Emerging Favorites: Latin America to Africa

11/08/2013 10:00 am EST

Focus: STRATEGIES

Jim Powell

Principal Analyst, Global Changes & Opportunities

Jim Powell, editor of Global Changes and Opportunities Report, makes the case for emerging markets, including Mexico and Chile; for those with a very long-term outlook, he sees opportunity in lesser known markets in the Middle East and Africa.

Steve Halpern: We're here today with Jim Powell, editor of Global Changes and Opportunities Report. How are you doing today Jim?

Jim Powell: I am fine. How are you Steve?

Steve Halpern: Very good. From a longer-term perspective, you've been particularly bullish on emerging markets. In fact, in your recent research, you said, "I think buying emerging nations, at today's beaten down prices, is a lay-up for long-term profits." Could you expand on that?

Jim Powell: Yes, I'm quite certain that I'm going to be proven correct in that pronouncement. The emerging markets are certainly not going to go back to being rice paddies and rubber plantation workers and so forth.

They have emerged. They are developing. They have large manufacturing bases. They've developed their natural resource assets. They have young, energetic workforces. They've just got a whole lot going for them and they're oversold right now.

To some extent, the emerging markets took on the role tech stocks had 20 years or so ago. A lot of people piled onto the emerging markets when they kind of became the in thing and their growth was very high and it became almost a fad.

Then, when growth cooled a bit, everybody started to bail out, and as we usually see in such situations, you have oversold prices, so I just think that when you put it all together, you realize these countries are going to come bouncing back when conditions are a little better.

I might add that their growth rates almost exclusively are at least twice—and sometimes three times—what the growth rate is in the United States, so it isn't as if they fell on their noses.

Steve Halpern: You consider Latin America to be among the most attractive in the emerging market world and you've recommended positions in both Chile and in Mexico. Could you tell us some of your reasoning behind picking those specific markets?

Jim Powell: Well, Mexico is a very compelling story, in particular, because it is most overlooked by US investors. It's the familiarity of being right next door sort of problem. Profit in its own land situation. Mexico's transformation has gone largely unnoticed in this country.

They lost a lot of business ten or 15 years ago to China, and what isn't being noticed is how much of that business is now coming back, as expenses in China keep going up, and the manufacturing expertise in Mexico is rising.

Mexico also has the advantage of having a 2000-mile border with the United States; they're right next door.

Most of Mexico is in the same time zone as many parts of America, so your customers can pick up the phone and talk to someone, and frequently, with some of the manufacturers, get delivery of a product a day or so later.

It's truly amazing. Mexico also has a very young workforce and quite a good education system for technical fields, and the new President is very energetic and is attacking a lot of problems.

Steve Halpern: So, exposure to that market...would you be looking at individual structure or would you recommend that investors look at exchange traded funds?

Jim Powell: I like the exchange-traded funds. I really think the iShares Mexico Fund (EWW)—EWW is a way for most Americans to go. If you have specialized knowledge of Mexico, and you know companies that you wish to invest in, you certainly can. There are plenty of them, but I recommend a fund.

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Steve Halpern: Now briefly, can you touch on Chile?

Jim Powell: Chile is another compelling story. They have the most laissez-faire economy in South America. It's leftover from Pinochet's regime, which was very brutal.

But it did have, at least, one good characteristic and it left the business sector largely alone and the new government, the more democratic government, has been smart enough to keep at least that part of the Pinochet legacy.

Growth rate in Chile, right now, is about 4.5%. They have a very diversified economy. They have, of course, the copper mining is their main forte, but they also have a booming agricultural sector, a manufacturing sector, fisheries, forestry, and they're developing a strong internal market, a consumer market, as well.

So, I just think that Chile has a lot going for it that you don't find in a lot of Latin American countries. (Editor's note: Jim Powell recommends investing in Chile through the iShares MSCI Chile Investable Market Index Fund (ECH)).

Steve Halpern: Finally, you see opportunity in the Middle East and North Africa region, which is an area that many advisors and most investors tend to avoid because of worries over geopolitical events, yet you're looking beyond those concerns. Could you share your thoughts on the opportunity there?

Jim Powell: You bet. This takes just a little bit of talking, so let me go through this. I think what we're seeing in the Middle East and in Africa is ethnic groups, sectarian groups that do not get along, that were thrown together by the European powers when they sat down and divided those areas up.

Those people are separating themselves and that's where you see almost all of the violence. I think the poster child for the Middle East is Northern Iraq, which has always been a Kurdish zone. When Saddam Hussein went his way, his justifiable way, the Kurds figured well, now's our time.

They wanted to have their own country, but that simply wasn't possible, but they were able to get is an autonomous zone, largely autonomous and is now known as Iraqi Kurdistan. Well, an almost magical transformation occurred after that was done.

People would not believe what's happening in Northern Iraq—shopping malls, extensive road system, a new university, manufacturing is going in. A tremendous amount of trade and not very much violence leftover, so I think we're going to see that happen slowly and country by country in the Middle East.

Now we're seeing it starting out in Syria. You've got the Alawites, you've got the Druze, the Christians, the Sunnis, the Shias, and if you take a look at a map at where the conflicts are going, you can see they're basically separating themselves back out again.

Maybe they'll remain Syria, having this kind of an overview, overreaching border and country name, but in those countries—Syria, Libya, Lebanon, and Egypt-I think you're going to see a lot more autonomy for the various groups and when you see that happen, when those groups know they're safe and they got a place of their own, I think we'll see the same thing as we're seeing in Iraqi Kurdistan.

They're going to start emphasizing internal development and trade, and this is a long-range thing. It will go country by country, but for long-term investors, I can't think of really a better place to start putting your money, especially if you're setting up any sort of a trust fund for children or grandchildren.

But the Middle East and North Africa will be the big surprise. The biggest surprise of this century—it will be as big a surprise as Communist China was and maybe even more.

Steve Halpern: Now, for people looking for long-term exposure to some of these developments you're talking about, how would you recommend that they take a position without incurring too much risk?

Jim Powell: Again, I would go with a mutual fund or an ETF. I like the Market Vectors Africa Index (AFK) if you're looking for kind of an all-Africa fund.

If you want to include the Middle East, I would go through with a T. Rowe Price Africa and Middle East Fund, (US:TRAMX).

If you're interested mostly in Southern Africa, they have a lot going for them as well, and perhaps, will develop more quickly. I like the iShares MSCI South African Fund (EZA).

Now when I recommended these funds, mostly in June of 2010, and compare where they are today, the AFK is up about 20%; EZA is up 31%; TRAMX is up 31%, and I think this is just the tip of what we're going to see.

Most of these numbers, when I bounced them off some of my clients, they couldn't believe it could be Africa. But check my numbers. It's Africa all right.

Steve Halpern: Well, we really appreciate your insight. It's fascinating information you've shared. Thank you for joining us.

Jim Powell: You're welcome Steve, anytime.

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