C list makes the A grade
In the latest in our series on investment opportunities in the world's emerging markets, Liam Robb looks at the pros and cons of speculating in Canada, Chile and Chine
Wednesday 08 January 1997
The resource base of the world's second-largest country has delivered one of the highest standards of living in the world since 1945; its 30 million population having access to cheap energy - notably hydroelectric power - and large oil and gas reserves. It is the world's largest exporter of forest products and the largest producer of zinc and uranium. The country has free access to the United States and Mexican markets via the North American Free Trade Area and 80 per cent of exports go to the US.
The Canadian equity market comprises 3,400 companies with the biggest including BCE, the telecoms company, Seagram, erstwhile sponsor of the Grand National, and the Royal Bank of . The market has risen 25 per cent over the past 12 months and Subodh Kumar, global strategist for CIBC Wood Gundy in Toronto, believes that, with IMF-predicted global growth of 4 per cent next year, this upward trend should continue. He is particularly bullish on Canadian exporters like Alcan, the aluminium manufacturer, and Macmillan Bloedel, the forestry company. The gold market, which has been flat for the past two years, may be due for a reversal of fortune in which case extraction companies like Placer Dome should benefit.
The vexed question over the future of Francophone Quebec, which has been threatening for decades to vote for independence, still dominates political debate and a referendum last year only just missed seeing the country split into two. (Crisis point was recently reached when Charles Aznavour, the French chanteur, was booed at a concert for singing in English). Such uncertainly severely dents business confidence.
Chile is the exception in Latin America for the simple reason that the economy there is on a very sound footing and has been for the past 10 years.
A free-market policy and the selling off of state enterprises at below market value led to large profits for investors in Chile earlier in the decade, yet despite being one of the first Latin American countries to implement a privatisation programme - and despite the fact that Chile was Latin America's fastest-growing economy last year with growth of nearly 9 per cent - last year was not one of the happiest for the Santiago stock exchange with the 270 companies listed losing 24 per cent of their value.
Ironically, the reason for the market's under-performance is Chile's economic excellence: the Central Bank has had to keep interest rates high in order to prevent the economy from overheating and this has kept the local pensions funds away from the market.
Wood pulp, fishing (particularly salmon farming) and fruit exports form major sectors but by far the most important is the copper industry which accounts for 35 per cent of the country's total GDP.
Stocks currently in favour with brokers include Soquimich, the fertiliser company, which produces 30 per cent of the world's iodine, and Enersis, the $4bn electrical distributor which has accumulated enough spare cash to start buying up stakes in companies outside Chile such as Cerj, the privatised Brazilian electrical utility.
China's relationship with the West has improved dramatically since the Tiananmen Square massacre in 1989, although, for the UK at least, concerns still remain regarding the handover of Hong Kong later in the year.
The 1.2 billion population is self-sufficient in food (China manages to feed 20 per cent of the world's population with just 7 per cent of the world's farmland), the country is the world's largest coal producer, and unexploited oil reserves in the western Tarim basin could be on a par with those in the Middle East.
However, population growth, massive under-employment (due to the gradual closure of loss-making state companies) and very poor education and transport systems are still a burden. As a result, despite being one of the world's fastest-growing economies since market reform began in 1978, the 350 companies listed on the Shenzhen and Shanghai stock exchangesperformed extremely poorly for most of last year.
Chinese companies are listed in a variety of ways. "A" shares are sold only to domestic investors and "Bs" are reserved for foreigners. "H" shares are listed on the Hong Kong stock exchange and some "Red Chips" - companies which have almost exclusive exposure to China - are listed in New York and in Hong Kong.
The prolonged market slump was due to the renewal of a ban on domestic investors owning shares which are denominated in foreign currency ("B" shares are denominated in dollars). However, these investors have recently been buying "B" shares illegally, presaging a market surge which has ensured that sterling returns are now a respectable 20 per cent.
International investors are urging Beijing to amalgamate the two forms of shares in order to avoid confusion and, providing this hurdle can be overcome, most analysts are optimistic about China's future.
Mary Whitehead, for example, who is responsible for Asian allocation at Clerical Medical pensions, is particularly bullish on the growing number of listed infrastructure companies, citing Guangdong Investments, a large property conglomerate, and Citic Pacific, a HK$7bn Red Chip in Hong Kong "which has been around so long I almost see it as a blue chip", as among her favourites.
Closer to home, the first Chinese share listing on the London Stock Exchange can be expected early next year when Beijing Datang Power Generation is scheduled to float an issue of shares worth pounds 180m.
Performance statistics, Datastream:
Numerous funds have exposure to North America, although Maxwell Meighton's Canadian General investment trust is one of the few to invest specifically in . Investment trusts include Rothschild's Five Arrows Chile fund, and Fleming's Chinese Fund. Country-specific unit trusts include Save & Prosper's China Dragon and Invesco's Hong Kong & China fundsn
In the next instalment, the `Cs' continue with Columbia and the Czech Republic, two markets which have shown staggering returns in the past but which over the past 12 months have been among the world's worst-performing stock markets.
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