Sectors Benefiting from BRICs' Growth

Valuations have now been driven into the ground. In my view, there remains a 12.5% downside to recent intra days lows. It is a time when it is scary to invest; yet it is likely to be amongst the better investment opportunities through 2015. Two portfolios can be viewed here (pdf warning).

The aim of these portfolios is to pursue capital growth, on the theme that growth once unleashed following economic reform, cannot be stopped. The BRICs will continue to grow; that is irreversible. What might change is the manner in which growth is financed. Compared with the past, I see higher levels of equity and lower levels of debt financing growth; the project quality will improve and the growth risks will decline as management will be more focused on ensuring return on equity is more than cost of equity.

How long will it take for growth to renew? High growth will likely renew during 2010. This delay is not only necessary, it is healthy. BRIC corporations have grown at a breathtaking pace over the past five years; time is required to consolidate the gains before re-commencing the process of building upon those gains.

Key sectors which will benefit are Energy, Basic Materials & Industrials. I tend to look at Basic Materials & Industrials as a single sector because of a high degree of sector co-dependence. Accordingly, I am heavily overweight all three sectors. I also remain significantly overweight healthcare because that is a sector in which I see great two decade potential; it is the area which will outperform after the infrastructure of nations has been built.

Financials is my main underweight sector, and this is because while stocks do look cheap, I have been unable to find a way of valuing an enterprise in the present market; if I do not understand valuations, I avoid the sector. I would love to buy Citi (C) at $9 because I feel the franchise in itself is worth that much, but after seeing several masters fail, I will not risk it just yet. I am also underweight Staples and Discretionary on valuation because the sector is driven by the US consumer, who is in trouble and likely to remain so for a while yet.

Other than looking at Basic Materials & Industrials as a single sector, I also look at Ultilities & Telecom as a single sector; like water, waste, gas, electricity; today telecom is more or less a necessity; since it is a service everyone requires and several provide, I see it as no different from a traditional utility. I also do not view IT as a unique economic sector. I allocate IT 50% to discretionary spending with the remainder being pushed out to economic sectors. The reasons I do this are noted on the US & India Portfolio file.

In putting together the portfolio, the primary objective is capital growth over the course of an economic cycle (5 to 6 years). Total stocks have been kept at under 16 simply because I do not believe an individual can reasonably follow more than that number of stocks. If you do not follow your stocks (including hearing the conference calls, reading press releases, reading SEC filings etc.) closely, you should start; investing is neither art, nor science; it is simply a reflection of hard work coupled with the ability to manage risk.

A secondary objective, is to try and secure yield of near 6.5%; this should help keep our nerve during these volatile times! 6.5% is selected mainly because it reflects the long term market returns; so any capital gains eventually made are pure out performance.

For the US Portfolio, most of the companies selected are included on the recently published Dow Global Index. The India Portfolio includes several from the Dow Jones India Titans Index. In the US Portfolio, several companies are European; the dividends are paid out annually or semi annually for AXA, Nokia (NOK), Siemens (SI) and Vodafone (VOD). These companies declare and pay dividends in a functional currency other than the US$. The dividend per share used is the most recent dividends converted at present exchange rates; for this reason, the US$ dividends are lower than what you will see on most websites; the US$ has strengthened considerably over the last year. ArcelorMittal (MT) and BP are also not US; however since they declare and pay dividends quarterly in US dollars, no adjustment or estimate is necessary.

Carnival (CCL) is included on this list because I feel it is a good long term play. However, with its dividend being suspended, I expect the share to trade down to near $12; this level represents 65% of book value (excluding goodwill and intangibles).

What is missing on this list are:

1. Food Plays: this is an area of fundamental long term strength. Monsanto (MON), Mosaic (MOS) and Potash (POT) can be considered. I have not included any as the capital appreciation and dividend yield do not look attractive as in other sectors. Yet, I believe these companies belong in a good multi decade portfolio.
2. Water Plays: to date, I have been unable to find any solid companies which will be able to address water resource management. This is an area which is very important with the demographics of the population in India and China growing as they are.
   

P.S. Thanks for taking the time to read through my vacation musings; I enjoyed posting and hope you enjoyed reading. Thanks to Google Analytics, I have been able to track the city and number of readers, and frankly I was amazed. For a while I started thinking of trying to monetize content; but then better sense prevailed and my vacation is done!

Work will be more of the same, but since time is short, the pace of posts will likely reduce and possibly disappear; I find it easier to do nothing than to make a half-hearted attempt.  I will likely see you closer to the next cycle bottom.

Just keep in mind that (1) Frugality is the first step towards growing capital (2) Time arbitrage is the only way to outperform (3) Do your own homework and do it constantly; investing success is a result of hard work.

Disclosure: I am long on every stock mentioned in this post and on the file http://www.maxkapital.com/USIndiaPortfolio.pdf except for MON, MOS, POT & C.

Comments

[zenstar666:]

You stated the "capital appreciation" for POTand MOS does not look attractive. Except for the financial crisis which unjustifiably brought their share prices down along with the entire commodity sector, their fundamentals, along with those of AGU and IPI, going forward appear to be decoupled from their share prices and tell a much different story. Am I missing something???

2008 Nov 17 07:35 AM

[Shiv Kapoor:]

Zenstar66 - POT, MOS, AGU & IPI are all good stocks. It is just that the portfolio was designed to look for capital appreciation backed by handsome yields. Combining the two criteria, these stocks never made it into my final selection.



On Nov 17 07:35 AM zenstar666 wrote:

> You stated the "capital appreciation" for POTand MOS does not look
> attractive. Except for the financial crisis which unjustifiably brought
> their share prices down along with the entire commodity sector,
> their fundamentals, along with those of AGU and IPI, going forward
> appear to be decoupled from their share prices and tell a much different
> story. Am I missing something???

2008 Nov 17 08:06 AM

[Kingsley An...:]

While I respect your thoughtful commentary and do not dispute the notion that Potash and Monsanto will eventually rise, now is not the time to be purchasing shares of either. In regards to Potash, it looked like it be forming an inverted head and shoulders pattern, but then the price crashed back down. POT looks like it will be retesting the 60.

2008 Nov 17 08:09 AM

[Shiv Kapoor:]

Kingsley - I feel you are correct on POT re-testing $60. In fact I am not sure that that price level will hold. As a worst case scenario I cannot rule out $50 to $55. Eventually the remaining downside is not significantly higher than the broad market downside. On the upside, I have a high degree of confidence to a level of $140 over 5 years. Over a longer period, the sky is the limit - this is why I feel MON/POT have multi decade potential; yet in terms of a single economic cycle they have not quite made it to my portfolio.


On Nov 17 08:09 AM Kingsley wrote:

> While I respect your thoughtful commentary and do not dispute the
> notion that Potash and Monsanto will eventually rise, now is not
> the time to be purchasing shares of either. In regards to Potash,
> it looked like it be forming an inverted head and shoulders pattern,
> but then the price crashed back down. POT looks like it will be
> retesting the 60.

2008 Nov 17 12:09 PM

[Pipo:]

"I am buying, Taiwan, China and agriculture" said Jim Rogers this weekend.

China is probably the best of the BRIC countries to invest in.

jimrogers-investments....

2008 Nov 17 05:45 PM

[berloe:]

No good water stocks? With VE down into the twenties from the nineties one would agree. But now?

2008 Nov 18 01:13 PM

[relmor:]

Jim Rogers suggested China Water at 2.05. I think its like .30 cents now or something. I wouldnt listen to him for timing whatsoever. Hes talking years... Not necessarily right now. No stock is up YTD, that I am aware of....

2008 Nov 22 10:29 AM

[relmor:]

When investors pick through the rubble, they will buy what did well last year, when the market turned. These would be companies that sell something you need.....

2008 Nov 22 10:30 AM