It was just over a year ago that the stock market’s recovery officially began. Between March 9 and May 7, 2009, the S&P/TSX composite index jumped more than 2,800 points, and investors were thrilled that the dark days of the recession were over. Since then, however, the picture hasn’t been as rosy. In the following 11 months, the markets have climbed only 1,800 points, leaving anxious Canadians wondering if they’ll ever see strong returns again.

About 15,000 kilometres away, in Singapore, Mark Mobius, the executive chairman of Templeton Asset Management, is giddy. He’s not concerned with North America’s stagnant indexes — he’s got his sights set on the world’s emerging markets, countries like Brazil, Russia, India and China (collectively known as BRIC), where growth is still rapid, presenting opportunities almost everywhere he looks. “The economic situation in these markets is very positive,” he says excitedly. Mobius, who manages several emerging-market portfolios for Franklin Templeton Investments, expects this part of the world to grow four times faster than developed markets. Last year, the sector blew away most other asset classes. According to Bloomberg, the MSCI emerging-market index was up more than 78% compared to 35% for the S&P/TSX. Clearly, there are still deals to be had. Investors just have to look beyond Canada’s borders. The BRIC countries house the biggest emerging markets, though any non-developed country counts. Drummond Brodeur, VP of portfolio management with Toronto’s Signature Global Advisors, says a big reason why these countries are so attractive is their low debt-to-GDP ratio. Developed countries generally have 80%–120% debt to GDP — in emerging markets, that number is closer to 40%. The large gap comes from the growing pains emerging markets faced over the years. Many countries had been wildly over-levered in the past, causing fiscal defaults in a number of locales. World leaders have learned from past mistakes, says Brodeur, though investing in emerging markets still hasn’t taken off. According to Investor Economics, a Toronto-based company that tracks the financial services industry, in 2009, Canadian equity funds had about $158 billion in assets, while international emerging-market funds had just over $5.6 billion. Many are still wary of investing in non-developed countries, but, asks Brodeur, “is the risk related to the fact they’re emerging markets, or because of excessive leverage?”

Either way, less attention means better buys, and Mobius says the emerging markets offer good value. The sector is not as cheap as it was at the beginning of last year, when every market around the world had low valuations, but it’s not as high as it has been in the past. “We’re still able to find many investor bargains,” he says.

Of the BRIC countries, Brazil, China and India see the most investment, though Brodeur says the latter nation should be approached with caution. India’s inflation recently hit 10% over the next couple months, meaning it may be better to wait a while before buying. Russia is more complicated: “It’s still driven by political agendas,” Brodeur explains. While valuations are cheap, Brodeur won’t invest there because of the political uncertainty. Mobius, on the other hand, has many investments in the former Soviet Union, and says he’s bullish on Russia’s oil and mineral sectors.

Besides BRIC, Canadians may also want to consider investing in frontier funds — areas such as Africa, the Middle East and the less developed countries in Latin American and eastern Europe. Tim Drinkall, manager of Morgan Stanley’s Frontier Emerging Markets Fund, says these countries are about where the bigger emerging markets were 15 years ago; everything from infrastructure to telecom and energy is rapidly expanding. Best of all, valuations are low, since most investors usually stick to BRIC if they invest in emerging markets at all.

Frontier markets didn’t do as well as their BRIC counterparts during the recession — the asset class was up only 11% in 2009. This year, it’s up 12% compared to about 5% for the more popular emerging markets. Drinkall adds that the frontier market is trading at a 25% discount compared to other emerging markets.

But if political climate was a big deal in Russia, it’s an even larger concern in frontier countries, many of which are run by dictators, and where attitudes toward outside investment vary. Drinkall looks at the macro environment — politics, transparency and economic cycles — to decide where he wants to invest. For him, Bangladesh, which is supportive of bank liquidity and domestic consumption, is a preferred market. Vietnam, which he thinks will have trouble pulling back the policy stimulus initiatives it announced last year, is one country he avoids.

One of the easiest ways to invest in the emerging-market countries is by purchasing a mutual fund or an ETF. That can mean buying a global fund, which can consist of both developed and non-developed countries, an emerging-market fund that invests specifically in BRIC and other locations, or a country-specific fund. Investors can also buy specific companies. And while investing in frontier funds may seem like a good idea, given the growth potential, Drinkall says this may not be the place for first-time emerging-market buyers. “It may be odd for someone who’s never invested in emerging markets to start with frontier countries,” he says.

Obviously, there are benefits to investing in emerging markets, especially since Canada’s markets are in a holding pattern. But while growth is the hot draw, it could also be its downfall. “The slower the markets grow, the better,” says Brodeur. “But those are the cycles you have to manage.”

14 foreign picks for your portfolio
Emerging and frontier markets offer a wide variety of rapidly growing areas to invest in. Here are 14 solid companies with strong growth potential.

China Merchants
Shipping is big business in China, so owning the country’s major port operator is a no-brainer. Drummond Brodeur, a portfolio manager with Signature Global Advisors, says China Merchants is “geared to the continuing growth and recovery in exports and trade.” It’s not a cheap buy — it’s trading at 20 times earnings — but with strong growth potential, there’s a good chance the share price will climb.

China Construction Bank
The majority of China’s growth will come from its consumption-hungry citizens — and if a billion-plus people want to buy, they’ll need credit. This bank is poised to take advantage of the increasing demand for auto financing and mortgages. The bank is trading at 10 times earnings and has “the best upside potential in stock price driven by loan growth,” says Brodeur. It also has a dividend yield of 4.5%.

XinAo Gas
When most people think of “mature” businesses like utilities, they don’t think of emerging markets. This basic gas utility has slowly been building up its distribution capabilities, and while it’s hooked up many homes in China, there are many more to go. The company is putting up about 20% growth. Trading at 19 times earnings, it’s not inexpensive, but its huge potential makes it a solid buy.

Banco Santander
Brazil’s credit market is still in its infancy. That makes Banco Santander a favourite of Brodeur’s. “Growth is very much driving demand for financial services,” he says.

BR Malls
If North America is any indication, the more Brazilians get credit, the more they’ll shop. BR Malls operates several large shopping centres in the country, so it’s well positioned to take advantage of the public’s increasing demands for goods. Brodeur says the company has solid, long-term, inflation-protected assets and good cash flows.

Petrobras
Make no mistake, oil companies are still a fantastic buy. Petrobras, a large Rio de Janeiro–based energy operation, has discovered large offshore oil deposits that it continues to mine. Brodeur says investors will see “strong double-digit growth” and, since the government owns the company, it gets preferential treatment over the multinationals.

Walmart de México
Strong management, vast retail knowledge and consumer growth should translate into double-digit earnings for Walmex (which is 44.7% owned by its U.S. namesake, Walmart). Right now it’s trading at 13 times earnings according to Brodeur, who says that’s a “very reasonable valuation.”

TSMC
TSMC is the largest semi-conductor manufacturing foundry in the world. When companies want to outsource their semi-conductor development, they turn to this Taiwanese company. Not only is it trading at 12 times earnings, but investors will get a 5% dividend yield as well.

Globe Telecom
“This is a pure yield play with a dividend yield of about 8.5%,” says Brodeur of the Filipino telecom business. Globe Telecom isn’t the largest wireless player in the country, but with increasing demand for mobile products, it should see high- to mid-single-digit growth.

FRONTIER MARKETS

Benue Cement
The cement industry may not be the sexiest sector, but don’t tell that to the Nigerians. The African nation uses 14 million tonnes of cement per year, but only manufactures eight million. New modern plants, however, should drive production, and Gboko-based Benue Cement is poised to capitalize. “Cement sales are going to grow leaps and bounds,” says Roelof Horne, a portfolio manager with Johannesburg-based Investec Asset Management.

Access Bank
Thanks to growing credit demands, and Nigeria’s recent banking crisis, many financial institutions have seen their values drop. Access Bank, says Horne, is one of those, but it’s still well-managed, with capital in excess of 30%. With the crisis shuttering many of its competitors’ doors, Access has a lot of room to grow.

CIB Bank
Egypt may seem like one of the more developed African countries, but only in the past few years has it allowed mortgage loans or car lending. As a result, the country is “very under-banked,” says Horne, with “huge growth potential to be had.”

Elsewedy Cables
The energy company makes electrical cables, meters and wind turbines — all products that Middle East and North African countries want. Horne says it’s an “active capacity” product line and, with its competent management team, should do well long term.

Depa
A Dubai real estate company might seem like a strange place to invest, given the property bubble and the recent debt crisis, but market troubles make for good valuations. Depa makes furnishings and finishings for big buildings and hotels. It has international aspirations, too. The company, says Horne, is “totally underpriced.”

Appeared in May 10, 2010 issue of Canadian Business magazine.

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