Emerging markets offer considerable rewards for investors, with growth potential that can easily outstrip that of investing in developed markets. However, these increased returns do not come without their own risks. Many emerging markets are beset by a range of problems, from a lack of transparency to corruption, unstable political and security environments, and opaque regulatory and legal systems. This makes it imperative that investors weigh the risk/reward trade-off prior to investing.
One way to take advantage of this growth potential while reducing risk is to invest in companies with considerable emerging markets exposure that are domiciled in a stable and low-risk jurisdiction like Canada. This is because the regulatory regimes surrounding listed companies make their operations more transparent and allow for significantly more disclosure.
Among emerging markets, those shaping up with some of the strongest growth potential are located close to home in Latin America. While the region’s largest economy, Brazil, may have come off the boil, Peru, Colombia, and Chile offer solid growth prospects. All three are set to see their economies grow by 5% this year and in 2015, which is more than double the 2% forecast for Canada.
This top five bank’s investment in Latin America is a key element of its growth strategy
For some time now I have been a huge fan of the Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) and its bold growth strategy, which is focused on expanding into emerging markets, particularly Latin America. This strategy has been carefully executed by the bank, with a focus on managing risk while ensuring there is a solid payoff for the bank and its investors.
Recent moves, which have seen the bank’s appetite for risk grow through a greater exposure to unsecured consumer lending and emerging markets, have concerned some analysts. This saw Moody’s downgrade its outlook for its financial strength to negative. However, the strategy is set to deliver solid returns for the bank, especially with its latest acquisition of a controlling interest in the financial services business of Chile’s largest retailer, Cencosud.
As investment in the region is bedded down, I would expect to see it generate considerable earnings growth for the bank, which would translate into further dividend hikes to reward investors. It also diversifies the bank’s revenue streams away from North American markets, reducing the impact any economic downturn in the region could have on it.
Colombia’s largest independent oil producer offers considerable potential
Canadian domiciled and listed oil explorer and producer Pacific Rubiales (TSX: PRE) is Colombia’s largest independent producer of oil, producing around 149,000 barrels of crude daily. The company has also amassed considerable oil reserves in Colombia and Peru, along with diversified exploration interests in those countries and Brazil.
This gives it a geographically diversified asset base and interests in some of the most exciting energy plays in the region. It has an enviable track record, with oil reserves growing with a compound annual growth rate of 20%, and an exceptional drilling success rate of 50%. In first quarter of 2014 alone, Pacific Rubiales made two new oil discoveries in Colombia’s Llanos Basin.
It also generates a significantly higher margin per barrel of crude, which for the first quarter of 2014 was $63.80 per barrel, well above the industry average for oil producers in North America of around $42 per barrel. This figure highlights the solid profit margins Pacific Rubiales is able to generate.
Both companies offer investors the opportunity to diversify their portfolio by obtaining significant exposure to increased growth prospects in Latin America while still providing the stability associated with investing in Canadian listed and domiciled companies.