The New Engine of Global Growth

AN iNdepeNdeNt sectioN by mediAplANet to the vANcouver suN em’s emerging investment experts assess em investing in canada middle class What do they What industries here how it affects you recommend? stand to gain the most November 2011 eMeRGInG MARKeTs

■ emerging markets

The new engine of global growth Home to over 80 percent of the world’s population, “Growth in the ﬁ rst half of the 21st emerging market countries are undergoing rapid century is likely to be driven by the economic growth and industrialization. Together, these emerging markets are a true powerhouse, representing inexorable rise of a new growth poles in approximately one-third of world trade and accounting the emerging economies of the world; for 90 percent of global growth in 2009. More than 20 countries worldwide are officially countries such as china and india, and considered emerging markets, including the BRIC other emerging economic powerhouses.” countries (Brazil, Russia, India and China) and others in Southeast Asia, Eastern Europe, Latin America and Africa. PRoSPeCTS FoR deVeLoPMenT the World bank, march 2010

Photo: hsBc GloBAl AssEt MAnAGEMEnt (cAnAdA) lIMItEd In recent years, emerging markets have garnered a lot of attention, and for good reason. WE RECOMMEND Expert advice marc cevey, hsbc Asset management (canada) limited pAGe 2 “in addition to broader emerging markets funds, emerging markets there are investment vehicles that are focused on the largest, developing economies such as brazil, russia, india, and china (bric) will continue to wield and even a range of more inﬂ uence single country funds.” ith in- evitable shift in the balance of power, tion, innovation and are able to attract creased per as these emerging markets begin to venture capital,” says Villar. “Both Bra- emerGiNG mArKets capita inco- wield more infl uence. “We will have to zil and India have vibrant corporate and 1st editioN, November 2011 me, increa- adjust,” he says of the developed world. higher education sectors, and in the ca- Responsible for this issue: singly sound “This happens every century, as new se of the latter, a lot of venture capital Publisher: Mark Rybchuk business en- players emerge with robust economies.” has moved from California’s Silicon Val- [email protected] Designer: Mariel Fitzgerald v i r o n m e - Caron says that what is remarkable is ley to India. On the other hand, the need Managing Director: Joshua Nagel nts and well managed budgets, these that these economies have grown in for government control in China sty- [email protected] w Contributors: Marc Cevey, Ken Donohue, countries are providing good opportu- such a relatively short period of time— mies creativity, which is needed for inn- Kevin Gopaul, Phil Langham, Andrew Seale nities for investors. And the long-term a generation, really. “What we are now ovation and growth.” Joseph Caron Photo Credit: All images are from iStock.com prospects still seem promising, despite seeing in many of these places, is a move Former Canadian Ambassador to China, India unless otherwise accredited. some apparent weaknesses. from abject poverty to an environment and distinguished fellow with the Asia Pacifi c Brain power Foundation Distributed within: “While China is still a powerhouse, it where people have enough to eat, a de- While most of the attention is focused Vancouver Sun, November 2011 still relies very much on U.S. and Euro- cent dwelling, and have access to medi- on economic systems, Caron also points This section was created by Mediaplanet “What we are now and did not involve The Vancouver Sun or pean consumption to fuel its economy,” cal care and education. ” seeing in many of these out that we shouldn’t discount the im- its Editorial Departments. says Daniel Villar, lead risk manage- Given their quick rise, Villar won- places, is a move from mense brain power that exists in India ment oﬃ cer, MIGA World Bank Group. ders whether Brazil, India, and China and China, which combined represent “So, in the short term emerging markets will be able to avoid the middle income abject poverty to an more than a third of the world’s popu- won’t be the locomotive of the global eco- trap, which can occur when there is a environment where lation. This he believes will be a big fac- nomy, but will play a much larger role.” period of rapid economic growth that people have enough to tor in the continued growth of these two FOLLOW US ON FACEBOOK AND TWITTER! then stalls, as the cost of production in- eat, a decent dwelling, countries. As Caron notes “there is no li- www.facebook.com/MediaplanetCA Setting a new stage creases. Brazil and India, he believes, are and have access to mit to human imagination if proper ru- www.twitter.com/MediaplanetCA Joseph Caron, Former Canadian Am- better structured to handle this phe- les and governance are in place.” medical care and mediaplanet’s business is to create new bassador to China, India and a distin- nomena, but isn’t so sure about China. customers for our advertisers by providing guished fellow with the Asia Pacifi c “The countries that avoid the middle in- education.” ken donahue readers with high quality editorial content that motivates them to act. Foundation, agrees that there is an income trap are ones that invest in educa- [email protected] 2 · November 2011 AN independent section by mediaplanet to the vancouver sun news Not long ago, only the most intrepid of investors would have dared to chance their investments in so-called second and third world countries. Better to stick to the safe environs developed nations. But the world isn’t what it once was. Navigating emerging markets has investors exploring new regions hina’s economy is gement compared to many developed poised to eclipse nations is another important factor. A that of the U.S. as country’s debt to GDP ratio is hugely the largest economy important when it comes to economic in the world. India’s growth, because it’s an indicator of how burgeoning midd- much a country can borrow to create in- le class, expected frastructure and jobs. With that figure Cby some to include 700,000 million pe- reaching nearly 100 percent in many ople (twice the size of the current U.S. developed countries, and with already population), is fuelling unpreceden- historically low interest rates, there ted growth. And Latin America isn’t the isn’t much ability to grow these econo- unstable place that used to scare away mies. This provides a good opportunity investors. All of this at a time when the for investors to consider emerging mar- anemic and highly leveraged economies kets. “I don’t see a lot of downsides in of developed countries teeter along. emerging markets,” says Asdhir. “They Traditionally emerging market are less risky than developed countri- countries were thought to predomi- es, with high return potential, and pe- nantly be the BRIC nations—Brazil, Rus- ople are starting to realize that econo- sia, Indian, and China—but they actual- mic growth in the next decade will co- ly include many more countries in Asia, me from emerging markets.” Latin America, Eastern Europe, and even According to Mobius, emerging mar- some in Africa. In fact, emerging markets now represent 34 percent of the kets represent about 80 percent of the world’s market capitalization, and he world’s population. believes that investors should consider

Photo: Excel Funds Ltd. increasing their exposure. In fact, the- On the rise re may be many more opportunities as “Investing in emerging markets is are seeing this in China and India, and countries, because they are all being im- vice. And related to that will is the de- so-called Frontier Markets are gaining good, because historically once a coun- the opportunities for investing are even pacted by advances in communications mand for commodities to produce tho- more attention with their nascent eco- try passes GDP per capita of $1,000, greater, because with a large population and transportation, giving them access se goods sought by the emerging mar- nomies. These include Kazakhstan, Ke- we see a trajectory of high growth,” and growing middle class, consump- to information and products. “The con- ket consumer.” nya, Romania, Slovakia, Bangladesh, says Bhim Asdhir, CEO of Excel Funds, tion is huge.” sumer goods sector will be a huge con- and others. which specializes in emerging market Equally bullish is Mark Mobius, exe- tributor to growth in these markets,” Room to grow investing. “We saw this in Japan and cutive chairman, Franklin Templeton’s says Mobius. “As the growth in per ca- While rising income levels in emer- Hong Kong and Taiwan, and these are Emerging Markets Group, who says pita income rises, so too will there be an ging markets is helping to fuel growth ken donahue relatively small countries. And now we there are a lot of positives with these increasing demand for goods and ser- in these countries, strong fiscal mana- [email protected]

Phil Langham Marc Cevey Kevin Gopaul Head of Emerging Market Equities, Chief Executive Officer, Vice President and CIO, RBC Global Asset Management HSBC Global Asset BMO Asset Management Inc. Management (Canada) Limited

Question 1: It is important for investors to understand that There are an increasing number of investment choices for Outside of speaking with an investment over the last two decades, exports and infrastructu- Canadian investors to access emerging markets. For instance, in professional or doing your own web surfing; What’s the best way for re has driven emerging market growth to lead to the addition to broader emerging markets funds, there are invest- the best way to learn how to invest in emer- investors to learn how commodity boom we have seen, and can also explain ment vehicles that are focused on the largest, developing econo- ging markets is by contacting the companies to take advantage of the close correlation between the Canadian stock mar- mies such as Brazil, Russia, India, and China (BRIC) and even a who offer EM ETFs or Mutual Funds directly. ket and emerging market equities. range of single country funds. Investors can also consider index They can tell you their rationale for offering “emerging markets”? Looking ahead, domestic growth within emerging products and exchange-traded funds to access these developing the products, how it fits within a typical in- markets is now becoming the key driver so investors markets. Lastly, there are not only equity products, but more re- vestment portfolio and what exposures you should focus on emerging market equity funds to get cently emerging market debt products have been introduced to are truly getting. For investors who do not ha- exposure to the prime contributors of growth. There take advantage of the higher yields these products offer. Many ve access to specific expertise in EM, ETFs are are a wide variety of emerging market equity funds in investors already have indirect exposure to the emerging mar- an excellent way to gain exposure to the as- Canada, which all have their own characteristics and kets through their investments in Canadian, US, and Interna- set class. styles. Investors can learn more about the characte- tional stocks whose business models are now geared to increa- ristics, style and investment processes of the various sing sales to the positive demographics underlying the develo- funds by analyzing documentation and speaking with ping markets. investment advisors.

Question 2: Over the long term, emerging markets are likely to Emerging market stocks typically have low correlations Considering the growing disparity bet- provide faster growth and better returns than develo- with traditional markets, meaning that they will perform dif- ween developed nations and emerging mar- What do emerging ped markets. They do not face the issues of excessive ferently under the same environment. There are a number of re- kets from both an economic and debtor per- markets offer as part of public debt and household leverage, have an attracti- asons for this: 1) their economies often operate on a different spective, emerging markets are poised for a diversified investment ve demographic outlook and look set to continue to see cycle from developed market economies, 2) the relative im- long term growth and outperformance. In- much faster income growth. However, short term vo- portance of certain industry sectors may be quite different e.g. vesting in emerging markets provides access strategy? latility can also be higher than other asset classes. No- the TSX is highly concentrated in just two economic sectors, na- to the purchasing power of a growing midd- netheless, studies have shown that adding an alloca- mely Financials and Resources, and 3) investment capital will le class, banking systems which are looking tion of approximately 10 percent to emerging market flow to and from emerging market stocks and their currencies healthier than many developed countries, equities, as part of a diversified investment strategy, as investor risk appetite changes. Over the long-term, emerging stable governments, and globally focused cor- can make a meaningful addition to returns with very markets should offer direct access to the positive economic opp- porations. Additionally, with today’s depres- little extra risk. For investors with a higher risk tole- ortunities of a growing consumer base and the necessary in- sed yield environments in developed nations, rance, higher allocations to emerging markets could be frastructure to support it. emerging market fixed income products offer considered. a higher yielding compliment with excellent diversification benefits.

Question 3: Although the current volatility has primarily been Clearly, despite solid fundamentals and continued opp- The easiest way to mitigate volatility is driven by the European sovereign debt crisis, all equity ortunities for superior growth, emerging markets have un- through appropriate diversification. Single Considering current markets, including emerging market equities, are pro- derperformed this year. With a growing list of concerns about country or sector emerging market invest- global market ving to be highly correlated. This often happens at ti- the health of economies and government debt, there has been ments may lead to unintended risk in your volatility, what do mes of stress. Investors are aware that this crisis will a flight to quality, read liquidity, into developed markets. This portfolio. Active management can provide not last indefinitely and that these periods of volatility highlights that while emerging markets may represent a good good value in emerging markets investing, you recommend for can provide great opportunity. Nonetheless, it is under- long-term opportunity, they are still subject to substantial vo- but until you find a manager with the experti- reducing risk when standable that during periods of market turmoil risks latility in any environment, particularly in periods of crisis. As se and performance you are comfortable with, investing in EM? need to be evaluated. When investing in emerging such, we do not believe that it is prudent to attempt to time your I recommend starting with a well diversified, markets, the focus of investors is generally on the po- entry into those markets; rather, you should contribute to them low-cost passive strategy such as an ETF. One tential long term growth, but these volatile periods are via a regular investment plan. This strategy can have the ad- can quickly gain transparent access to nearly an important reminder that risks cannot be ignored. vantage of smoothing out the returns and fluctuations, while two dozen emerging market countries and of- Risks can be reduced by focusing on funds that are bro- ensuring a growing participation to an attractive investment ten over 1,000 companies with one single in- adly diversified and that focus on high quality long opportunity for the considerable future. As a rule, emerging vestment solution. term growth stocks as opposed to funds with high markets are generally suitable for investors focused on capital exposure to cyclical areas of the market or to smaller growth with a long-term horizon exceeding ten years; investors companies. This approach of focusing on high quality should also be able to withstand temporary volatility or losses. and growth at a reasonable price will not only lead to We advocate that investors view emerging markets within the performance holding up better in a volatile environ- context of their international diversification in their portfolios, ment, but will also be likely to produce superior perfor- with the objective of gradually reducing exposure to more deve- mance over the longer term. loped international markets, such as United States and Europe.

4 · November 2011 AN iNdepeNdeNt sectioN by mediAplANet to the vANcouver suN news

QUESTION & ANSWER

What industries/sectors are How Canada is poised for the most growth within the emerging markets? ■ The prime sector will be consumer goods. The growth in per capita income means that there will be an in- tapping into challenging creasing demand for consumer goods and service. Related to that will be the demand for commodities to produce those goods that are being sought by new export markets the emerging markets consumer. Traditionally emerging market For the first time in Canada’s opened to about 450-500 a week with countries are thought to be pre- history, exports to the United plans by CN to nearly double that capa- dominately made up of BRIC. States are being surpassed by city to about 700-800 a week by 2012. What opportunities do you see in exports to emerging markets, China’s hunger for dimension lum- other EM countries that may not bringing with it a series of ber has seen a massive increase gro- be on investors’ radar? How bul- challenges to exporters. wing 166 percent when comparing Ja- lish are you on these markets? nuary to June 2010 to the same period ■ There are many countries other Avrim Lazar, President and CEO of the in 2011. Coal exports were up about 66 than the BRICs, They include Korea, Forest Products Association of Canada percent as well. Taiwan, the Philippines, Thailand, and chair of the Advisory Committee Peter Jeﬀ rey, vice president of Ca- Vietnam, Poland, Turkey, South Afri- on Paper and Wood Products (ACPWP) nadian Manufactures and Exporters BC ca, Nigeria, Argentina, Chile and many to the United Nations, points out that says his sector has seen a major change many more. I’m bullish on all of them the shift in export climate has helped us in exports. since they are all being impacted by weather the current economic turmoil. “For our sector in B.C. you’re seeing advances in communications and “If you pay any attention at all to glo- for the fi rst time exports exceed 50 per- transportation, which is giving them bal markets and fi nancial news, you cent to somewhere else other than the access to information and products. know that the center of gravity—the U.S.,” says Jeff rey but points out it’s a engine of economic growth—is increa- long road ahead. What’s the risk versus reward singly in the emerging markets,” says “Canada doesn’t have any trade agre- scenario with emerging mar- Lazar. “That’s what has gotten us th- ements running west,” says Jeff rey. “It’s kets investing in your opinion? rough this recession to the extent that new ground with a lot of companies ■ Emerging market now represent 34 we’re through with that.” running into problems with the rules percent of the world’s market capitali- Lazar is still quick to acknowledge the and regulations of foreign countries.” zation. So investors should think about United States role. But industry is optimistic. increasing their exposure to that extent. “They are still our most important “Ten years ago we were in there doing customer,” says Lazar. “But any stool the right thing and people said it would What emerging markets are needs more then one leg and what we’re never work,” says Lazar noting that the you studying now for future doing is creating the stability that co- perseverance on both the government opportunities? mes from diversifying.” and industry side has driven the growth ■ We are now looking at the Frontier EMERGING EXPORTS The shift in the forestry export climate has helped the industry weather of China as an emerging market. Markets where not much research the current economic turmoil. Photo: IPG Transportation logistics “You don’t go to China to make a sale, has been done and where the markets With increased demand from the Asi- Initiatives Prince George, a municipal- “The dynamism of the Asia-Pacifi c is you go to China to make a relationship are at the nascent stages such as Ka- an markets specifi cally, the ports and ly owned corporation and one of the key having cascading implications—most- and sales come with the relationship.” zakhastan, Kenya, Romania, Slovakia, existing infrastructure at Prince Ru- players in developing transportation lo- ly good—for northern B.C. and B.C. as a Bangladesh and many others. pert and Prince George in Northern gistics for the region, calls the region a whole,” says McEwan. MaRk MoBIuS B.C. have become the gateway for goods “strongly emerging transportation hub To put it in perspective, 17 months ago executive chairman, andReW SeaLe heading west. to facilitate the growth of exports into the port at Prince Rupert saw about 30 Franklin templeton’s emerging markets Group Tim McEwan, president and CEO of the Asia-Pacifi c markets.” containers a week. That fl ood gate has [email protected]

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INDUSTRIES ON THE MOVE As developing countries grow, EM companies are looking towards Canada for investment opportunities. Photo: IPG A primer on investing in Canada for emerging markets As companies in emerging markets look at the impact of such listings on the integri- stretch out their feelers in search of ty of the Canadian capital markets. Scott Murtha, resources, Canada is becoming a more a tax lawyer at Boughton Law Corporation says, attractive place for foreign companies “Any time you have a non-Canadian investor and to establish themselves. they acquire control of a Canadian business, they have to make an application under the Investment “There has been an increasing trend over the last Canada Act. That’s sort of a gatekeeping legislation few years of the Canadian capital markets provi- whereby the Canadian government gets to review Lean, nimble, fast, flexible and results-oriented. ding companies from emerging markets with fo- certain transactions over certain thresholds.” WeirFoulds. reign capital,” says Rajeev Dewan, a senior asso- Although Murtha adds “Canada doesn’t try to ciate at Canadian law fi rm WeirFoulds LLP. make it diﬃ cult to do business here,” Dewan has Dewan explains “with world-leading experti- his concerns for the future; pointing out “The On- se in natural resources, including oil and gas, mi- tario Securities Commission issued a notice in ning and clean technology, Canada’s two prima- July that it would be conducting a target review ry public capital marketplaces, the TSX and the of certain Ontario reporting issuers listed on Ca- TSX Venture Exchange (the “TMX Exchanges”) nadian exchanges which have signifi cant opera- are considered an ideal venue for such companies tions in emerging markets.” looking to fund their growth and innovation. But “Accordingly, the growth in the number of navigating the Canadian investment marketpla- emerging market companies raising capital and ce isn’t just a fl ash of a pen—there are rules and listing in Canada may be impacted by the results regulations to play by. of this regulatory review,” Dewan explains.

Getting on the list Completing the cycle Currently, the bulk of listed companies from However, on the other side of the coin, a number emerging markets have come from China and of Canadian fi nancial services fi rms have expan- South and Central America. ded their global footprint and established a pre- Stimulate growth – savour success. As of September, 57 Chinese companies have lis- sence in these emerging markets to access com- To learn more, contact ted on the TMX Exchanges with an aggregate mar- panies in these markets. ket capitalization of approximately $5 billion. The- Dewan points to Scotiabank’s acquisition of Wayne Egan at 416.947.5086 or [email protected] re has also been an increase in interest amongst Dresdner Bank SA last September, which enables resource companies from India, “who are explo- its investment banking division, Scotia Capital to ring the viability of listing in Canada given our ex- tap into “an existing wholesale operating plat- pertise in these sectors,” explains Dewan. form to target key sectors in Latin America, including oil and gas, power and mining.”

Hitting the brakes? Do the deal your way. Gain a strategic advantage. WeirFoulds LLP. 416.365.1110 With increased interest in Canadian assets by andReW SeaLe www.weirfoulds.com emerging markets, regulators are taking a second [email protected]

WeirFouds-EmergingMarketsAd.indd 1 11/7/2011 3:24:40 PM