Readers’ Questions Answered Part VI
It’s been a while since I answered some readers’ questions. Thank you, readers, for all your responses to the blog—they have been highly encouraging.
What are your main criteria when picking a sector and the company in a particular sector?
— Tolga, Turkey
Firstly, we do not pick sectors or countries. Our focus first and foremost is on individual stocks and it does not matter which sector or country they may be in. There are many opportunities in various sectors and it would be very limiting if we were to restrict ourselves. Our main criteria to pick stocks include profitability and long-term growth prospects. Our objective is to find companies that our research shows to be underpriced by the market but have the potential to grow in value over a span of about five years.
Most of the small companies in India are family-owned. Does this create a problem?
— Rishant, India
This is not a problem at all. In fact, we like many family-owned companies. They often have a long history controlling and managing the company, and are often strongly committed to the business. One factor we look at with these types of companies is strong corporate governance and fair treatment of minority shareholders. If the family in control treats minority shareholders fairly and for instance, include them in certain decision-making, such companies can be very good investments. We have had good experiences with family-controlled companies in India and elsewhere.
What are your thoughts on Africa?
— Vitalijus, United States
I think Africa has tremendously bright prospects and a positive outlook. The continent boasts abundant natural resources, of which only a fraction have been tapped. As a result, it has gathered heightened interest from other emerging countries like China, Brazil, Russia and India. These emerging countries need resources and are willing to invest in Africa’s infrastructure, which will help African economies. The IMF projects that growth in sub-Saharan Africa will be 5.5% in 2011 and 5.8% in 2012. In addition, 45% of the continent’s 1 billion-strong population is aged between 5 and 24 years. The rising number of Africa’s youth could have vast potential, if they improve their education and skills, and could be a great asset to drive and sustain the continent’s growth and development going forward.
We have been investing in many African companies – not only in South Africa, but also in Nigeria, Kenya, Ghana, Egypt and others. Nigeria is especially interesting to us at the moment, as the country has seen significant reform, particularly in the banking sector.
What is your view on the Baltic States? Which sectors do you think are the most interesting?
— Patric, Switzerland
The Baltic countries, specifically, Estonia, Latvia and Lithuania, are certainly an investment interest for us and we continue to research those markets. We have investments in Estonia and continue to seek opportunities in Lithuania and Latvia. Their membership in the European Union gives them an added degree of credibility and puts them on a path toward positive reform. However, we believe that as a result of the perceived risk in these markets, stock prices in the region have recently fallen substantially, which can create attractive investment opportunities .
What is your view on the Brazilian and the Mexican equity markets for 2011?
— Ivan, Brazil
We cannot make specific predictions on the market levels or individual stocks. As mentioned earlier, our objective is to research and pick the best stock bargains that we seek to hold for the long-term. Our Latin American analysts, who discussed Mexico and Brazil on my blog last year, continue to find good value in both countries.
We continue to be focused in both countries, with Brazil as the greater focus for us than Mexico. Both countries have stable economic environments, advantages in the production of commodities, as well as a large and growing working-class consumer population with rising per capita incomes and increased purchasing power.
In our view, Brazil has been doing very well in terms of market performance as well as currency strengthening. It has an abundant mix of hard and soft resources such as minerals and food products, as well as a vibrant consumer market. Mexico is a net exporter of oil. In recent years, it increased inter-regional trade and diversified its export base, enabling it to be less dependent on the U.S. economy. I think Mexico remains a very interesting market to watch.