Three Emerging Markets Picks for 2011

12/15/2010 3:53 pm EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

A Chinese bank, Russian wireless operator and UK bank active in Hong Kong will lead the stampede of emerging-markets behemoths next year, writes Yiannis G. Mostrous in The Silk Road Investor.

As we enter 2011 the situation has grown more complicated for investors. Markets have performed well, and therefore “buying everything” may not be the best strategy. As the world’s economic growth cools, investors will have to be very selective in their market and stock picks.

Although Asian valuations are higher, they’re nowhere near alarming levels and the majority of investors expect substantially lower earnings. Liquidity remains ample and this always helps markets climb higher. Asian markets as measured by the MSCI Asia ex-Japan index should gain about 20% next year.

The guiding theme for our portfolio in 2011 is that large-cap companies will outperform their smaller peers. With slower economic growth in 2011, the companies that can endure the lull while protecting earnings will come out on top. These winners will be large-cap companies.

Asian large caps have underperformed the broader market and their smaller peers from mid-2008 to mid-2010 as investors chased fast-moving smaller companies in order to make up for portfolio losses. Expect this trend to change in 2011.
 
China to Lead the Way
China remains my favorite market. Chinese authorities will successfully slow the country’s red hot economic growth without derailing the economy. China will post growth of 8.5% to 9% in 2011.

China Construction Bank (Hong Kong: 0939) is my favorite Chinese stock. The lender is one of China’s “big four” state-controlled banks and the second-largest lender in terms of market value. The bank was established in 1954 with the original mandate of funding public works projects such as roads and bridges. China Construction Bank is now a full-service financial institution with a significant retail network throughout China.

Despite recent moves by Chinese banking regulators to slow runaway loan growth, the long-term outlook for the Middle Kingdom’s banking sector remains positive. China Construction Bank shares trade at a deep discount to its regional competitors. Buy China Construction Bank up to HKD8. [Shares recently traded below HKD 7—Editor]

Moscow Believes in Oil
Russia is my second-favorite market for 2011. It’s a good proxy for global growth because its market is overweight energy. The country also has a decent domestic demand story, although it lacks the glamor of India and China. But the country’s domestic demand is still on the right track as evidenced by the recent high-profile PepsiCo (NYSE: PEP) acquisition of Russian dairy and juice maker Wim-Bill-Dann Foods (NYSE: WBD). Russia also has the benefit of being one of the cheapest emerging markets.

Mobile TeleSystems (NYSE: MBT) is my favorite stock to own in Russia. It’s the largest cellular network operator in Russia, Eastern Europe and Central Asia, with 50 million subscribers. It has licenses in 87 Russian regions, Ukraine, Belarus, Uzbekistan and Turkmenistan, covering a population of more than 233 million. It’s a clear play on growing consumption in the region, and well-positioned for steady growth. Buy Mobile TeleSystems up to $25 [Shares recently traded just above $20—Editor].

Many Positives for Hong Kong
Next on the list is Hong Kong, one of Asia’s most open economies and a direct beneficiary of China’s growth. The economy has been revitalized with the influx of direct investment from the mainland. It is also the greatest beneficiary of a weaker US dollar and low US interest rates via the Hong Kong dollar’s peg to the greenback.

Standard Chartered (London: STAN, OTC: SCBFF), which has a dual listing in Hong Kong and London, generates more than 40% of its retail income from deposits and related fees. The banking giant’s income streams are highly diversified, with no consumer or wholesale geography contributing more than 9% of revenue. Furthermore, management has a solid reputation for running the business in a prudent manner, especially compared with most of its competition. The company is growing fast in Asia and other emerging regions. Buy Standard Chartered in London up to £19. [Shares recently traded near £18—Editor.]

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