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Emerging Markets Investing the El-Erian Way

By    |   Monday, 25 August 2008 06:04 PM

Mohamed El-Erian is co-CEO, along with super-investor Bill Gross, for bond fund giant Pimco. In addition to turning to Gross for help, El-Erian can seek the counsel of Pimco consultant Alan Greenspan for help in managing nearly $700 billion in assets.

El-Erian previously managed Harvard University's $35 billion endowment fund. While there, he delivered a 23 percent gain in his last year on the job, increasing the world's largest university endowment by $5.7 billion.

He also recently published When Markets Collide: Investment Strategies for the Age of Global Economic Change, a book which advocates holding only 15 percent of your investment portfolio in U.S. stocks.

That's quite a switch: Historically, financial planners have told their clients that 10 percent in foreign stocks is a ceiling for risk. El-Erian sees the real risk in holding too few foreign stocks.

Fifteen percent is the same allocation El-Erian recommends for stocks in emerging markets, an asset class he thinks will better reflect the macroeconomic trends of coming decades. Another 15 percent goes into stocks of developed foreign countries.

Concerned about inflation, El-Erian also thinks investors should hold at least a quarter of their portfolios in investment hedges, including real estate and commodities.

For this week’s screen, I identified potential winning stocks in the emerging markets category using a couple of simple rules:

• The investment must be listed on a U.S. market. This means they comply with generally accepted accounting principles. Investing directly in an emerging market requires specialized expertise and would require opening brokerage accounts for access to each individual market.

• The price-to-earnings ratio must be less than the average earnings growth rate over the past five years. This criterion should help us to avoid overpaying for a stock.

• The stock needs to be among the top half in market performance over the past three months. This identifies the stocks doing well in a generally down market and increases our odds of finding winners.

I found seven stocks that fit this El-Erian emerging markets screen criteria:

Braskem (BAK) is a Brazilian plastics maker. The company is spending $300 million on a factory for sugarcane-based bioplastics, making it a large player in the “green plastics” industry. With the Brazilian economy expected to grow by 4.5 percent this year and demand for plastics growing at 10 percent to 12 percent, BAK is likely to see continued earnings growth. Recent price: 15.42.

Compania Cervecerias Unidas (CU) produces and distributes beer in Argentina and Chile. In his classic “Investment Biker,” Jim Rogers recommended buying beer brewers whenever possible in a developing country. He found in his travels that as national income rises, so does beer consumption. At a recent price of 33.55, CU offers investors a 3 percent dividend.

eTelecare Global Solutions (ETEL) is a Philippines call-center provider. Outsourcing of tech support is a continuing trend among Fortune 500 companies, and ETEL is poised to profit. Earnings are expected to double next year, yet the stock has a P/E ratio of 12 at a recent price of 5.95.

Gruma (GMK) With the recent declines in the price of corn, this Mexican tortilla producer should see increased profit margins. With a P/E ratio of 8, the company seems undervalued at its recent price of 11.69.

Lan Airlines (LFL) should benefit from lower oil prices. Passenger traffic is expected to grow by 15 percent for this Chilean airline. LFL has managed to remain profitable over the past year, and analysts are expecting to see 10 percent earnings growth next year. Longer term, analysts are forecasting annual growth of 15 percent. Recently trading at 11.55.

PT Indosat (IIT) offers investors a chance to participate in Indonesia's economic growth. The country is expected to see its economy increase by more than 6 percent in 2008. Like GMK, this stock was identified as a value investment in our previous Bill Gates investment screen. Now trading near 32.32, the telecom provider has a P/E ratio of 15 and a dividend yield of 2.6 percent.

Telecomunicacoes de Sao Paulo (TSP) provides traditional phone service and cable television within Brazil’s most populous and richest state. It also provides interconnections between cell phone carriers, capturing reliable income from this growing sector. At a recent price of 28.92, TSP is paying a 2.1 percent dividend yield.

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Mohamed El-Erian is co-CEO, along with super-investor Bill Gross, for bond fund giant Pimco. In addition to turning to Gross for help, El-Erian can seek the counsel of Pimco consultant Alan Greenspan for help in managing nearly $700 billion in assets. El-Erian previously...
Monday, 25 August 2008 06:04 PM
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