It’s unlikely that will occur soon but, long term, many asset managers think that an emerging-market currency, likely the Chinese renminbi, will become the global reserve currency of choice. If that happens, demand for the yuan (as it’s also known) will explode, and its price will rise accordingly. But even if investors still cling to the greenback for safety, as they did in 2011, several emerging-market currencies should still see their values increase. And that’s good news for retail investors who are looking for other ways to grow their portfolios.

Currencies can help investors in two significant ways: they offer a yield and the ­prospect of appreciation. For the former, investors can get a return by simply ­changing Canadian dollars into a currency that has a higher interest rate. If, for example, you put loonies in an Australian savings account—the country’s central bank rate is 4.5%, 350 basis points higher than Canada’s—the yield could be as high as 6%. Even easier, an investor can open a foreign-exchange account at an online brokerage and buy currency there. Brokerages, says Hewlett, will pay the central bank rate minus a few bucks for fees.

When it comes to appreciation, investors should treat currency like they do stocks. Find the undervalued buys that have long-term growth potential. François Bourdon, associate chief investment officer with ­Montreal-based Fiera Sceptre, says that while there are other dynamics that determine the price of a currency, it ultimately comes down to supply and demand. Just look at the renminbi. Despite the Chinese government’s efforts to keep it from appreciating, increasing demand has boosted its value 30% versus the U.S. dollar over the past six years. Bourdon thinks it’s still undervalued by 30%. He predicts that the price will increase by about 3% every year for the next five to 10 years. “China’s not even the most attractive currency,” he adds.

The most appealing currencies are in Asia. That’s because of the region’s high GDP growth, its robust exports and the low cost to produce materials. Bourdon explains that as long as Asian nations keep exporting goods, demand for their currencies will rise. Exporters, he explains, are paid in U.S. dollars. They then exchange the dollar for their domestic currency. The more American dollars get changed into local currency, the more demand there is for those homegrown shekels. Demand can come from within the country, too. As the Asian middle class grows and seeks higher wages and higher-end items, more pressure will be put on a currency’s supply-and-demand balance.

Many investors consider currency more volatile than other securities, but that’s not true, says Hewlett. In fact, it’s far less jumpy than commodities or stocks. Year-to-date, the S&P/TSX composite index is down 13%; the loonie’s fallen 3% since Jan. 4. Forex gets its risky rep because most currency traders use large amounts of leverage in order to get higher returns. Retail investors should avoid leverage.

Currency is also more liquid than most asset classes. Monica Fan, head of business development with London-based Millennium Global Investments, says that more than $4 trillion of U.S. currency is traded every day. While the idea is to hang on to an undervalued currency for the long term, it’s easy to exit if you need to. “That’s very helpful in a period like we’re in now when people want exit positions available,” she says.

Hewlett points out that currency should be considered a separate asset class to stocks and bonds. It’s a useful ­diversification tool, especially if your portfolio is heavily weighted to the domestic market. How much to allocate to this asset class depends on your risk tolerance and the weight of your other foreign holdings; between 5% and 10% is enough to give your portfolio a boost.

When deciding what currencies to buy, look at macroeconomics and fundamental valuations, says Jeff Zhang, chief investment officer with San Francisco–based Mellon Capital Management. If a country is unstable, it’s likely its currency will be too. Many African countries share similar characteristics to Asian nations—they export, the cost of living is low—but political instability makes investing there too risky. Look at a country’s historical inflation, Zhang advises; the lower, the better.

Zhang also keeps watch of a country’s current account deficit, the total imports of goods and services versus total exports. The more exports, the better. “A country like Argentina is running a huge deficit,” he says. “The currency will depreciate.”

Look for countries with high interest rates. Then, even if the money doesn’t appreciate, the interest will provide some return. ­Bourdon says the Malaysian ringgit is a good buy; not only is it undervalued by 40%, but its deposit rate is 3%. Canadian investors can open a Malay bank account online, though it may be easier to hold the currency in a forex account at a discount brokerage.

There are several ways to invest in currency. Besides opening a bank account or holding money in a forex account, some people buy stocks in another denomination. However, you’re then subject to market risk as well as currency risk. If you like all your holdings in one place—such as a bank brokerage account—consider buying currency ETFs. These funds hold either actual units of currency or short-term debt. It’s an easy way to make a pure play on foreign exchange. Most of the major currencies can be bought with an ETF, such as the Australian dollar (NYSE Arca: FXA), the Indian rupee (NYSE Arca: ICN) and the Chinese yuan (NYSE Arca: CYB). Some of the less popular currencies such as the ringgit don’t have an ETF, so you’ll have to buy them in a forex account.

Because the currency market is so massive and it’s not as familiar to investors as other asset classes, Hewlett warns against getting carried away. Treat currency like any other investment. “If you think a currency will go up, stop thinking about forex accounts and currency forwards and just buy that currency,” he says. “Don’t be too clever.”

OUR PICKS

Undervalued currencies may not come a dime a dozen anymore, but there’s still plenty to choose from. Ways to play them include opening a foreign bank account (all these countries except China have deposit insurance), holding them in a forex account with a Canadian brokerage, buying currency ETFs or buying foreign stocks on their home-country stock markets.

Malaysian ringgit
Malaysia’s money tops François Bourdon’s list of must-have currencies. The Montreal-based asset manager says that the country is moving up the manufacturing chain. It has commodities including oil and natural gas, and the cost of living is cheap. As the country’s manufacturing sector grows, so will the ringgit. He says it’s about 40% undervalued.

Singapore dollar
Singapore’s big attraction is that it’s the main shipping destination in Asia. When global commerce improves, the number of shipments—and therefore dollars—into the country will increase. “Everything goes through Singapore,” says Bourdon, who likes the country’s export potential and its respect for the rule of law. The city-state’s dollar is undervalued by 20%, he says.

Indonesian rupiah
Indonesian exports are booming—global demand for the nation’s goods increased 37.5% in the first nine months of 2011 compared to a year earlier—and Bourdon thinks its share of the Asian export market will increase. The currency has appreciated nearly 30% against the U.S dollar in the past three years. Bourdon thinks it could rise by 25% more.

Chinese renminbi
The renminbi is a no-brainer buy, says currency expert Mark Hewlett. With China poised to become the world’s largest economy by the end of the decade, its GDP growing four to five times faster than developed markets, and a huge trade surplus, its currency can only rise. Keep in mind the yuan has only limited convertability. While the Chinese government will likely float it one day, it could take years. That’s a good thing, Hewlett says. Its value will climb slowly but steadily.

Australian dollar
The Australian dollar is about 15% overvalued, says Bourdon, but with the central bank’s “cash rate” at 4.5% and strong demand for commodities, some experts maintain their view that it’s a good purchase. Hewlett likes it because it’s liquid, its central bank is strong and its fundamentals look better than the American dollar’s. “Most people sell Australian dollars,” he says. “I say, Why not buy?”

Appeared in Canadian Business magazine’s December 1, 2011 issue.

Pic via

Most stock markets are dirt cheap. There are only a handful of times over the past 20 years that the Standard & Poor’s 500 and the S&P/TSX composite index have had price-to-earnings ratios this low. At the end of October, the S&P/TSX was trading at a P/E of 15—its average since 1994 is 19.25—while the S&P 500 had a P/E of 13, versus an average of 19.85. Price-to-book ratios are below average, too. With numbers like that, investors are finding more bargains than a snowbird in a Florida flea market.

“It’s time to open up the war chest,” says Michael Lehmann, a portfolio manager with New York’s Third Avenue Management. Lehmann bought stocks throughout 2011, but when the market fell in the autumn his spending went into overdrive. Investors can still play it safe by buying well-known, large-capitalization stocks, he notes, but it may be time to move money out of bonds, which continue to experience record inflows, and into stocks. Some professional investors are recommending that people devote nearly 100% of their portfolios to equities.

Just because something can be bought at a discount doesn’t mean you should buy it, of course. Stocks were cheaper three years ago. It’s the combination of cheap stocks and clean balance sheets that’s making long-term investors salivate. Since the recession, many companies have been hoarding cash. They’ve also cut operating expenses, and margins are finally starting to grow. In other words, businesses are generally healthier than they’ve been in years.

These facts lead Jim Barrow, an executive director and portfolio manager at Dallas-based Barrow, Hanley, Mewhinney and Strauss, to doubt the likelihood of a double-dip recession. He also points out that the economic crisis was caused, in part, by a crash in the U.S. housing and automotive sectors. Autos and housing are still on the bottom, so they can’t go any lower, he says. “With any longer-term improvements in those sectors—and you will get improvements—the economy will do well.” Barrow is fully invested in the market. He knows the European debt crisis could send his stocks lower, but with many stocks trading at a 30% to 50% discount to what value managers deem their intrinsic value, he sees no point in waiting on the sidelines any longer.

Lehmann and Barrow’s views often get drowned out by the bears, such as Gluskin Sheff chief economist David Rosenberg, who think we’re headed for another recession. Rosenberg argues that productivity is declining, people are saving more, American job losses are going to increase and U.S. commercial real estate could be the next bubble to burst. In October, he wrote that we are “confronting the next leg of the most intense deleveraging cycle in modern history.”

Like many in the markets, though, Sam Wiseman, chief investment officer at Toronto’s Wise Capital Management, is tiring of the bears’ unwavering growl. “If you listen to these guys, it’ll seem like we got mauled 100% every year,” he says. Wise, who manages money for large pension funds and wealthy individuals, says that the longer someone stays in the market, the better the return. His research has shown that any five-year return in the Canadian market and any 11-year return in the U.S. since 1970 is positive, assuming you invested on the first day of the year. Crashes don’t matter, he says, as long as you stayed in and rode it out. “That’s the type of time frame you need to be in the market,” he says.

There’s another reason why markets will make people money in 2012, says Srikanth Iyer, head of global systematic investments for Toronto’s Guardian Capital Group: dividend payouts are set to climb. During the recession, many companies cut payouts or halted increases, he says. Now, with corporate balance sheets flush with cash, dividends will have to start rising again.

Iyer explains that dividends are due for a comeback. In 2010, stock price appreciation represented 85% of the gains made in the market. Dividends accounted for only 12%. That’s about the same as the ratio was in the 1990s, but in the decades prior, dividend appreciation accounted for between 24% and 71% of total returns. The reason for the decline, says Iyer, is that in the ’90s CEOs were rewarded with stock options. In order to get paid, the earnings had to rise. Companies put less emphasis on dividends and more on growth. Now, he says, CEOs are being rewarded with restricted stock that can only be sold after a certain number of years. Therefore they are more motivated to generate dividends in the meantime. That, combined with the demand for income from investors and the fact that companies have so much cash saved up, makes Iyer believe that over the next few years dividends will once again make up a significant part of the market’s total return. “What are they going to do with all that money?” he asks. “They need to grow the company or pay it out.”

To withstand the shocks that could still come, though, investors have to do their due diligence and choose the right companies. Lehmann first looks at debt. The company has to be able to roll with a short-term setback. He likes to see the ratio of debt to total capitalization (debt divided by shareholders’ equity plus debt) under 50%. He then looks for an above-average return on equity and a high percentage of the management’s own net worth invested in the company. When calculating the price-to-book ratio, Lehmann removes goodwill—a price put on intangible assets, like a strong brand name—in order to get a company’s tangible book value. As with P/E, the lower the ratio, the cheaper the stock. He also looks for companies that trade for under 10 times normalized earnings, under five to six times EBITA, and free cash flow yields should be in the 7% to 10% range.

Tim McElvaine, a value investor and president of Vancouver-based McElvaine Investment Management, wants his assets to at least double over four or five years, so he looks for stocks that he thinks will do just that. He pays particular attention to discounted cash flow—an estimate of future cash flow that factors in risk and length of time invested. “You’re making assumptions about the future,” he says.

The bottom line is that you want to buy a discounted company that’s running a solid operation, has strong earnings and lots of potential. Fortunately, in today’s precarious investing environment, there are a lot of sectors with companies that match those criteria.

One of the sectors poised to make investors money in 2012 and beyond is energy. Irwin Michael, founder and president of Toronto’s ABC Funds, says that energy companies are “very cheap” and not reflecting the still high price of oil. People aren’t just nervous that markets will fall; they’re worried energy prices could drop, too, and that’s depressed share prices. Add to that increasing demand from China, and the long-term outlook for oil stocks looks good. Lehmann and Wiseman also think natural gas—which is at US$3.69 per thousand cubic feet—should climb to at least $5 in the short-term and $9 longer term. Again, demand from China for cleaner fuel sources will push prices up.

Barrow and Iyer think investors should bet on tobacco stocks. While these companies are unsurprisingly out of favour with many investors—a lot simply won’t buy these companies on moral grounds—they think the sector’s high yields, low correlation with market cycles and steady earnings will make investors give them another look, and then stock prices will appreciate. If Philip Morris is any indication—its share price has increased 43% over five years and about 20% year-to-date—their prediction will be right. Wiseman’s also looking to agriculture for big returns next year. “The world is eating better and needing better yields on food,” he says. There are lots of stocks with good long-term potential, such as Agrium and PotashCorp.

Looking back from five years hence, 2012 could well be the year of the stock. “There are terrific long-term growth stories,” says Lehmann. “Get through the shorter-term period that’s focusing on Europe, and the next five years looks great for equities.”

OUR PICKS

Cheung Kong (Holdings) Ltd. (HKG: 0001)

This Hong Kong–based conglomerate is one of Michael Lehmann’s favourites. The Third Avenue portfolio manager likes Hong Kong commercial real est­ate, but Cheung Kong also owns retail buildings, it’s the world’s largest port operator and it owns infrastructure. It’s also dirt cheap with an 8.1 price-to-earnings ratio.

Glacier Media INC. (TSX: GVC)

Portfolio manager Tim McElvaine can’t get enough of Vancouver-based Glacier Media. The community newspaper and trade magazine publisher is small— it’s got a $160-million market cap—but it has all the criteria for a good stock. Directors own about 33% of the company, the head office is modest, it has good free cash flow and it recently acquired some bigger titles from Postmedia Network. It trades around 10 times earnings.

Savanna Energy Services Corp. (TSX: SVY)

Calgary-based drilling company Savanna is high on Irwin Michael’s list of must-buys. The portfolio manager likes its management team and diversification; it drills and rents oilfield equipment in Canada, the U.S. and Australia. It’s trading at a cheap 0.9 times book value and has a low debt to common equity of 16.4%.

AVX Corp. (NYSE: AVX)

AVX, based in Myrtle Beach, S.C., makes electrical components for cellphones, hearing aids and other devices. It’s a cyclical company, says Lehmann, and it tends to get too undervalued on the downswing and overvalued when business is good. The company has a dominant market share in its industry and is trading at eight to 10 times earnings—a 50% discount to what it should trade at, he says.

KeyCorp (NYSE: KEY)

Cleveland-based KeyCorp is a regional bank with about $50 billion in assets. It’s a stock Lehmann wished he could have bought years ago, but valuations were too high. No longer. The company is trading at 35% discount to its tangible book value. It is also well capitalized, though it did get caught extending too much credit in the mid-2000s. Its stock has rebounded, and Lehmann expects it to climb further as the economy improves.

Appeared in Canadian Business magazine’s November 16, 2011 issue. Lead story in CB’s Investing Guide 2012.

Pic via

Now, five years later, with prices at a paltry $3.62/Mcf, Pendill is, again, taking a contrarian view. It may take a few years, he says, but the price of natural gas will rise.

Despite Pendill’s optimism, many investors think the price of gas will stay low for a long time, so they’ve abandoned it for higher-priced oil. That’s made natural gas—the commodity and the companies—the black sheep of the energy sector. And that’s a good thing. “The natural gas industry is a value play,” says Pendill. “Near-term, natural gas producers will lag their oil-based peers, but down the road the market will balance itself.” The natural gas industry is also going through some major changes, which presents numerous undervalued opportunities for investors. Find the right stocks today, and you’ll likely be rewarded later.

Natural gas prices have a long history of dramatic rises and falls, but the last time they dropped, in 2008, it was because of a revolutionary change in the industry. Advances in drilling technology made it possible to extract gas from solid rock formations such as shale, vastly increasing the size of the reserves that could be economically recovered. Eric Nuttall, manager of Toronto’s Sprott Asset Management’s Energy Fund, says that eight years ago the average natural gas well would initially produce 250,000 cubic feet of gas per day. That number is over a million cubic feet today. The go-big-or-go-home economics of shale gas mean North American supply is far outstripping demand, even though that is increasing, too, as users switch from more expensive (oil), more polluting (coal) or more dangerous (nuclear) energy sources.

But while North America faces a glut, Asia faces a shortage. China’s natural gas imports have climbed 27% in the first half of 2011, and Indian demand for gas is expected to double by 2015. Currently, North American companies can’t tap into that demand; there’s currently no way to transport gas produced domestically overseas. So, while a Canadian utility might pay $3.62/Mcf for gas, Chinese customers are coughing up $11/Mcf. To move gas from Canada to China, it needs to be liquefied and shipped over the ocean. Scott Vali, a vice-president and portfolio manager with Toronto’s Signature Global Advisors, says North America has been slow to adopt the technology needed to convert natural gas to liquefied natural gas (LNG). With so much supply here, though, companies are now working hard to build LNG conversion plants. Canadian companies should be ready to begin shipping gas to Asia by 2015, says Vali. When that happens, North American operations with export contracts will start earning a higher price for gas, while domestic supplies may finally get drawn down.

To get into this market, investors could buy an exchange-traded fund, but Steffen Torres, a portfolio manager with Kalmar Investments, based in Wilmington, Del., advises against it. Some gas ETFs hold futures contacts that are purchased at a certain price. When it comes time to sell, if the contract is lower than the purchase price, the ETF’s value drops. With gas prices so low, Torres thinks there’s potential to lose a lot of money. If you invested US$10,000 in the United States Natural Gas Fund ETF in March 2007, for example, you’d have about $900 today. ETFs that hold an undifferentiated basket of stocks are likewise inadvisable since some of the companies will have a cost of production above current prices.

It’s a better idea, says Torres, to buy company stock directly. With gas prices so low, though, investors have to look hard for the best buys. The first thing to consider, from a stock valuation perspective, is how much it costs a company to produce gas. The lower the cost, the better. The current price of a basket of natural gas companies, says Torres, assumes gas can be produced at $4.50/Mcf. With gas likely to bounce around between the $3.75 and $5 range, he wants to buy companies where the stock assumes that gas could be produced for $3.50/Mcf or less.

Investors should also look at companies that drill “liquid-rich gas,” which contains some dry gas (methane) and several other liquid forms such as ethane, propane, butane and condensate. “All those different products have a different sales price,” says Nuttall. Companies that can sell all these wet gases often make more than operations that only produce methane. Calgary-based Painted Pony Petroleum, for example, makes 62% more in revenues with those gases than if it only produced dry gas, Nuttall explains.

It’s also important to look at reserve potential and proven reserves. Vali wants to know if a resource base can be grown. “Based on what we know today, how can that resource be developed?” he asks. “What is the value you can assume for that resource base?” It’s risky to place a bet on something unknown, which is why companies on unproven reserves are often cheaper, but if an investor concludes that there is potential, and that pays off, the returns could be huge. Pendill likes to look at proven reserves—reserves that people know will yield gas, but the land hasn’t yet been drilled. The price of proven reserves is based on today’s economics with today’s technology. If technology improves, or gas prices rise, the economics will be that much better.

Looking at the usual metrics, like price-to-earnings, doesn’t work with natural gas companies, but investors still want to see healthy free cash flow and nearly no debt. Look for under one times debt to cash flow, says Nuttall. If prices fall further and a company does have to cut back on growth, a large debt load could force it into bankruptcy. Also look for dividend-paying companies. “You’re basically getting paid to wait for the recovery in the gas markets,” says Pendill.

It may still take years before the benefits of investing in the sector appear, but don’t wait until stock prices rise to get into the market. Pendill was correct when he warned investors in 2007 that the price was too high, and he may be right again that prices are too low. “It will turn,” he says now. “When we get those export facilities, things could really change.”

Our picks

Encana (TSX: ECA) Lanny Pendill, an Edward Jones portfolio manager, can’t say enough good things about Calgary-based EnCana. It’s a low-cost producer, it’s in four of the five most attractive natural gas basins in North America and it pays a 3.56% yield. He also says the company is sitting on a lot of acreage in emerging gas fields, and its investment-grade credit rating of BBB+ means it’s a low-risk play.

Range Resources (NYSE: RRC) Range Resources, based in Fort Worth, Texas, is a big player in the Marcellus Formation, a large area in New York, Pennsylvania and other neighbouring states that’s expected to produce vast amounts of liquid-rich gas. Scott Vali, a portfolio manager with Signature Global Advisors, says the company owns a lot of land, and because it’s so close to a consuming market—the northeastern U.S.—it doesn’t have to pay heavy tolls to ship it to its final destination.

Painted Pony Petroleum (TSXV: PPY.A) Calgary’s Painted Pony Petroleum, a junior oil and gas company, has been a “huge winner,” says Sprott fund manager Eric Nuttall. It recently flowed the highest volume of natural gas ever from a well in the Montney shale formation in B.C. and Alberta. “It’s extremely prolific,” he says. It’s also producing natural gas liquids, which means it makes more money than it would if it just mined methane. It trades at $12, but Nuttall thinks it could soon reach $18 to $20 a share.

Magnum Hunter Resources (NYSE: MHR) Houston-based Magnum Hunter has three operations in “the United States’ most enviable formations,” says Steffen Torres, a portfolio manager with Kalmar Investments, including five “strong” wells in the Marcellus Formation. It’s trading at about US$4, but Torres thinks it’ll rise to $7. Its capital expenditures have outpaced cash flow, but the company has the ability to grow production by 80% over the next few years, he says.

Chicago Bridge & Iron Co. (NYSE: CBI) It’s not a gas producer, but buying this Amsterdam-based engineering and construction company is another way to play the natural gas market. CB&I has designed numerous liquefied natural gas plants around the world, and with demand for LNG conversion facilities rising in North America, Torres thinks it’s poised to make huge profits. “Their backlog is increasing,” he says. It seems others agree with Torres; the firm’s stock price has risen by 10% year-to-date.

Appeared in Canadian Business magazine’s November 2, 2011 issue.

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Since Jan. 3, the S&P/TSX composite index has dropped 13.6%, while the S&P 500 has fallen nearly 5%. With Greece on the verge of default, America mired in debt and facing a very real threat of a double-dip recession, there’s a good chance markets won’t improve in the short to medium term. We may even see another crash. But there are ways to protect your capital and earn income without having to take a chance on equities.

Guaranteed investment certificate
One of the safest securities is a guaranteed investment certificate, or GIC, offered by Canadian banks. It’s a good tool for investors who want to avoid volatility altogether, says Richardson. The Canadian Deposit Insurance Corp. protects GICs, so if the financial institution goes under, investors will get up to $100,000 back for certificates that mature in five years or less. Because it’s safe, and interest rates are so low today, investors make almost nothing, though. A 30-day GIC is yielding around 0.5% on an annualized basis; a five-year certificate is yielding 1.85% or less, depending on the bank.

You can also buy a market-linked GIC, which offers some additional money if stock markets recover. Generally, investors don’t get any income on these GICs until the term is up. At the end of the term—market-linked GICs usually have to be held for three or five years—you get a payout that depends on how well the market has done. You’ll always get your principal back, but if stocks continue to fall, you won’t receive any yield.

One drawback to GICs is that they’re not liquid. You can’t trade them like stocks or bonds. To get around that issue, banks created cashable GICs, which offer a lower interest rate than regular GICs but allow investors to trade in the certificate before the term is up. “It’s useful if you think interest rates are going to go higher,” says Richardson. Investors, he says, can cash out if rates increase and buy another GIC with a higher yield.

Bonds
Bonds have soared in popularity since the financial crisis—Canadian inflows averaged about $1.5 billion per month before the financial crisis and now average about $8 billion. Why the spike? Nervous investors. Whether it’s Government of Canada, provincial or highly rated corporate bonds, fixed income is almost always safer than stocks, and it also provides income. Albrecht Weller, president of Toronto-based Schwaben Capital Group Ltd., suggests sticking with provincial or corporate bonds. “You reduce risk, have liquidity and have a safe harbour for your money,” he says. Provincials and corporates are riskier than Government of Canada bonds, so they come with a higher yield. If you do go the corporate bond route, Weller suggests sticking to investment-grade bonds—BBB or above—and make sure the company has a relatively clean balance sheet.

Preferred shares
Investors who want decent yield but aren’t ready to jump into dividend-paying stocks should look at preferred shares. While preferreds are technically equity instruments, they’re usually considered part of the fixed income family. That’s because, like bonds, interest-rate movements affect payouts—if rates rise, the value of a preferred falls—and they’re assigned a credit rating. The major benefit is the dividend, which is usually higher than an investment-grade corporate bond. “There’s a whole slew of them that have 4% to 6% yields,” says Schwaben Capital’s Weller.

Preferred shareholders don’t have voting rights, but they do get preferential treatment when it comes to dividend payouts. Companies will always cut dividends on common shares before slashing payments on preferreds.

They are usually issued for $25, but sometimes they cost $50 or $100 to buy. The interest rate, says Weller, is based on current interest rates and some spread over Government of Canada bonds; it depends on the asset’s risk level. Weller suggests sticking to preferreds offered by large, high-quality institutions such as banks, utilities and telecoms. Stay away from companies that have credit risks, low liquidity or cash-flow concerns. “You want solid credit worthiness,” he says.

Segregated funds
Investors have long used insurance as a way to make sure that, regardless of what happens in the market, family members will still have some cash coming to them. But insurance companies also provide people ways to get some guaranteed money before they die.

Segregated funds work much like mutual funds. Investors have a suite of funds to choose from that cover various sectors, countries and everything in between. If stocks rise, so do returns. But there’s one huge difference: investors won’t lose their principal if the markets crumble. It’s this downside protection that’s attracting an increasing number of investors, says Peter Wouters, the Toronto-based director of tax and estate planning at Empire Life. “They want the protection and the upside potential too,” he explains.

Seg funds also come with a “lock in” feature, which means, if the investments go up, you can add those gains to the guarantee. For example, if your $100,000 investment rises by $50,000, and you chose to lock in the extra cash, your principal will never fall below $150,000.

There is a catch. Usually, the guarantee kicks in after 10 or 15 years. Plus, the funds come with higher management expense ratios than mutual funds. The more frequently you’re allowed to lock in, the higher the fee will be. While investors are taking a chance with seg funds—if the market recovers, those high fees won’t be worth it—for many frightened investors, principal protection is worth the two percentage points of insurance.

There is another option investors have available to them: keep their money in cash. But as bleak as the global economic outlook may be, think twice before storing your dough under a pillow. “Unless you think the world is about to end, it still makes sense to get your money working for you,” says Richardson. “Money in a mattress won’t do that.”

Our picks

RBC Target 2013 Corporate Bond ETF (TSX: RQA)
This exchange-traded fund is brand new—it launched in September—but Baskin Financial vice-president Barry Schwartz says it’s a good bet. Unlike other bond ETFs, it has a maturity date. When it expires, you’ll get your money back, plus any gains. “It’s like a closed-end fund, but it’s still fully liquid,” says Schwartz, meaning you can still trade it like a stock. The ETF has 52% of its assets in AA-rated corporates, 36% in A and 11% in BBB.

DEX Short Term Bond Index Fund (TSX: XSB)
Investors who want to play it safe should consider this iShares product. Just over 94% of its holdings have a maturity date between one and five years. The short time horizon protects the bond from rising interest rates. It’s also got a mix of government bonds and corporates, with the biggest weighting in federal bonds. With 62% of its holdings in AAA-rated instruments, it’s one of the most risk-averse funds on the market.

ALLY Guaranteed Investment Certificate
Among GICs, Ally offers the best rates around. The interest rate on its one-year GIC is 1.75%, about 75 basis points higher than what the big banks offer. Ally’s terms range from three months to five years. If you want something shorter, Ally has a High Interest Savings account currently paying 2%.

BCE Inc. (TSX: BCE.PR.R)
Schwaben Capital Group founder Albrecht Weller is a fan of BCE’s preferred shares. The company, he says, has a solid credit rating. Dominion Bond Rating Service gives it a Pfd-3 (high), which corresponds to a BBB corporate bond rating, and it pays an annual dividend of about 4.5%. Weller says investors should buy preferreds from companies like BCE—large, stable conglomerates with little chance of defaulting.

iShares S&P/TSX North American Preferred Stock Index Fund (TSX: XPF)
This ETF holds preferred shares of both Canadian and U.S. companies, which makes it more diversified than the Canadian-only options on the market, which almost only hold banks. It still has an 80% weight in financials, but also holds other sectors such as telecom, utilities and consumer discretionary. Canadians won’t get the dividend tax credit on the U.S. portion of the ETF, but U.S. shares have a higher yield.

Appeared in Canadian Business’ October 19, 2011 issue.

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Paul Ehrlichman can’t wait to see Greece finally default. “The country’s a fraud,” he says. “There is no hope.” With a one-year government bond yielding more than 100%, it’s as if the country has already defaulted, explains the head of global equity for Delaware-based Global Currents Investment Management. The sooner it goes under, the sooner Europe can start healing. But until the region works out its myriad problems— there’s also Italy, which was recently downgraded by S&P from A to A–, not to mention Spain and Portugal—people will continue to run from Europe’s markets.

Ehrlichman, though, isn’t going anywhere. There are plenty of opportunities, he says. People just need to make sure they’re investing in the right countries, instead of the region as a whole. “We used to look at the world as one big happy place,” he says. “But now we’re starting to talk about countries again because not everyone is getting access to capital at the same price.”

Because of the worries around sovereign debt, all of Europe, from Finland to Poland, has never been cheaper. Parus Shah, a London- based portfolio manager with Fidelity Investments, says that, in general, companies are trading at a 20% discount from the depths of the recession. Yet, having cleaned up their balance sheets since 2008, businesses are in better shape. Compared to the S&P 500, which is trading at about 14 times earnings, Germany’s DAX Index is trading at 9.9 times earnings; France’s CAC is trading at 8.5; most of the eurozone is trading at 10 times or below. Shah thinks people are overreacting to Europe’s economic woes. “There are so many global funds not invested in a single European company,” he says. “That’s strange.” The longer people stay away, though, the better stocks look to value investors.

The rule of thumb is to buy blue-chip, dividend-paying multinationals that sell to fast-growing emerging markets. That way, you aren’t exposed to country risk and don’t have to worry as much about slowdowns in consumer spending. But with the gap between healthy and weak European countries widening, investors can’t simply ignore where a company is based anymore. A weak country could raise corporate taxes as a way to increase revenues and pay down debt, says Shah. It could levy fees on utilities or telecoms. While higher taxes won’t kill a strong business, a 5% tax increase could destroy some of a company’s value.

Shah also warns that companies in weaker countries may also find borrowing more expensive. The longer the turmoil continues, the more investors will want a premium from corporate bonds. If a business has to pay a 6% yield instead of 3%, it could eat into profits or make it difficult to pay the higher coupon back.

Germany tops most people’s list of places to invest because its debt-to-GDP ratio is low, at least compared to other eurozone countries, at 83%. It’s also competitive, explains Ed Devlin, an executive vice-president at Pacific Investment Management, with the price of products increasing more than wages. It’s got a skilled workforce, and exports are still strong. Its main risk, says Devlin, is that it, along with France, has put its balance sheet at risk by propping up struggling countries.

Opinion is mixed on France, because its banks have more sovereign debt exposure than Italy. But, says Ehrlichman, Italian banks are in worse shape than French ones, and the French are more productive, so GDP is likely to grow faster. France’s government also directly or indirectly employs about 35% of the workforce, says Shah. As long as the country’s finances stay stable, these people aren’t going to lose their jobs. Investors should consider telecoms, infrastructure companies and, though they’re riskier, banks.

If investors want to buy companies in the weaker countries, such as Spain and Portugal, it would be wise to stick to more international operations as it’s likely the domestic market will continue to face downward pressure. Shah says that governments may be less likely to tax multinationals since they can move their head office if there’s a threat to their profits. However, Ehrlichman says there are a lot of good opportunities in Ireland. That country has already faced the worst of its problems and, he says, is beginning to heal. Two years ago Irish bonds were yielding about 20%; today rates are closer to 9%. “The credit markets have been telling an accurate story,” he says. Besides buying bonds which, Ehrlichman says, “looks like money,” a basket of contrarian and quality stocks—including Bank of Ireland for the former and airline Ryanair for the latter—is the way to go.

Countries outside the eurozone, like the U.K., Switzerland, the Scandinavian countries and some Baltic states, are also worth a look. Their banks don’t have the same sovereign debt exposure as Germany and France and, since they have their own currencies, they have more options to deal with financial crises.

After deciding which countries to focus on, you’ll want to find companies with low debt, especially in the weaker countries. If a business is too leveraged, and interest costs rise, then there will a massive drop in earning power, Shah explains. Also make sure that more than half of revenues come from international sources.

Price-to-earnings and price-to-book ratios don’t matter as much in Europe because everything looks cheap. Dividends, though, are important as they speak to a company’s health. Don Reed, president and CEO of Franklin Templeton Investments, likes companies that can grow earnings and pay dividends higher than 3.5%, which is what the MSCI EAFE Index, a benchmark that tracks Europe, Australasia and the Far East, pays.

Ehrlichman wants companies that have lowered their earnings expectations for 2012 and 2013. He says a lot of businesses, especially in the industrial sector, haven’t yet adjusted their projections to the global economic slowdown. “We know the forecast will be wrong,” he says. “And would you rather be on the side of a positive surprise or a negative one?”

Ultimately, investors need to be patient. Valuations could still drop as the region works out its economic issues, and there are still uncertainties around who will be using the euro in the future. But hold on for the long term and you won’t go wrong. “What will happen in Europe over the next 10 years?” asks Shah. “I think the next 10 years will be a lot better than the last 10.”

Our picks

BNP Paribas SA (EPA: BNP)
While many investors still consider Europe’s financial sector risky, fund manager Paul Ehrlichman is happy to take a chance on Paris-based BNP Paribas. The European Central Bank has demonstrated that it won’t let large banks fail, “so there won’t be a Lehman-like event,” he says. And, with a strong consumer banking business, a near-7% yield and a price of about five times earnings, it’s got a lot of upside.

Marks & Spencer Group PLC (LON: MKS)
Despite living in what Ehrlichman says is “the worst consumer environment since 1870,” Britain’s retail stores are doing surprisingly well. In May, Marks & Spencer, which has more than 700 stores across the U.K., reported a 13% increase in profits over the year before. Its shares jumped 7% in September after it announced it was revamping its stores. Private equity investors are reportedly interested in buying the company. Its price-to-earnings is 8.6 and it pays a 5.1% dividend yield.

Novartis AG (NYSE: NVS)
Switzerland-based Novartis is a favourite of Don Reed, CEO of Franklin Templeton Investments. He likes the pharmaceutical giant because it’s a global company in a non-cyclical sector. The company produces some of the world’s leading drugs, including Excedrin and Ritalin. Because a large portion of its business is outside of Europe, it has less exposure to the region’s economic risks. It’s not as cheap as some other companies—it trades at about 13 times earnings—but it does pay a 4.2% yield.

Bank of Ireland (NYSE: IRE)
Dublin’s Bank of Ireland is a contrarian play, says Ehrlichman. Most investors still think it could fail, but with Ireland’s fortunes improving—it’s already implemented its austerity measures— he thinks the bank’s shares should start climbing soon. In a sign of confidence, the bank has raised US$3.9 billion of term debt since June, despite not being able to access the public debt market. Another private bond sale worth $1.6 billion is reportedly on the horizon.

Telefonica SA (NYSE: TEF)
Reed likes this Madrid-based telecom company because of its high dividend—about 9%—and its international exposure. The company’s stock is down 15% year-to-date because of fears over Spain’s public debt load, but only onethird of its business is done in its home country. A big piece of its business comes from Latin America, where GDP growth is still robust. Its P/E is about eight times.

Appeared in Canadian Business’ October 5, 2011 issue.

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While investor sentiment is largely driving the silver market right now, the metal has something going for it that gold doesn’t: supply–and–demand fundamentals. Silver is used in a whole host of products from electronics and batteries to solar energy and cars, while gold is mainly used in jewelry, or it sits unused in vaults. That means silver could be ultimately safer — even if investor sentiment sours, there will still be demand for the metal for its more practical uses. “I see silver as being a crossover precious metal — it’s bought for investment, and it has industrial applications,” says Barry Wainstein, vice–chairman and deputy head of global capital markets at Scotia Capital.

However, tempering that advantage is the fact that there is currently far more supply than demand in the silver market. Silver has been in surplus for nine of the past 10 years, and Mark Bulsing, a UBS strategist, expects there to be more supply on the market in 2011. Still, David Morgan, a U.S.–based precious metals analyst and author of The Morgan Report, says over the longer term silver demand will catch up. He says demand is growing by 100 million ounces a year, while mining production is increasing by only 30 million ounces. Wainstein also likes silver as a long–term play because of the narrowing supply–and–demand gap. “If a commodity is used in industries that are growing, then demand will remain firm,” he says.

Even if industrial demand increases, however, current investor sentiment makes it difficult to know if silver’s price is accurately valued. Historically the gold–to–silver ratio is between 55 and 80 — meaning that the price of gold is between 55 and 80 times that of silver. The ratio is currently at 50, which suggests silver is slightly overvalued today, even compared to the current sky–high price of gold.

Platinum and Palladium

While silver may be a good long–term buy, there are other, and perhaps even more fundamentally sound, precious metals to choose from. Only a tiny percentage of investors purchase platinum and palladium — both of which have seen their prices rise over the past two years — as a U.S.–dollar alternative. Instead, the price is driven almost exclusively by industrial demand. The main use for both metals is to create catalytic converters, a device in cars that reduces the toxicity of emissions. As the auto sector recovers, and emerging–market demand for vehicles increases, more converters will have to be made.

For these metals, demand is already outpacing supply. For years, Russia, one of the main producers of palladium, stockpiled the commodity to keep prices stable. But that supply is nearly tapped, so Russia is no longer able to keep a cap on prices. “They’ve sold off the majority of their reserves,” says Brahm Spilfogel, a vice–president and portfolio manager at RBC Asset Management. “You’ve lifted one negative element to palladium.” The metal is primarily mined in South Africa, which, says Darren Lekkerkerker, manager of the Fidelity Investments Global Natural Resources Fund, doesn’t have enough power to facilitate a supply increase. The mines are deep and costly to run, and many companies can’t generate positive cash flow. All of this has pushed palladium prices through the roof. Since January 2009, the metal has jumped from about $200 to $800 per ounce.

Platinum is in high demand too. Its price has been on a steady increase for the past two years, climbing from around $800 an ounce in early 2009 to $1,800 today. The platinum–to–gold ratio is currently low — at one time, platinum was double the price of gold, but now it’s about 1.35 times, meaning its price has room to grow. That makes palladium and platinum a better bet for more value–oriented investors.

How to get in the game

One reason the price of gold and silver has spiked is that it’s much easier to buy than it used to be. Investors can now easily purchase gold, silver, platinum and palladium exchange–traded funds, or ETFs, which track the price of the metal. Of course, all four precious metals can also be purchased in the form of bars, too. ScotiaMocatta, a division of Scotiabank, sells gold, silver, platinum and palladium directly to investors via its website (scotiamocatta.com). Investors can store their gold or silver in safety deposit boxes or, if quantities exceed $10 million, at the main ScotiaMocatta office.

Another way to tap into precious metals is by buying shares of the companies that mine it. The most important factor in deciding what company to own is the quality of the resource it’s mining, says Lekkerkerker. Higher–grade ore costs less to produce because there’s more metal in the rock. Also keep in mind the size of the resource. Owning a mine that produces 500,000 ounces a year is better than one that produces 50,000, he explains. Spilfogel also considers the mine’s potential. If the main deposit has one million ounces of ore today, but there’s the potential to uncover another couple million, the RBC manager says that would merit further study. Other factors such as strong management, low price–to–earnings valuations and a company’s growth potential should also be considered.

However one invests, it’s best to keep in mind that in the short term, precious metal investing is strictly a speculator’s game. Both silver and gold appear to be overvalued. That doesn’t mean they won’t keep going up in the near future, but it does mean there is increased risk of a sudden crash. Longer term, however, investors may want to put a limited portion of their portfolio — no more than 5% say most experts — into the precious metal markets for diversification. If that’s the aim, it’s best to stick to the metals where the fundamentals are strong — which could mean favouring silver, platinum and palladium over gold. “There are investors selling 20% of whatever they had invested and buying gold,” says Jim Lowell, chief investment strategist at Adviser Investments. “They’re going to get clobbered when the bubble bursts.”

Our picks

Interested in precious metals other than gold? Here are some good bets:

EXCHANGE-TRADED FUNDS

iShares Silver Trust (NYSE: SLv)
Most people don’t want to stash thousands of dollars’ worth of silver coins in their safety deposit box. Owning a silver ETF is the next best thing. iShares launched this product in the U.S. five years ago, and it’s now the go-to fund for silver investors. You can buy the ETF on the markets like a stock, and the fund is designed to rise and fall in value in tandem with silver prices. The fund charges a management expense ratio (MER) of 0.5% and has more than $9 billion in total net assets.

ETFs Physical Palladium Shares (NYSE: PALL)
Just over a year ago, New York–based ETF Securities launched the first U.S.-listed palladium ETF. In its first 13 months, the fund — which rises and falls with palladium’s spot price — has attracted more than $500 million in assets. The ETF is currently trading at about $81 and has a 0.6% MER.

ETFs Physical Platinum Shares (NYSE: PPLT)
The same day ETF Securities unveiled its palladium ETF, it also launched this platinum fund. The MER is also 0.6%, and the shares are currently priced at about $180, up 20% since this time last year.

COMPANIES

North American Palladium (AMEX: PAL)
Toronto-based North American Palladium owns one of the continent’s largest palladium mines, located 85 km north of Thunder Bay, Ont. Brahm Spilfogel, a portfolio manager at RBC Asset Management, likes this company for two reasons: it doesn’t have geopolitical problems, and he expects production to grow from 100,000 ounces a year to 200,000 by 2013. The company is also diversifying — it bought the Sleeping Giant gold mine in 2009.

Silver Wheaton (TSX: SLW)
Vancouver’s Silver Wheaton has taken a hit lately, but thanks to a 117% rise in its stock price over the past year, it’s still popular with investors. The company doesn’t actually mine silver — it purchases the ore from other mines using longterm purchasing agreements and resells it for a profit. That means there are no mine-related operating costs. Fidelity fund manager Darren Lekkerkerker says the company should have access to 37 million ounces of silver in 2013, an increase of 130% from 2009.

Appeared in Canadian Business magazine’s February 28, 2011 issue.

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Fortunately, 2011 is looking a lot better. The economy continues to recover, and more sectors are finding their footing. With the March 1 RRSP deadline around the corner, now may be the right time to park some cash in places you wouldn’t have touched last year. While it’s always a smart idea to stay diversified, here are five areas where any extra investment money could boost your savings this year.

Dividend investments

Murray Belzberg, president of Toronto–based Perennial Asset Management, doesn’t need a complex graph to tell him what many of his clients will be after this year: high–yielding stocks. “Anything that pays a high dividend or interest will continue to be a place for savers,” he says.

Many Canadians have yet to make up what they lost during the financial crisis, and with money–market funds and government bond yields barely producing returns, people are turning to income–generating equities to improve their money’s performance. Norman Raschkowan, chief North American investment strategist at Mackenzie Investments, expects Canadians to flock to large–cap dividend–paying companies in particular, partly to regain lost retirement income, but also because, in a still shaky global economy, these bigger operations — such as McDonald’s or Power Corp. of Canada — are often more stable than companies that don’t pay dividends.

Deciding which equities to add to an RRSP portfolio comes down to fundamentals, such as earnings profile and dividend stability, says Juliette John, a fund manager with Calgary–based Bissett Investment Management. “We want to see a pattern of rising earnings.” That’s because businesses set payout ratios as percentages of earnings. In other words, if earnings rise, so will the dividends. John also looks for companies that raise dividends at least once a year. Annual increases, she says, are a sign of strength: if a company can continue boosting payouts, it usually means its fundamentals are healthy.

Large–cap dividend–paying companies often grow more slowly than small–cap businesses, so don’t expect massive stock price increases. But as long as dividends are regularly increased, you benefit.

While there are many dividend stocks to choose from, investors also have the option of purchasing high–yield mutual funds. Exchange–traded funds — which simply follow a particular index — are another viable alternative. Some ETFs track specific high–yielding sectors, while others follow indexes made up of dividend–paying companies. Many ETF issuers, such as Claymore and iShares, have even created dividend ETFs specifically for high–yield seekers. Whatever investment type you choose, John advises making sure it yields more than the composite index’s 2.5%, or you’re not adding enough value to your portfolio.

Scoring some bonus income through dividends might seem like a no–brainer, but Belzberg cautions against getting carried away. Yields above 7% should raise red flags, as a massive payout may be a sign that earnings aren’t sustainable. That likely won’t bother those who want to recover lost income, but it should. “People are willing to close their eyes to taking on more risk because they think they don’t have any choice,” says Belzberg.

By adding the right dividend investments to your RRSP, you’ll accomplish two things, says Bob Gorman, chief portfolio strategist with TD Waterhouse. You’ll reduce volatility by about 30%, and you’ll outperform the index over the long–term. According to Chris Hensen, senior portfolio manager for U.S. equities at Boston–based MFC Global Investment Management, over the past 100 years, 50% of equity returns on the S&P 500 have come from dividends.

There’s one caveat. Dividends held outside an RRSP get taxed at a lower rate, but inside an RRSP, all income is treated the same. In other words, when you withdraw RRSP money, it’s taxed at your marginal rate, whether it was originally paid as a dividend or not. Also, foreign yield–producing stocks, with the exception of U.S. equities, are subject to a withholding tax (generally 15% of the dividend). You usually get that back, but not if it’s in an RRSP.

Claymore S&P/TSX Canadian Dividend ETF (TSX: CDZ)
Just last quarter, this ETF consisted mostly of financials, but it now has 26% of its assets — its biggest weighting — in the energy sector. Dan Bortolotti, an ETF expert who runs the Canadian Couch Potato blog and is a columnist for MoneySense magazine, says the shift is related to the structure of the index the ETF tracks. The S&P/TSX Canadian Dividend Aristocrats Index holds only companies that have increased dividends every year for five consecutive years. Many financial companies stopped doing that since the recession and therefore were removed from the ETF. That’s OK, though: with names such as AGF Investments and Telus Corp., the ETF is yielding around 4%.

iShares Dow Jones Canada Select Dividend Index Fund (TSX: XDV)
This ETF holds almost all the banks. It’s got CIBC, BMO, National Bank and more — 52% of the fund is in Canadian financials. Bortolotti argues that because of their very different holdings, investors would be wise to buy both the Claymore and the iShares for their RRSP portfolios. The iShares MER is slightly lower than Claymore’s — 0.05% compared to 0.6% — but it’s yielding about the same, around 3.5%.

TD Monthly Income Fund
RRSP investors will want to consider this fund for two reasons: it pays once a month, and the managers are top–notch. The fund’s biggest holdings are banks — the Big Five institutions each account for about 4.5% of total assets, and the fund holds some government and corporate bonds as well. David O’Leary, director of fund analysis at Morningstar Canada, says that Doug Warrick, the fund’s equity manager, and bond manager Jeff Wilson are two of the best in the country. The yield is 3%, while the MER is a relatively low 1.4%.

Power Corp. of Canada (TSX: POW)
Montreal–based Power Corp. is mostly a financial company, with interests in Power Financial Corp., Great–West Life and Mackenzie. POW’s dividend is an attractive 4.3%, and it has a five–year dividend growth of 109%. The stock price has had its ups and downs — it fell about 8% in 2010 — but it should bounce back as the financial sector improves.

BCE (TSX: BCE)
The communications company boasts a high yield and regular dividend growth. Its payout is 5.5%, and dividends are expected to increase annually by 4%; BCE has actually raised dividends six times in the past two years. Although its business is primarily media and telecom, Kate Warne, Edward Jones Investments’ market strategist for Canada, says it is well diversified in those sectors. She expects much of the company’s growth to come from video services and the data fees associated with customers accessing more content. BCE is trading at 12 times 2011 earnings, which is lower than most of its North American peers, adds Warne.

U.S. financial sector

Three years ago, most investors wouldn’t have been caught dead owning an American financial stock. But now that many banks have repaid their TARP loans, cleaned up their balance sheets and announced plans to raise dividends, U.S. financials may finally be back in vogue.

Canadian RRSPs are already bank–heavy — any balanced mutual fund will have a number of home–grown names — but if you’ve got some money to invest, you can’t beat the cheap valuations of our Big Five’s American counterparts. Martin Cobb, portfolio manager at Templeton Global Equity Group, says many of the large, stable American banks, such as JPMorgan Chase, are trading at an inexpensive one times price to tangible book value (the price of a security compared to the costs of its tangible assets). Because many investors are still wary of the sector, a lot of these high–quality companies are dirt cheap.

However, you shouldn’t just pick any American bank to add to an RRSP portfolio. The key, says Raschkowan, is to choose a company that’s wiped its balance sheet clean. “See how much reserves they’ve taken on their mortgage portfolio and how their loan growth is progressing,” says the Mackenzie manager. JPMorgan, he notes, has added money to its reserves to arm against future losses. Bank of America, however, hasn’t saved enough cash and, says Raschkowan, “is going to be facing more clean–up.”

Banks that have stopped writing off bad loans will get an instant boost to the bottom line, adds Cobb. Over the past couple of years, defaults have been eating up profits, so those finally done with write–offs can go “from zero to something positive” without doing anything. The healthiest banks have also been given the green light from the U.S. government to increase dividends. Payouts were halted during the economic crisis, but financial institutions that meet certain requirements, such as holding core equity capital (mostly common stock) of 5% of total assets, can now start raising dividends. Nancy Bush, an analyst with NAB Research, expects to see a flurry of dividend jumps in the next few months. “We should have…a short period of ‘shock and awe’ in early 2011 as the first tranche of the major banks are set free to begin to return capital to their long–suffering shareholders,” she writes in a report.

Investors can get into this market by buying individual stocks, U.S.–based mutual funds or sector–focused ETFs. Because there are still questions surrounding many names in this sector, carefully choosing a few high–quality bank stocks is a wise way to go. Adding stable, dividend–paying American banks to an RRSP should pay off long term — as the U.S. financial sector rebounds, stock prices will rise, while the dividends will add income to your portfolio.

While foreign dividends are usually subject to a 15% withholding tax, which Canadians don’t get back if they hold these investments in registered accounts, the rule doesn’t apply to U.S. stocks. And with rising interest payments and stock values, the gains should start adding up quickly.

Financial Select Sector SPDR Fund (NYSE: XLF)
This State Street Global Advisors ETF holds 90 companies, including banks, insurance companies, REITs and diversified financial services firms. It’s got an extremely low MER of 0.2% — much cheaper than other funds in this sector. Its performance hasn’t been hot, of course, given U.S. financials’ implosion — the 10–year annualized total return is –3.8% — but with most of the fund’s weight in relatively safe big banks like JPMorgan and Wells Fargo, it could do well in 2011.

iShares Dow Jones U.S. Financial Sector Index Fund (NYSE: IYF)
This iShares ETF has a whopping 258 names in it. The top holdings are similar to State Street’s offering — JPMorgan, Wells Fargo and Bank of America are the three biggest — so it should benefit if these companies’ profits take off as expected. Some investors may want the diversity, but the MER is more expensive than State Street’s, at 0.5%. The 10–year annualized total return, however, is better, at –2.15%.

FBR Large Cap Financial Fund
This fund, run by Arlington, Va.–based FBR Capital Markets, gets a Strong Buy rating from Zacks Investment Research, a four–star rating from Morningstar, and has received five stars from Standard & Poor’s. As its name suggests, the fund holds large–cap financial stocks such as Bank of America and Visa. Its expense ratio is a modest 1.8%, though it’s had negative returns over the past five years. The 10–year average annualized return is 4.2%.

JPMorgan Chase & Co. (NYSE: JPM)
Ask fund managers which U.S. bank they like, and it’s a good bet JPMorgan Chase will top their lists. Edward Jones’s Warne puts the New York–based bank ahead of the pack because of its diversified business mix, including investment banking, asset management and retail financial services. It’s also got a robust international business. JPMorgan is trading at a cheap 8.6 times earnings, and while dividends are at a low 0.5%, Warne expects to see yield grow by 7% per year starting in 2011.

Wells Fargo (NYSE: WFC)
One of the biggest pluses in the San Francisco–based bank’s corner is that it was an acquirer during the financial crisis. In 2008, Wells Fargo bought Wachovia, based in North Carolina, and Warne expects the benefits from that purchase — it now has operations in 15 states it wasn’t in before the merger — to continue. It is also one of the companies allowed to raise dividends, and Warne expects them to grow by 6% a year over the next five years. The company is cheap, too, trading at 10.3 times its 2011 earnings.

Eastern Europe

You can’t blame investors for wanting to have nothing to do with Europe. Images of violent protests and non–stop news of bailouts, default threats and credit–rating cuts have decimated European stock markets. Although the European Union is helping pull nations like Spain, Portugal and Ireland out of near financial ruin, it’s unlikely these countries will sort out their issues soon.

Not all of Europe is mired in a sovereign debt crisis, however. In fact, many investment experts predict that parts of eastern Europe will thrive in 2011. Lower wages, better GDP growth and non–euro currencies all make the region a good candidate for your RRSP dollars.

According to David Hussey, head of Pan–European Equities for MFC Global Investment Management, markets that don’t use the euro are generally in better shape than ones that do. “Many of these [non–euro] countries may be in the fortunate position of being able to devalue their way back to health,” he says. Devaluation allows nations to become more competitive globally, and that can expand their economic growth. “There will be interesting growth opportunities [in eastern Europe] while southern Europe continues to struggle,” says Mackenzie’s Raschkowan.

Investors should consider markets where western European companies have set up shop, or places that have ties to healthier nations in the region. Poland is one of Hussey’s favourites. It has lower wages than its neighbour Germany — the strongest European country — and that’s enticed many corporations, including German ones, to start operations there. Parus Shah, a fund manager with Fidelity Investments, expects the country’s GDP to grow by about 4% in 2011.

Turkey is another locale that’s poised to do well this year (many eastern Europe funds include Turkey within the region). Shah expects 7% GDP growth and says domestic demand is booming. The stock market is one of the strongest in the region, and consumer confidence is high.

There are some areas to avoid. Romania and Hungary, for example, are dealing with debt problems. But, Hussey points out, eastern Europe “remains a low–cost growth engine for western Europe with positive long–term prospects.”

There are several ways to share in those prospects. The first is to buy stocks. While investors can purchase shares in eastern European businesses, Shah suggests instead picking up cheap western European companies with lots of exposure to eastern nations. Investors can take advantage of the low valuations — many companies in the debt–ridden western countries have dropped in value — while capitalizing on the strength of eastern Europe. Portugal–based food distribution company Jerónimo Martins is one example: it owns Poland’s largest food retail chain. Investors could also buy country–specific mutual funds that invest in companies located in a particular nation, or an exchange–traded fund that’s tied to a country’s index.

But emerging markets are, of course, riddled with pitfalls. While funds can provide decent exposure to various countries, MoneySense columnist Bortolotti says that in the case of exchange–traded funds, handfuls of large companies tend to dominate indexes — if one goes under, you’re in trouble. There are also political and currency risks that could affect your portfolio, whether you buy an ETF, a mutual fund or a stock. Bortolotti prefers to buy broad–based eastern Europe ETFs that spread those risks across several countries.

That said, having foreign exposure in an RRSP gives Canadians access to sectors and opportunities they won’t find domestically. While TD strategist Gorman cautions against putting too much retirement money into eastern Europe, it’s hard to go wrong if you add strong companies to your portfolio, no matter what country they’re in.

iShares MSCI Emerging Markets Eastern Europe Index Fund (NYSE: ESR)
There’s one problem with investing in eastern European exchange–traded funds: they’re over–exposed to Russia’s oil sector. That’s fine if you like Russian energy, but not great if the country scares you. With that in mind, Bortolotti suggests purchasing this iShares ETF. It has an almost 20% weighting in Russian energy conglomerate Gazprom, but it also holds a number of Polish companies and some Czech Republic stocks. It has only been around for just over a year, but has returned about 15% during that time.

SPDR S&P Emerging Europe ETF (NYSE: GUR)
This State Street Global Advisors ETF isn’t much different from other eastern European funds — it holds nearly 17% of assets in Gazprom. But Bortolotti says it is slightly less concentrated in energy: about 37%, versus 44% for the iShares ETF. It’s also 13 basis points cheaper than iShares’ offering. The fund is mostly weighted to Russia, with 60% of its assets in that country, but also has 19% exposure to Turkey and 15% to Poland.

U.S. Global Investors Eastern European
Like ETFs, many eastern European mutual funds are heavily weighted to Russia. That hasn’t stopped Chicago–based Zacks Investment Research from giving this one a Strong Buy rating. Its biggest concentration is in commercial banks, with the top holding of 10% in Russia’s Sberbank. Just over 50% of net assets are in Russia, but it also has a 19% exposure to Turkey, 6% to Poland and 4.8% to Hungary. The fund has a 2% MER and a 20% 10–year annualized total return.

Warsaw Stock Exchange (WSE: GPW)
Buying a recently listed bourse might not seem like a typical recommendation, but Shah swears by the Warsaw Stock Exchange. It’s trading close to 20 times earnings, and while that’s not as cheap as other European exchanges, “it’s cheap for what you’re getting,” he says. The exchange’s profits will grow as more companies — domestic and foreign — list on it. Meanwhile, impending changes to the Polish pension sector will mean more money flowing through the markets and more profits for the platform.

Garanti Bank (IST: GARAN)
Istanbul–based Garanti Bank is one of Turkey’s largest banks. It has domestic and foreign branches, and owns financial institutions in Moscow and Amsterdam. Besides banking, it’s involved in leasing and insurance, and offers services to corporate and small and medium–sized businesses. Shah says it’s trading at 1.9 times book value — similar to the country’s other banks — but it’s growing at 25% per year. Garanti is also one of Turkey’s best–managed banks, he adds, and its loan growth is high.

Energy sector

Kate Warne’s philosophy about promising sectors for 2011 is simple: “Some of the things that lagged last year will do better this year,” says the Edward Jones strategist. Hence, she is bullish on energy. The sector was up 10% in 2010, compared to 14% for the S&P/TSX Composite Index. “It was one of the worst performers,” she says.

Michael Herring, a Bank of Montreal investment strategist, agrees that the sector “has basically done nothing” for two years. He argues that further global economic growth and better oil and gas prices will help the industry. “We’ve seen pretty meaningful improvement in the price of oil and natural gas,” he says, “and it will be higher a year from now.” Warne expects oil to remain around its current levels of $90, while natural gas should climb a dollar or two from the $4 at which it sits now.

TD’s Gorman says that even if prices don’t rise, continued emerging–market demand for energy, especially from China, and sustained domestic demand should boost the sector’s returns in the coming year. “Producers can make a good buck with prices in the $80s,” he says.

Both Warne and Herring recommend holding large, high–quality energy stocks in an RRSP portfolio. Herring buys companies that use their capital wisely — having a disciplined exploration program is a good sign. “Find out how a company is bringing things online and how it manages reserves,” he advises. Be careful about energy firms that used to be income trusts, he adds. You want to know if they can increase cash reserves and manage exploration rather than simply running off assets.

Warne likes companies that have diversified production sources — a mix of oil and gas is best. She also prefers investment–grade operations that pay dividends, though any yield above 8% is at risk of being cut.

Owning energy stocks carries some risk. Another economic crisis could hurt prices, while production problems may damage a company’s bottom line. But with most economists predicting continued global growth and double–dip fears mostly in the past, it’s unlikely prices will drop to the $70 levels we saw during the recession.

Buying Canadian energy companies is fairly easy, though there are few high–quality stocks to choose from. While there are some sector–specific mutual funds and ETFs, they either hold lesser–known outfits or just 10 or so names. Gorman and ETF expert Bortolotti recommend sticking to funds offering name brands. Bortolotti’s favourite energy ETFs hold most of the large home–grown companies, such as Suncor and Encana.

BMO S&P TSX Equal Weighted Oil and Gas Index (TSX: ZEO)
BMO’s energy ETF follows 14 companies, most of which are pipelines and energy producers. You’ll know the names, all of which are on the S&P/TSX 60 index of Canada’s largest companies. The ETF gives investors about a 7% exposure to brands such as Enbridge, Encana and Suncor. “I like the strategy of picking the biggest players and buying equal amounts of each,” says Bortolotti. The ETF’s price sits at about $15.70, up 6.5% from the start of 2010.

Claymore Oil Sands Sector (TSX: CLO)
The big difference between this ETF and the BMO energy index fund is that the Claymore has no companies that produce only natural gas. Its largest holding is the relatively little known Black Pearl Resources, but the rest of the fund includes many of the same big names that BMO offers. Less exposure to natural gas could be a downside for some investors, especially if prices go up, but the big oil and gas companies should still do well in 2011. The ETF’s price is $19, up about 12% in 2010.

TD Energy Fund
There aren’t many energy mutual funds in Canada, but TD’s is one of the better–performing options, with recognizable names in it. Its top company is Suncor, which makes up 11.4% of the assets, while Talisman, Encana and Chevron are others among its top 10 holdings. The management expense ratio is 2.2% — lower than the category average of 2.6% — and it has a 10–year annualized total return of 11.9%.

CIBC Energy Fund
Morningstar’s O’Leary says this CIBC product is the best–returning energy sector fund — 16.5% over the past decade on an annualized basis — but it mostly holds mid–cap companies. The MER is also below average, at 2.4%. Its top holdings include Calgary–based Petrominerals and Toronto–based oil and gas company Pacific Rubiales Energy.

Suncor (TSX: SU)
In 2009, Suncor merged with Petro–Canada, creating this country’s largest oil company. The acquisition has allowed the oil and gas giant to grow profits by increasing production — it gave Suncor new properties to work with — and cutting costs. “A year into the merger, it’s improved its operational efficiencies,” says Warne. The company is trading at 14 times 2011 earnings, and the stock price has climbed 18.9%, to $37.14, over the last six months.

Encana (TSX: ECA)
Warne’s keen on Encana because it’s a natural gas producer, and natural gas has struggled. “We like companies that underperform at times when there’s a catalyst for the stock to do better,” she says. With many commodity experts predicting higher natural gas prices, profits should improve without much effort. And the business is diversified, with assets in Canada and the U.S. Warne adds that the company is one of the lowest–cost producers, so it can afford to wait out low gas prices. It’s trading at 20 times 2011 earnings, which sounds high, says Warne, “but that’s the flip side of having low earnings tied into low natural gas prices.”

Corporate bonds

Whether you are four decades away from retirement or have just a few years to go, it is always a good idea to have some fixed income in an RRSP. Bonds are usually less volatile than stocks, and the yields provide additional gains. But these days, government bonds — which are what most people hold in the fixed–income portion of a retirement account — have some of the lowest yields in years. Government of Canada bonds yield about 2.5% for a five–year bond and just above 3% for a 10–year version. Many income–generating stocks offer payouts much higher than that. A number of investment experts think corporate bonds — debt issued by companies — will be better picks in 2011.

Derek Amery, head of Canadian Fixed Income at HSBC Global Asset Management, is one manager who’s keen on corporates. The difference between government and corporate yields, he explains, is at historically high spreads. Investors will earn about 150 basis points — 1.5% — of additional yield on corporate over Canadian government bonds. The average spread is usually 95 basis points.

Higher yields on corporate bonds reflect their higher risk profile — corporations are more likely than governments to default on their debts — but Tom O’Gorman, senior vice–president and director of fixed income for Bissett Investment Management, says corporate credit quality is strong and the default rate for corporate bonds is low, as many businesses refinanced debt and lowered leverage in the aftermath of the financial crisis. According to credit rating agency Moody’s Investors Service, corporate bonds are today at a 2% risk of default — much lower than the double–digit numbers seen during the recession.

But you should take into account the length of the bond. When interest rates rise, bond prices fall and yields increase. Since most economists think rates will rise in 2011, investors would be wise to stick to corporates that mature in five years or sooner. Short–term bonds, says Amery, have lower interest–rate risk and will not depreciate as much as long–term options that have a chance of being exposed to multiple rate hikes over a decade or more. You can hold the bond for three years, get paid back and then use the proceeds to purchase another bond with a higher yield.

Investors don’t typically buy individual bonds like they do stocks, however. Purchasing bond funds or ETFs is a much easier way to access the market, and it provides flexibility — you can buy short–term, long–term, government or corporate funds. But beware: With yields so low these days, high management expense ratios can eat into bond returns.

Holding fixed income — even corporate bonds — in an RRSP lowers a portfolio’s risk level over sticking solely to equities. While younger Canadians will lean toward having more stocks than bonds, the general rule is to have 60% equities and 40% fixed income, then gradually add more bonds as you near retirement. TD Bank’s Gorman suggests putting upwards of 70% of the fixed–income portion of your portfolio in corporates, with the rest in government bonds. “Corporates,” he says, “will be a very good way to go [this] year.”

Beutel Goodman Corporate/Provincial Active Bond Fund
For high corporate bond exposure, Morningstar’s O’Leary recommends this Beutel Goodman fund. It has 96.6% of its assets in corporates, with the rest in provincial bonds. It holds mostly financials and energy companies (its biggest weights are in Royal Bank, Scotiabank and Hydro One). It’s not a short–term play — only 30% of the portfolio can be held in short–term bonds — but with a low MER of 0.7%, a yield of 3.2% and five–year average annual compound rate of return of about 5.7%, it’s a solid fund for your RRSP.

NexGen Canadian Bond Registered Fund
Toronto–based NexGen Financial has only been around since 2005, so its funds don’t have the track record of many competing offerings. That doesn’t bother O’Leary, who speaks highly of manager Jeff Herold. Many bond funds, he says, look similar to the benchmark DEX Universe Bond Index, but not this one. “We like managers who aren’t afraid to be different, and this fund isn’t that similar to the index,” he says. It’s not as heavily weighted in corporates as Beutel’s fund — company debt makes up 42% of its holdings — but it’s also hanging on to 32% cash. The three–year return is 6.5%, its yield is 2.5% and it has an MER of 1.35%.

Claymore 1– to 5–Year Laddered Corporate Bond ETF (TSX: CBO)
Bortolotti likes this Claymore corporate bond ETF so much that he holds it himself. The fund’s main selling point is its laddered structure. It holds 25 bonds, five of which mature in five years, five in four, five in three and so on. Every year, 20% of the bonds mature, then the fund buys five new bonds with a five–year maturity. “It spreads out interest rate risk,” says Bortolotti. The Claymore mostly holds debt from banks — about 51% of its weight — while industrials make up 19% of the portfolio. The fund has a yield of 4.8%.

PowerShares 1– to 5–Year Laddered Corporate Bond Index Fund
Invesco Trimark’s PowerShares also offers a laddered bond fund. Like Claymore’s ETF, it generally holds 25 names that mature at different times. Its bond holdings span a number of sectors and include the likes of the Greater Toronto Airport Authority, Shoppers Drug Mart and Scotiabank. Its interest yield is 5.1%, while the MER is 0.75%.

BMO Short Corporate Bond Index ETF (TSX: ZCS)
This BMO exchange–traded fund invests only in products that mature in five years or less. The two big differences between it and Claymore’s offering is that the BMO is not laddered and has four times the number of bonds. “It goes for broader diversification,” says Bortolotti. It’s also heavily weighted to banks: 68.4% of its holdings are in the financial sector. Investors should expect about a 4% yield.

Originally appeared in Canadian Business magazine’s February 14, 2011 issue.

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You’ve worked with so many popular artists. Has dealing with egos ever been a problem?

I’ve never had a problem with ego, but I have worked with strong–minded folks. The best thing to do in those situations is to let their ideas be brought to a conclusion. If someone has an idea, never say no. You might try another idea or two beyond that, and then a few days later we listen back and choose the best one. I never tell people what to do. I may provide them with surprises sonically and give them a different way of looking at their work, but I would never say no to anybody.

How did you become a music producer? Did you take courses?

I never went to school for it. It started with my brother Bob, with a little tape recorder in my mom’s basement. I found I was good at helping people, and I was able to offer that help because I’m firstly a musician. After a few years in the basement, I got really good at it. I was better than everybody else—by the time I was 18, I was a master editor and I knew more about this than anyone in Toronto. My brother Bob pretty much taught me everything I know technically, and then Brian Eno was the turning point in the road.

Eno was already famous from his time in the band Roxy Music, and was living in New York. How did you end up meeting him?

He had a girlfriend in Toronto, and he heard some tapes I had worked on that he really liked, and asked how they were made and tracked me down. But I had never heard of him. I said to my brother, “Make sure to get cash from this guy, cause I don’t know who he is.” And then I ended up working exclusively with him for the next three years.

What’s been your best experience as a producer?

The best thing that can happen is when a record takes on an identity of its own, like with U2’s The Joshua Tree. Oftentimes, that’s out of one’s control. It’s a lovely feeling when it happens, especially when it’s an original direction. The Joshua Tree developed a personality in the first two weeks [of recording]. “With or Without You” was done in the first week, so I knew early on [that it was going to be good]. I’ve got a good sense of what’s good and what is not. That’s why I do what I do. It’s not mysterious: when the groove is good, the lyrics are good, and the vibe is good, it all starts communicating universally.

What’s been your most challenging experience?

Working on The Unforgettable Fire, the first U2 album I was part of. We did it in a castle by Ireland’s River Boyne, and we were operating on river power—one of those old–fashioned generators run by the river. Sometimes the voltage would drop and affect the sound; the amps weren’t getting enough power. We had to send guys into the river to paddle to beef up the current.

Did it work?

Yeah, but it was all relative to the rain. The more it rained, the more power we had.

Whether it’s sound, people or scheduling, you must deal with a lot of unforeseen events. How do manage those situations?

I operate with the philosophy of low baggage, high mileage. Maximize what you’ve already got. Fewer options often make for better work. It’s a terrible misconception that if you have all the bells and whistles then you’ll make great work.

Do you ever have to encourage an artist, maybe hold their hand?

Absolutely. I call it spotting. Through a day’s work, when someone does something special, I make a note of it. Whether it’s a riff or lyrical idea, I keep track of all those special moments that happen and then lay them out on a menu and bring it to people’s attention. I’m corralling the favourite moments of the day or week.

What sort of deadlines does one of the world’s most successful producers have to cope with when dealing with some of the world’s most successful acts?

It’s always the beginning of a tour. With very big artists there is a limitless amount of money that can be spent. That’s good, but it can also be bad. My best friend is the start of a tour. I have wrapped things up with a tour just on the horizon.

Can it get nerve–wracking?

Not really. It’s human nature that the creative process has a curve. We usually get a lot done at the beginning, a lot done at end, and the middle part is the labour. That means you might consider less material and maximize what you already started. We humans are good at dealing with resourcefulness. If we’re given a set of parameters, we can get something done.

You said that big bands can spend limitlessly, but isn’t there a budget?

Early on there was. I used to give labels a package price of $150,000 and I’d deliver a record. But I’d just go out and buy a bunch of equipment with the money, then make a record and keep the equipment. These days, it’s a little different. I never discuss budget with U2. And I’m often not negotiating with the label, because if someone’s established, they don’t need record–company funding. But we want to be reasonable and not be wasteful with people’s money.

You just send them a bill?

Usually, I negotiate an advance for myself relative to royalty income. Then the costs of recording are separate from that. I have pretty good business sense, and I have an attorney, but I’ve never audited anyone. I told a friend that and he said, “You’re crazy. You’re owed millions.” I just accept what I get sent and get on with my life.

Really? You’ve never checked to see if you’re owed more money?

I don’t want any enemies.

Originally appeared in Canadian Business magazine’s December 6, 2010 issue.

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Moving more money abroad, then, makes good sense right now. Plus it’s hard to diversify by staying in Canada — financials and energy make up most of the TSX’s market capitalization. Broad exposure to other sectors, such as health care or technology, requires investing in other countries. And while Canadian businesses are seeing single–digit revenue growth, some emerging–market operations are experiencing 20% growth or more.

All that growth potential does come with risk. Some markets are politically unstable; others have uneven fiscal policies that are hard for foreign investors to navigate. Canadians also have to worry about exchange rates. When choosing countries, make sure the stock market has cheap price–to–earnings ratios, low beta — the measure of volatility of a market compared to other countries — and attractive earnings estimates. Balance those metrics with the risks, and investing in some countries is clearly better than others. We spoke to several investment managers who offered their picks on where Canadians should invest today.

1. Brazil
Brazil has come a long way from its days of hyperinflation. In April 1990, the inflation rate was 6,821%; today it’s 4.7%. Drummond Brodeur of CI Investments says the country “has lifted its game, proving it can take its growth rate to a higher, sustainable level.” The Bovespa stock market is about where it was pre–recession, and it’s cheap, with the MSCI Brazil Index trading at 11 times forward earnings.

Risks: Political change is the biggest risk says Brodeur. Not enough is known about where Dilma Rousseff, the country’s new president, stands on free–market matters.

2. China
While some say China is more of a developed market than an emerging one, it’s still growing much faster than North America. Witterick advises investors to buy companies focused on domestic growth. “China realizes it can’t sell to Walmart forever,” she says. “So it’s better to participate in businesses that sell to other Chinese.” The MSCI China Index is trading at 12.2 times forward earnings with a 2.5% yield.

Risks: China is still hampered by corporate governance issues, while tensions with the U.S. could result in protectionism.

3. Germany
Thanks to Greece’s near economic collapse, many European stocks are trading at a discount. Stephen Way, senior vice–president and portfolio manager at AGF Investments, likes Germany for its cheap valuations despite its fiscal soundness. In January, the MSCI Germany Index was trading at 13.7 times forward earnings, compared to 13.1 times for the rest of the world. That’s down to 10.2 times forward earnings versus 12 times for the world today. “Germany has gone from a 5% premium to a 15% discount,” he says.

Risks: A strengthening euro.

4. India
On the surface, India looks expensive. It’s trading at 23 times forward earnings and has a paltry dividend yield of 0.9%. But with GDP growth at about 9% for 2010, there are opportunities. Witterick says investors should buy smaller and mid–sized companies, rather than large ones. A lot of funds have to buy the bigger businesses for liquidity reasons, making the smaller players cheap. As in China, domestic exposure is better than international.

Risks: Two words: red tape. Bureaucracy is “atrocious,” says Brodeur.

5. Japan
It’s a controversial choice, but a lot of Japanese companies have remained competitive despite the country’s sluggish GDP growth and have exposure to emerging markets. “The yen will weaken, and that will cause profits to surge,” Way predicts. The MSCI Japan Index is currently trading at 13.4 times forward earnings.

Risks: A stronger yen and demographic challenges — the population is expected to fall by 30% by 2055.

6. Netherlands
The Netherlands is another solid country available at a bargain. In January, says Way, the MSCI Netherlands Index was trading at 12 times forward earnings; today’s it’s at 9.9 times. Exports are booming — they were 12% higher this Q2 than a year before — while Dutch GDP has grown by 2.1% year over year.

Risks: Dutch businesses have a lot of exposure to emerging markets, so a slowdown in developing–country growth rates could hurt.

7. Singapore
“Singapore is the Switzerland of Asia,” Brodeur says. It’s the city state’s growing financial sector that’s drawing the comparisons. It’s slightly more expensive than other countries, with the MSCI Singapore Index trading at 14 times forward earnings, but it’s growing rapidly; 2010 GDP growth is estimated at 13%.

Risks: A rising U.S. dollar or protectionism would dampen growth.

8. Turkey
“We’ve been looking at Turkey for a long time,” says Christoph Arnold, an investment strategist with UBS’s ultra–high–net–worth group, and he’s now ready to recommend it. The country’s main motivation these days is to join the European Union, for which it has opened its markets to more foreign investors. It’s more disciplined in its fiscal policy than it was a decade ago, but the MSCI Turkey Index is still cheap, trading at 10 times forward earnings.

Risks: Because Turkey’s market is small, one company’s fall could have a big impact. There’s also some concern of a turn toward Islamic rule.

9. United States
Brodeur knows that America doesn’t top most people’s list of go–to investment locales, but he says if you know where to invest, it could result in strong returns. Investors should focus on companies that have exposure to emerging–market growth. These businesses are growing by 20% faster than their domestically focused counterparts.

Risks: Soft domestic demand. A rising dollar could hurt exports too.

10. Vietnam
Andrew Martyn, president of Falcon Asset Management, thinks Vietnam is poised for economic expansion; GDP is expected to grow by 6.7% this year, while industrial production has already increased 14%. The country has a young population — 32% are under 15 — that will demand more western–style living as it ages.

Risks: While its attitude toward foreign investors has relaxed, the communist government’s inconsistent policies and transparency issues make the market volatile.

Originally appeared in Canadian Business magazine’s December 6, 2010 issue.

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Just as the public rushed to cash in on gold’s rising price, so did investors. But instead of selling, they were buying. “I bought a lot,” says John Embry, chief investment strategist of Toronto–based Sprott Asset Management, and he’s not done yet. He thinks gold will not only climb well above US$2,000. It could one day become the currency of choice. “People are going to lose total confidence in paper money,” he says. “Then we’ll have to create a new system, and that could be backed by gold.”

Like Embry, countless managers and economists envision a world where gold climbs to between $2,000 (all figures U.S.) and $5,000 an ounce — a steep hike from the $1,400 it sits at now. Buying gold could very well land someone a huge payday or save them from a crash in other assets, but if investors don’t understand why it’s rising — and why it could fall — a lot of them may lose.

Gold has been appreciating for 10 years, but it’s only since the recession hit that the yellow metal’s price has taken off. Between 2001 and 2007, the cost of an ounce of gold jumped by about $300; it has soared by almost $800 in the past three years. The worse investors think America’s economy will get, the higher gold prices will go. “It’s buying into an insurance policy against fiscal instabilities, political turmoil and inflation,” says Ani Markova, co–manager of AGF Investments’ precious metals fund.

By that logic, gold will continue making gains. The U.S. Federal Reserve’s recent quantitative easing measures — it purchased $600–billion worth of government bonds to try to stimulate the economy — has stoked fears of hyperinflation, which could cause gold to rise even further.

While it appears as though gold’s price is correlated to the U.S. dollar, though, the whole premise is based on how investors react to world events. Almost all other commodity prices are predicated on the fundamental rules of supply and demand. Tim McElvaine, president of Vancouver–based McElvaine Investment Management, looked at gold’s supply versus demand and found that there’s an overabundance of the metal in the market. According the World Gold Council, excess production will hit 1,930 tonnes in 2010. “That means there’s no intrinsic backing for the value of gold,” says McElvaine. “The entire investment is basically dependent on sentiment.”

That makes McElvaine nervous. While he’s owned gold in the past, he’s staying away from the commodity now. He thinks we’re in a bubble that could burst at any time. “Bubbles form when it’s difficult to put a finger on what something’s worth,” he says. “Value becomes more in the eye of the beholder.” As with other momentum plays, investors may still have time to ride this demand surge, but it’s a risky move. It’s impossible to know when sentiment will turn. The last time prices tumbled was between 1980 and 1982, when the commodity dropped from $850 to around $300, a range where it remained, with short–lived spikes and slips, for about 15 years.

If an investor is set on owning gold as a hedge, he or she shouldn’t own more than 5% or 10% in a portfolio, and should hold it for the long term. Investors can buy physical gold, gold ETFs such as State Street Global Advisor’s Gold Shares (NYSE: GLD) or shares in gold mining companies. Rick Ferri CEO of Portfolio Solutions, based in Troy, Mich., recommends the third option, because it retains liquidity and value in any scenario. Make sure the business is well run, has kept its operations steady through gold’s ups and downs and is generating revenue, and a dividend payment never hurts.

McElvaine, however, won’t entertain holding a small amount of anything gold–related. “It doesn’t make sense,” he says. “You’re holding 5% of what?” As long as celebrities are shilling for the metal, he’ll stay far away.

Originally appeared in Canadian Business magazine’s December 6, 2010 issue.

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