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Driving through the BRIC wall

There's more to investing in developing economies than sticking to the four usual suspects, THERESA EBDEN writes

Investing in emerging markets has become synonymous with buying funds that focus on the growing economies of Brazil, Russia, India and China.

But just as you need more than bricks to build a house, you also need more than just BRICs to build a successful emerging-markets portfolio.

Here are three other regional areas that many professional money managers are holding this year.

Eastern Europe

When Bhim Asdhir, president and CEO of Excel Funds Management Inc., couldn't get his visa approved for a business visit to Russia recently, he did what any money manager would do.

He took his business elsewhere.

And so he found himself in Ukraine, one of the former Soviet Union members that achieved full independence in 1991. With its fertile plains, vast fossil-fuel stores and mature industrial base, it has long been thought of as the republic best suited for independence in a free market.

Based on what he saw there, Mr. Asdhir is in talks to hire a manager to start a new fund for the greater Eastern European region, which he hopes to launch in the third quarter of this year.

"People from Germany and Switzerland, they are heavily investing in Eastern Europe, especially in Ukraine. We might have even missed the boat, even though we're not hearing much over here," he said. "I came back and said, 'Oh my God, we better do something.' "

Western European investors have taken notice of the disparity in per-capita income in this region, Mr. Asdhir explained, and factories are being set up to take advantage of the gap. The region is getting richer, which means spending on infrastructure and consumer products is on the rise.

"People were very well-dressed, there was lots and lots of construction happening. There were trade shows at my hotel, with people from all over Europe," he recalled. "It's exactly how I felt when I went to India 10 years ago."

Another hot area in the Eastern European region is Turkey, according to Mark Mobius, who oversees $30-billion (U.S.) in emerging-market equities at Templeton Asset Management Ltd.

"Turkey is attempting to meet the criteria to join the European Union, and in the process of doing that they are undertaking a lot of economic reform," said Mr. Mobius, who is based in Singapore. "It will put the economy on a more stable footing."

He's keen on Turkey's oil-refining sector, as well as manufacturing, exporting and banks. The risks, as he sees it, include Turkey's ability to continue its reform process amid the "constant battle" between those who want an Islamic state and those who embrace the secular spirit of the modern Turkish republic created in 1923 by Mustafa Kemal Ataturk.

South Africa

Another region heating up this year can be found at the southernmost tip of the world's poorest continent. South Africa ended its repressive apartheid system in the 1990s; its middle-income market has a modern infrastructure and ample natural resources as well as strong industries including energy and financials. Its stock exchange is one of the world's 10 biggest. Even so, there are challenges, including high crime rates, widespread poverty and an unemployment rate of at least 25 per cent.

When it comes to buying emerging-market stocks, "it's about valuations, and we think South Africa is cheap," said Mr. Mobius from his cellphone while near Stellenbosch, the country's famed wine region. "Private equity firms are now getting interested, and that's a good sign."

He's looking at the retail sector, particularly clothing and food.

Excel's Mr. Asdhir is also keen on South Africa, and he has identified the greater region as a possible candidate for a new fund. Now in "research mode," he plans to visit within four months.

"There is a population in South Africa that is highly educated and it's a market that is growing rapidly," Mr. Asdhir noted. "We like the resources and consumer products there. With all the emerging markets, what's happening is they used to be basically poor countries and now all of these countries have a sizable middle class, and so consumer products is attractive."

Asia

With all of the news coverage about China's growth, it's easy to think that country is the only Asian destination for emerging-market investors.

But Patricia Perez-Coutts at AGF Funds Inc. believes that those who venture beyond will reap large rewards. As the lead manager of the $420-million AGF Emerging Markets Fund, she has her sights set on Taiwan, Thailand and South Korea.

Ms. Perez-Coutts currently has a 5-per-cent exposure to Thailand, whose military government unsuccessfully tried to impose capital controls on foreign investors recently.

The Thai people "are still living under a non-democratic government after the coup last summer," she notes. "The expectations are that this will straighten itself out in the summer" in the runup to elections promised for next October. "Life goes on, and continues to be very much the same in Thailand."

Mr. Mobius at Franklin Templeton shares the view that Thailand is a good place to invest, particularly in technology.

"Thailand's new government has made a number of unsettling statements regarding foreign exchange controls and foreign ownership/control of businesses and there is a legitimate concern on the part of foreign investors, particularly foreign direct investors," Mr. Mobius wrote in a recent report. "As far as portfolio investors like ourselves, the impact has been muted and the final policy adopted by the government does not impact us. Stock valuations in Thailand are attractive and there is no reason to sell those stocks at this time."

Meanwhile, Ms. Perez-Coutts is also keen on South Korea, where she considers stocks to be relatively cheap, including Samsung Electronics Co. There, under the shadow of North Korea's nuclear threat, she believes investors can find promising stocks such as Posco, Hyundai Department Store Co., Hankook Tire Co., and many of the banks.

More turmoil lies ahead in another part of her portfolio. The self-governing island of Taiwan, considered by China to be one of its territories, saw the chairman of its main opposition party step down after being indicted for alleged misuse of funds. Despite a growing political crisis, Ms. Perez-Coutts continues to hold Taiwanese assets. In fact, Taiwan recorded more than $1-billion (U.S.) in foreign net inflows in January. The benchmark Taipei weighted index has dipped below last months' six-year high, but Ms. Perez-Coutts is not backing off.

"Recently there has been so much return on capital to shareholders," she said. "It has been in a difficult backdrop, but all the while, it's business as normal in Taiwan."

Taiwan's strong technology and banking sectors, as well as a strong business relationship with China, mean Ms. Perez-Coutts isn't afraid to put 7 per cent of her fund's holdings in the country. Among her holdings, she counts Taiwan Semiconductor Manufacturing Co., Mega Financial Holding Co., Formosa Petrochemical Corp., and Giant Manufacturing Co.

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

*****

Beyond the sea

$78.6-BILLION

Amount of foreign securities purchases by Canadians in 2006, an all-time record

STATISTICS CANDA

© 2007 The Globe and Mail. All rights reserved.

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