|Investing opportunities in the “New World”
Thursday, May 06, 2010
The United States is in the process of involuntarily passing
on world leadership to the emerging nations, led by China, India,
Brazil, and to a lesser extent Russia (commonly called the BRIC
nations). As I outlined last month, economic power is likely
to transfer first, followed by a change in the world political
power structure. The BRIC nations will begin to demand more
political influence to match their new economic power.
Here’s how this seismic shift will affect your investment portfolios
and how you can take advantage of it.
Investing in the U.S.
Although the U.S will be one of four or five large and powerful
countries that share economic and political influence more equally,
this doesn’t mean you shouldn’t avoid U.S. investments. It does
mean the percentage of your portfolio allocated there should
Owing to the growing risk of the future erosion of the U.S.
dollar against the Canadian dollar, your U.S. investments should
be currency-hedged – in other words protected against adverse
exchange-rate fluctuations. One way is to invest in U.S. companies
that do a sizable portion of their business internationally
– for example, McDonald’s Corp., Microsoft Corp., and Apple
Inc. – whose revenue streams in themselves provide a sort of
Investing in the BRIC
You can invest in the BRIC nations either directly or indirectly.
The direct method is to buy mutual funds and/or exchange-traded
funds (ETFs) that focus on the BRIC nations. Broader emerging
market funds and ETFs will also typically give you some exposure
More adventuresome investors might try investing directly in
stocks of BRIC-domiciled companies. But this can be risky. Financial
reporting transparency and investor protection mechanisms as
we understand them are virtually unknown outside the industrialized
West. For example, China’s business enterprises in particular
don’t follow generally accepted accounting principles (GAAP),
which obviously makes direct investing more risky. The upside,
however, comes from the tremendous growth trajectory these countries
are on and the opportunity to profit from it.
You can invest indirectly in BRIC by purchasing good Canadian
mutual funds and/or ETFs that have a high percentage of their
assets allocated to BRIC investments. Or you might invest in
Canadian natural resource funds and/or ETFs to take advantage
of those same markets, but have the added safety of investing
in companies and in a country that you trust and understand
better. The same goes for Canadian- or U.S.-exchange-listed
My strategy is to invest the bulk of client portfolios (80%-85%)
in good, solid Canadian mutual funds with some foreign exposure
to industries or sectors in which Canada does not have wide
choice (healthcare, for example). For the remaining 15%-20%,
I like to invest in BRIC (or emerging markets) and natural resource
funds. This helps diversify portfolios and also helps mitigate
the downside of weaker fixed-income yields.
I also like real estate and precious metals, owing to their
low correlation with most major market indexes.
With interest rates low and fixed-income investments not generating
great returns, I believe most investors need equity exposure,
including perhaps some BRIC funds and/or resource funds to stay
ahead inflation and taxation. This is also important for sustained
longer-term portfolio growth as life expectancy increases and
with it the risk that you’ll outlive your retirement nest-egg.
These are very exciting times for investors, with plenty of
risk but also full of new opportunity. With careful planning,
we can stay ahead of the curve to keep our investments growing
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.