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Demand in China, India reaffirms Sehgal's bullish commodities stance

INVESTMENT REPORTER

Canadian investors would do well to pay attention to developments in Asian economies, most notably China and India, because those emerging markets will have huge repercussions on markets in this country and others, advises fund manager Rohit Sehgal.

Mr. Sehgal has been managing the Dynamic Power Canadian Growth Fund and several other funds since mid-1998.

The fund, which has about $1.17-billion in assets, has been on a tear so far in 2005, as evidenced by its 8.92-per-cent return year to date. The fund posted a 19.37-per-cent return in the 12 months ended Jan. 31, which is more than double the 9.9-per-cent return of the S&P/TSX composite index. Its annualized returns at three, five, 10 and 15 years are also well ahead of the index at 14.75 per cent, 6.88 per cent, 11.06 per cent and 13.08 per cent, respectively.

In 10 to 15 years, "China no doubt will be the No. 2 economy in the world and I think India . . . will probably be No. 3," replacing Europe and Japan, said Mr. Sehgal, chief investment strategist at Toronto-based Dynamic Mutual Funds Ltd.

What is happening there is going to have a positive ripple effect on the whole global economy, said Mr. Sehgal, who just returned from a trip to Asia. It reaffirms his very bullish stance on commodity stocks.

His holding in Calgary's Western Oil Sands Inc. (WTO-TSX), which holds an interest in the Athabasca Oil Sands Project, fits in with that theme. The project is in production now and "everything is going pretty smoothly," Mr. Sehgal said.

The shares, which closed yesterday at $53.75 on the Toronto Stock Exchange, are trading at a big discount to their net asset value close to $60, which sets Western Oil Sands apart from others in its group, he said.

The other companies' shares are trading at a premium to net asset value. Accordingly, Mr. Sehgal thinks Western Oil Sands' class A shares "could easily trade at $65" -- his 12-month target for the stock.

The choice of Toronto-based Inco Ltd. (N-TSX) springs out of his bullish view on commodities. "I think we are going to see shortages of nickel in the next two years" because of demand for the commodity from China, he said.

Last week, Inco announced that in 2004 it recorded its largest annual profit since 1989. Also, Inco's Voisey's Bay project in Labrador will begin production next winter, so Inco has "both volume increases and good prices" going for it, Mr. Sehgal said. He has a 12-month price target of $60 (U.S.) a share on Inco. The shares are currently changing hands at $48.11 (Canadian) and $39.33 (U.S.) on the TSX and New York Stock Exchange, respectively.

The Dynamic Power Canadian Fund is allowed to invest up to 30 per cent of its assets in foreign securities and, given Mr. Sehgal's bullishness on the Indian consumer market, it isn't particularly surprising that he likes Housing Development Finance Corp. Ltd. (HDFC.IN on the Bombay Exchange), one of India's largest housing finance companies.

Housing demand in India is being spurred by the fact that 40 per cent of the population is under 20 and that group is becoming better educated and forming a huge middle class.

HDFC has a market capitalization of about $4-billion (U.S.) and assets of close to $9-billion, he said. It has been growing at around 30 per cent a year and its profit by at least 30 per cent. Moreover, the shares are "very reasonably priced" at around 18 times this year's expected share profit, Mr. Sehgal said, adding that the return on equity is nearly 30 per cent.

Mr. Sehgal continues to hold the three stocks mentioned in a Jan. 2, 2004, Best Bets: Calgary's Niko Resources Ltd. (NKO-TSX) has soared to $61.20 from $27.10 (Canadian) at the end of 2003; stock of Saskatoon's Cameco Corp. (CCO-TSX) has jumped from a split-adjusted $24.92 to $54; but Vancouver-based Ivanhoe Mines Ltd. (IVN-TSX) has fallen to $8.78 from $10.30.

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Bullish on commodities

Asian demand will have a positive ripple effect on global economy, fund manager says

Statistics

Category: Canadian equity

Manager: Goodman & Co.

Load status: Open-ended

Inception date: August, 1985

Total assets: $1.17-billion

Management expense ratio: 3.57%

Globefund 5-star rating system: *****

RRSP eligibility: Yes

Minimum investment: $500

***

Returns

To Jan. 31, 2005

1-month simple rate of return: 1.1%

3-month simple rate of return: 12.4

6-month simple rate of return: 22.6

1-year compound annual rate: 19.4

3-year compound annual rate: 14.8

5-year compound annual rate: 6.9

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Top 10 holdings

To Nov. 31

Cameco

Canadian National Railway

First Quantum Minerals

Ivanhoe Mines

Ketch Resources

Niko Resources

Nova Chemicals

Potash Corp. of Saskatchewan

Precision Drilling

Teck Cominco

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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