Looking for the Next Big Thing

By JoAnne Sommers

If you haven’t taken what’s left of your investments following the worst recession in decades and stuffed them in a mattress for safekeeping, you’ll be pleased to know that investment prospects are looking a good deal brighter for 2010.

Let’s start with a look at emerging markets, especially those in Asia, which are a consensus pick to lead global growth in the coming year.

“Unlike previous post-recession rebounds, which were led by the developed world, developing nations are showing the way this time,” says Aron Gampel, vice-president and deputy chief economist with ScotiaBank in Toronto.

“The Asian and Pacific Rim countries and Latin America are most likely to outperform from a growth standpoint next year. And unless investors are well-diversified globally, they won’t be in a position to take advantage of those opportunities.”

In its October Economic Outlook, the International Monetary Fund (IMF) raised its 2010 GDP growth forecast for China to 9%, compared with 3.1% for the world. India’s GDP growth was pegged at 6.4% and Indonesia’s at 4%. By comparison, Canada’s GDP was expected to grow by 2.1%, Japan’s by 1.7% and the U.S.’s by 1.5%.
China’s growth will be driven by the country’s four-trillion-yuan (US$600 billion) stimulus program, which is powering domestic demand and helping to boost many of the trading nations in its vicinity. The program includes spending on infrastructure projects, including health care reform, water, environmental protection and technological innovation.
While the stimulus package is designed to boost local industry, foreign companies are strongly positioned to benefit, says Bruce McLaughlin, Sydney-based CEO of Sinogie Consulting. “Some of the biggest opportunities lie in sectors where foreign firms can compete equally or enjoy a strong advantage.”

It appears that the Canadian government is finally waking up to the potential of Sino-Canadian trade. During his recent visit to the Asian superpower, Prime Minister Stephen Harper said he is focused on devising strategies for capitalizing on China’s unrivalled economic transformation, acknowledging that Canada is "only scratching the surface" when it comes to business and trade deals with China.

The need for new infrastructure is not limited to China. According to the Asian Development Bank, Asia as a whole will require infrastructure investment of approximately $8.29 billion (USD) over the next 10 years.

“Infrastructure will be a major story in 2010,” says Gavin Graham, director of Investments at BMO Asset Management in Toronto. “The emerging markets need everything, plus there is considerable rebuilding going on in Canada, the U.S. and Europe because so much post-war infrastructure is crumbling.”

Asia’s rapid economic growth is also expected to be a big boon to the commodities sector in the coming year. “The underlying story in both China and India is their emerging middle classes and the resulting need for commodities,” says Graham. “They need everything from copper, iron ore and metallurgical coal to oil and natural gas.”
Commodity-producing countries like Canada, Australia and Brazil will be among the major beneficiaries of the increased demand, says Norman Raschkowan, chief investment officer with Mackenzie Financial in Toronto.

“Mackenzie has significant participation in the emerging markets of Latin America as well as Asia,” says Raschkowan. “We like Brazil and Chile, which both have high standards of living, growing middle classes, significant natural resource exposure, strong financial systems and high literacy levels.”

The IMF recently upped its 2010 GDP growth forecast for Brazil to 3.1% and with the 2016 summer Olympics going to Rio de Janeiro, the need for infrastructure development will result in billions of dollars invested over the next decade.

Raschkowan thinks the best way for the average retail investor to capitalize on opportunities in emerging markets is through an emerging markets fund. “We like some of Brazil’s financial services and consumer-oriented companies, but they’re only traded locally,” he explains.

Global multi-nationals are another, low-risk way to participate in emerging-market growth, says Raschkowan, citing Microsoft, Cisco, IBM, Proctor & Gamble and Avon, “which has a particularly solid presence in Latin America.”

As to Canada’s investment prospects, opinion is mixed. From a global perspective AGF Funds ranks Canada 21st in relative attractiveness, says Stephen Way, senior vice-president and portfolio manager. “Valuations are slightly below average, we have a small current account deficit and we tend to be more volatile than average because of our commodity exposure.”

On the other hand, Patricia Croft, chief economist with
RBC Global Asset Management, says Canada looks like a winner coming out of the recession.

“We have some challenges on the fiscal front but they’re manageable. The deficit as a share of GDP deficit is about 2% and Moody’s ranks our banking system as the best in the world.”

Moreover, our dollar is approaching parity with its American counterpart and may stay there for a while, which is good news for resource producers even if it’s less welcoming to exporters.