I recently took a look at the Russian stock market, because as Baron Rothschild said in the 18th century, “the time to buy is when there’s blood in the streets.”
At first glance, Russian stocks seemed like a huge bargain. The average company on its stock market trades at right around 10 times earnings, or about half that of the S&P 500. Many companies trade under book value as well. Since the country has become an energy powerhouse, the vast majority of large companies that call Russia home are energy related. For an energy bull, it seems like a good place to be.
And then I found out about the corruption.
It’s common knowledge that corruption is a reality of doing business in Russia. As long as the right people get bribed, companies are essentially free to do what they please. Often, the government will “suggest” a company take a certain course of action, or fire an employee who is speaking out against government intervention. Because of this interference, running a business in Russia is very different than in North America.
This problem exists in varying degrees across developing nations. The Chinese government is extremely active in the management of its economy. Red tape is a constant problem in Turkey and India. Brazil has environmental problems. It seems like every developing country has some reason why investors shouldn’t invest directly in the country.
Investors who are looking for emerging market exposure don’t have to invest directly in a country with growing pains. Instead, they can invest in Canadian companies that do a lot of business overseas. This way investors can get exposure to emerging markets, but avoid some of the problems that plague those domestic companies.
Bombardier (TSX: BBD.B) is a terrific choice for investors looking for long-term exposure to emerging markets.
Many cities in the developing world are investing extensively in mass transit, including upgrading their subway systems. As one of the world’s largest manufacturers of rail passenger cars, this is good news for the company. Its rail business currently has the longest backlog in the company’s history, and is consistently profitable.
The company has made headlines lately because of problems with its new line of CSeries jets, which are scheduled to be delivered to customers starting in late 2015. Most of the customers who have already committed to buying CSeries planes are from the developing world. There’s little doubt demand for air travel in these markets is set to explode, as customers can finally afford to take international vacations.
Colombia has emerged as one of South America’s oil powerhouses. The country’s production recently surpassed a million barrels of oil per day, about half of which gets shipped north to the U.S. One of the largest producers in the country is Pacific Rubiales (TSX: PRE), which accounts for about 15% of the nation’s production. The company also has operations in Peru, and is open to exploring options across South America. It is comfortably profitable, paying investors a dividend of 3.4%. The payout ratio is less than half its operating cash flow.
Because Colombia is such a low cost country to do business, Pacific Rubiales has some of the highest netbacks in the industry, most recently coming in at more than $63 per barrel. This is significantly higher than most Canadian producers, and nicely compensates investors for the extra risk taken on from Colombia operations.
You wouldn’t think so, but emerging markets might be BlackBerry’s (TSX: BB)(NASDAQ: BBRY) only hope of survival.
The company recently launched the Z3 smartphone in Indonesia, where early results appear to show the device was a hit with consumers. The phone retails for less than $200, making it affordable for the average person in the country. With the company’s North America sales forecast looking grim, BlackBerry’s best chance for growing its struggling handset business is in the developing world.
It faces considerably less competition in emerging markets as well. Most consumers there just can’t afford the latest smartphone. Also, BlackBerry’s messenger service is popular, since it lets users avoid costly text message fees, which are an issue for price sensitive customers in the developing market.
