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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 perhaps decrease.

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 currency-hedge.

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 to BRIC.

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 individual stocks.

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 and prospering.



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.