings visibility. The firm is well positioned to capitalise from the current administration’s measures to boost the economy – over and above even the existing National Infrastructure Plan 2007 – 2012, which involves $226bn. Indeed, estimates suggest that the Mexican government will spend 50% more on infrastructure this year compared to last year.
Finally, Parkson Retail Group (HK: 3368). This is China’s leading department store chain, broadly similar to John Lewis in Britain. With flagship locations in Shanghai and Beijing, Parkson has the broadest geographic coverage and target market among the country’s department store operators. Parkson can be viewed as a proxy for the discretionary retail sector in China. The firm is Malaysian-owned and managed. China’s domestic economy is arguably set to be one of the strongest globally, and retail sales have been resilient in the face of the global economic downturn – up 16% in the year to date. As millions more Chinese citizens move into the middle class, Parkson, with its earnings visibility and dominant franchise, is ideally placed to capitalise.
The stocks Joanna Terrett likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| China Railway Group | HK$7.13 | HK$3.25 | HK$6.23 |
| ICA | $27.65 | $4.26 | $8.07 |
| Parkson Retail Group | HK$13.40 | HK$10.54 | HK$5.21 |