Time To Replace BRIC With BRAC

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The New York Sun

Here’s a bold recommendation on overseas investing from veteran investment adviser Stephen Leeb: Replace the BRIC countries with the BRAC.

The BRIC nations are Brazil, Russia, India, and China, four rapidly growing economies that have drawn big bucks from American investors. They are good investment choices, but BRAC — Brazil, Russia, Australia, and Canada — are better.

Mr. Leeb is replacing India and China with Australia and Canada because the latter are rich in resources and offer more enticing earnings growth. While Mr. Leeb is by no means minimizing the appeal of China and India, he notes that the biggest resource for these two fast-growing economies is cheap labor, which will become increasingly costlier as their markets continue to mature.

In contrast, he says, the BRAC countries are the ones most brimming with essential natural resources, such as oil, gas, and uranium. Each is also a net exporter of fuels and other natural products. Resource shortages will only get worse, so these countries will stand out from the pack, Mr. Leeb observes.

Meanwhile, continued gains in commodities mean Australia and Canada are gaining relative to the rest of the world. “You can’t overstate just how important relative resource independence is in a world where resources are becoming even more scarce and expensive,” he says. It means lower and more predictable costs, which translates into faster growth, less inflation, and a strong currency, he adds.

Among the BRAC nations, the riskiest investment plays are thought to be Russia and Brazil, which have the lowest per capita incomes and lowest per capita energy consumption. That also means, however, they have most potential. Still, Mr. Leeb is quick to toss in a caveat: As they develop, Russia and Brazil increasingly will need to draw on their abundant resources for internal consumption to fuel their growth.

Mr. Leeb, editor of a New York investment newsletter, the Complete Investor, reckons the easiest way to gain a broad-based stake in a BRAC country is through an exchange-traded fund linked to the major stocks that trade in their marketplace. In this respect, the most compelling ETF in each BRAC nation is: Brazil (EWZ); Russia (RSX); Australia (EWA), and Canada (EWC).

The closest approximation to a BRAC fund is thought to be the Fidelity Emerging Markets Fund.

Individual stocks, of course, offer more potential. Here’s a brief rundown of Mr. Leeb’s top choices in each country:

  • In Brazil, Banco Itaú Holding ($17.78): It’s the country’s second-largest bank, but by a significant margin the most profitable and the fastest growing. “Double-digit growth with good loan quality has been, and we think will continue to be, the hallmark of this exceptional financial institution,” Mr. Leeb says. On a price/earnings growth basis, Banco Itaú is priced in line with the top-quality American banks. If you’re about to say Brazil is riskier than America, Mr. Leeb hastens to point out that the subprime debacle has left this Brazilian bank virtually unscathed.
  • In Canada, Canadian Oil Sands Trust ($44.02): As a significant minor owner in major tar sands projects, the company is one of the few oil production beneficiaries likely to see a rising stream of income independent of oil prices. The firm is able to pass along all its receipts to investors in the form of distribution. As a result, its yield is above 8%, and the distribution should grow in coming years, as the Canadian dollar appreciates and more tar sands are developed. The negative is that the company is betting the farm on the continued success of one major project. Given the project’s ongoing output and the world’s desperate need for fossil fuels, Mr. Leeb feels the risks are well worth taking.
  • In Australia, Energy Resources ($15.20): A uranium miner, it’s positioned to be not only among the fastest-growing uranium companies, but one of the fastest growing of all commodity companies. The stock also should benefit from rising production and higher uranium prices.
  • In Russia, Gazprom ($34.56): The world’s largest gas company, it has a near-monopoly on the production, distribution, and export of Russian gas, and it also produces oil. Of the world’s major energy companies, Gazprom has the lowest price/earnings growth ratio, and one of the best growth profiles. Thanks to a large inventory of undeveloped properties, plus the prospects of additional licenses, the company likely will be able to boost its production at least 1% a year for the foreseeable future. The risks: The uncertainty of Russia itself is the major one, but Mr. Leeb argues, “The tremendous upside potential justifies at least a small position in a stock virtually mandated to grow.”


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