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China, India driving forces for growth

Two Asian nations are 'leaping from the 17th century into the 21st,' while the euro zone also flagged as good bet for 2007

As consumers rush through malls searching for deals on holiday gifts, global fund managers are scouring the globe for investments that will perform in the year ahead.

Even as growth slows amid rising interest rates, 2007 has a number of good opportunities, according to Lisa Myers, who recently became lead manager of the $5-billion (U.S.) Templeton Growth Fund.

The 52-year-old fund's approach involves searching the globe for solid, dependable companies whose stock prices have taken a beating, but have good intrinsic value and strong fundamentals.

For 2007, that means large capitalization stocks scattered throughout the world.

"Clearly they've been under-loved and sort of ignored while small cap stocks have been doing well," said Ms. Myers. "Small companies were able to use accommodative interest rates to grow their business over the past couple of years. Large companies put up consistent growth. A lot of these big companies are very well-positioned."

In particular, she is "excited" about media holdings. The ability to move forward and embrace technology is what she likes about companies such as British Sky Broadcasting Group PLC, and Rupert Murdoch's News Corp.

Ms. Myers also likes the looks of large banks such as the Dutch conglomerate ING Groep NV. The Dutch banking giant is trading at a modest nine times next year's earnings estimates, and has an attractive 4-per-cent dividend yield.

"It's got a lot of exposure in emerging markets and will continue to grow," she said. "It's at such low valuations that it doesn't make sense to us."

She's also keen on another financial firm, DBS Group Holdings in Singapore, which is "a great example of a country that has reinvented itself as a service economy."

Finally, Ms. Myers is keen on global pharmaceutical companies, whose share prices have been ransacked over issues such as patent expiry and litigation.

"The list is long of current concerns," she said. But as populations age, and genetics become more prominent in drug research, she sees value in holding companies such as Merck & Co., Pfizer Inc., GlaxoSmithKline PLC of Britain, and Sanofi-Aventis SA of France.

"Companies are very flush with cash. There is strong earnings growth, they have paid down debt," Ms. Myers said.

"As long as growth seems moderate, we should continue to see a relatively benign environment for equities."

Still, she believes the year won't be without its risks for stock buyers, including the ever-present threat of rising inflation.

"Central banks around the world would have to raise interest rates," she said, noting that higher oil prices are always possible.

For the most part, growth and inflation seem to be under control, she said, even in regions such as China and India, making them attractive for some investors.

"China's doing a good job in terms of moderating its growth rate so it can sustain that rate for longer. India seems to be making some of the right moves in terms of spending the money on infrastructure and watching its economy as it moves forward - being smart about growth and not overheating the economy," Ms. Myers said.

Many investors believe that demand from China and India is sure to keep oil prices from falling, even in the face of the war in Iraq, the world's seventh-biggest oil producer, and the growing influence of Hugo Chavez, the leftist president of Venezuela, the world's fifth-biggest oil producer.

"If something were to happen in the Middle East or Latin America, where there [could be] minor shutdowns, for the most part Russia can act as a swing factor," said H. B. King, sector portfolio manager at Fidelity Investments. "Risk is skewed to the higher side for oil prices."

Mr. King is keen on big integrated energy companies for low valuations, high dividend yields, and the potential for merger activity. He also likes utility companies for their low valuations and high dividend yields.

As interest rates rise in 2007, large banks will have more compressed net interest margins, making it harder to make a profit, said Michael Embler, chief investment officer at Franklin Mutual Advisers, who oversees $60-billion (U.S.).

"We like to buy these things when people are scared," said Mr. Embler, who is based in New Jersey. His picks include BNP Paribas SA, Société Générale SA, Danske Bank A/S, and Svenska Handelsbanken.

Investors are wise to bet on rising rates, said Dennis Gartman, editor of The Gartman Letter, a must-read research paper for many traders and investors around the world, released daily before the sun rises over New York.

"The propensity will be for central banks everywhere to quietly tighten interest rates, because the global economy will be a good deal better than some people anticipate," he said.

"The driving force has been, and will continue to be, China and India."

As people in those countries continue to push for a better quality of life, that will create jobs that spill into the West, he added.

"It's . . . that continued demand that is there for stuff -- for things, curtains, washing machines, electric motors, radios. You name it, they want it. That's what economics is about, the creation of demand," he said. "China and India are leaping from the 17th century and into the 21st."

One area that hasn't exploded, as some investors predicted, is Japan. With a birth rate well below replacement levels, the economy will languish even as stocks continue to perform, Mr. Gartman said. "With Japan, you have to learn how to divorce yourself from the economy and the stock market."

Europe is the preferred region of choice for Art Hogan, chief market strategist at Jeffries & Co. in Boston. "We're more excited about the euro zone for growth," he said. "There's a reason why the euro is beating the yen and pound right now."

Interest rates will continue to rise in Europe, but not so much as to hinder growth in profits, Mr. Hogan believes.

He sees opportunities in energy exploration and production stocks, such as Urals Energy Public Co., and specialty pharma companies, such as London-based SkyePharma PLC.

With the recent easing of oil prices, Mr. Hogan said he noticed that alternative energy stocks have not been getting as much attention as they warrant, given the finite supply of the world's fossil fuels, and increased government investment in alternatives.

"It was hot last year," he said. "But then it fell off a cliff."

Theresa Ebden is an associate producer for Report on Business Television.

***

Big picture for 2007

Here is the Organization for Economic Co-operation and Development's projected real GDP growth in 2007 for selected member countries:

Canada 2.7%
United States 2.4%
Mexico 3.6%
Brazil* 3.8%
Germany 1.8%
U.K. 2.6%
Euro area 2.2%
France 2.2%
Russian Federation* 6%
China*10.3%
India* 7.5%
Japan 2%
South Korea 4.4%
Australia 3%

*Non-member countries

SOURCE: OECD ECONOMIC OUTLOOK No. 80, NOV. 28, 2006

© 2007 The Globe and Mail. All rights reserved.

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