Special Report

Finding Emerging Market Opportunities

November, 2010

Six Emerging Market

Opportunities
By Rudy Martin, Director of Research,
www.LatinCapitalMarket.com

Dear Investor,

Emerging markets continue to present attractive opportunities. And now I see a once-in-a-lifetime
chance to apply the best long-term investing practices I’ve learned over the past 30 years as a money
manager to generate more growth and higher yields.

So let me give you my “Six Emerging Market Opportunities,” with insights about the
transformations occurring in Latin America that could put you on the path to financial freedom.

Emerging Market Opportunity #1 — Latin America is indeed the investment story of

New wealth not “Made in the USA” this decade:

The latest Forbes poll of billionaires gives the
world's richest title to Carlos Slim Helu, the
Mexican tycoon behind the telecommunications
giant, America Movil (NYSE:AMX) and a
significant investor in other major companies
including The New York Times (Nasdaq:NYT).
He made his wealth from the huge boom in
consumer demand for telecommunications and
media in Mexico, Brazil and elsewhere in South
America.
Last year, Carlos Slim lent The New York Times
$250 million and received warrants which are
now in the money by a cool $75 million.
Recently, Fitch upgraded Panama's bond rating
to investment grade, the first among the major
U.S. rating agencies to do so. It mentioned
sustained improvement in public finances, tax
reforms that are expected to add 1.5% to 2% of
additional revenue to that country's GDP and
Panama's resilience to an economic downturn.
Further south, Chile announced a $30 billion
infrastructure program to rebuild from the
devastating earthquakes. This is another shot in
the arm for an already strong economy. A
Chilean exchange traded fund (ETF), one of my
recommendations, is up 55% in just six months
this year!

And recently Slim proposed selling his interest in
the slightly under-funded Telmex (NYSE:TMX)
and Telmex International (NYSE:TII) to America
Movil. This was a big plus for AMX, which
became a full-service provider of wireless,
broadband and video services.
For Carlos it consolidated his control of the
media sector into one higher-valuation public
company. That's value investing at its finest.
But the gold medal for economic rebound goes
to Brazil. It now ranks 6th in the world with
foreign exchange and gold reserves of more than
$277 billion at the end of September 2010. The
Brazilians have more reserves than the next four
largest Latin American countries combined.
They also have more reserves than the Swiss,
Germans or even the United States.
This wealth has unleashed a consumer buying
binge in Brazil. For example, last quarter,
Carlos Slim’s America Movil added 6.6 million

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November, 2010
wireless phone subscribers. A third of these
were from Brazil.
Fortunately, you don't have to be a well-funded
billionaire like Carlos Slim to pick off a few
weakened international companies at low
prices.
There are also tools, such as ETFs, that help you
invest in areas that would normally be closed
off to individual investors.
Emerging Market Opportunity #2 —
Catch the trillion-dollar global infrastructure
boom
There is a new category of ETFs that focus on
infrastructure investing — basically companies
that benefit from large, longer term
construction projects. One aims at China, the
other focuses on Brazil and the third covers
India.
These three countries have the need to attract
capital and build the transportation, telecom,
technology and energy support systems for their
growing populations.
If you consider the size of the undertaking in
their respective geographic regions and the
capital required to accomplish this, what we’re
talking about here will require TRILLIONS of
dollars!
Just a year ago, an analysis by CIBC World
Markets predicted worldwide government
spending on public works projects would total
$35 trillion over the next 20 years. By the
middle of 2009, a number of analysts —
reviewing projected demands in the commodity
and raw materials markets — had raised that
forecast to $40 trillion, with nearly $4 trillion of
that coming in 2010 and 2011 alone.
Already, a massive building boom is occurring in
emerging markets as countries build roads,
bridges and ports to connect their new mega-
cities and to facilitate shipment to places like
China.
In Latin America a lot of this China-bound traffic
goes through Panama, which is undergoing a
massive $5 billion expansion of the Canal. And
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Panama is not the only country to see the value
in having better ports.
Mexico’s government announced a spending plan
worth $50 billion in 2008. The flagship project is
Punta Colonet, a $5 billion project to build a
massive port in Mexico’s Baja California. The
goal is to rival the strategically-important Long
Beach, California port.
Other countries are building like crazy, too ...
Brazil is working feverishly to reduce the
logistical bottlenecks associated with significant
congestion at the major seaports and the poor
condition of its railroads and highways. These
threaten Brazil's continued competitiveness and
economic growth.
Then there is the Internet ...
In developed countries, we take the impact of
the Internet for granted.
Indeed, during the last few years media and
shopping have gone online with dramatic force.
Consider that in the U.S. $155 billion was spent
on local advertising in 2009. If half of that
moves to internet advertising, imagine the boom
we are talking about just in the U.S.!
Now add in the emerging world with the billions
of people in China, India, and Brazil and
elsewhere who are adopting the Internet, and
this media migration idea really takes wings.
One very smart management team in Latin
America has figured out how to create a unique
company with both content and technology. It’s
marrying up a broadband/mobile distribution
system with a full content creation complex.
One day this is likely to be considered the hot
growth stock to have bought into.
The last part of this infrastructure boom is
probably the largest component ...
The emerging countries’ accelerated growth
rate means they’ll need a steady increase in
energy supply, including oil, gas, electricity and
alternative energy.
Emerging Market Opportunity #3 —
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The new commodities super cycle brings
wealth to the emerging world
According to The Wall Street Journal, China has
just passed the U.S. to become the world's #1
consumer of oil.
So the Chinese have become very serious about
oil. And this has major implications that could
greatly affect the price of oil, gold and other
world currencies in the coming months.
The biggest beneficiaries of this Asian,
commodity boom are the Latin America
suppliers. In fact, Chile, Peru and Venezuela
rely on raw materials for more than three-
quarters of their exports
That’s why for my money, I'm betting on the
countries that are raking it in from the supply
side, especially Brazil ...
In addition to its financial strength Brazil has a
young, increasingly productive workforce with
rising personal incomes. So the country's
demographics support a solidly growing
economy.
And investors are finally focusing on Brazil's
offshore oil discoveries and renewable energy
sources, which are putting the country well
along the path to becoming an energy super-
power.
In September, Petrobras (NYSE:PBR) raised
about $70 billion dollars in the world's largest
stock offering to fund oil exploration,
development and production.
China recently invested $10 billion dollars in
Petrobras, in exchange for oil.
And Sinopec (NYSE:SHI), one of China's biggest
oil and gas producers, is buying a 40% stake in
Repsol's (NYSE:REP) Brazilian operations. The
deal would create one of Latin America's largest
private energy companies, valued at $17.8
billion!
So you can see, MONEY — and I mean BIG MONEY
— is rushing into Brazil and other Latin American
countries left and right!
This wealth will flow to the new middle class.
They, in turn, will require governments to spend
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more on public services, infrastructure and
education.
It may seem a safe bet that billions of Asians
will continue to gobble up oil, iron ore, copper,
soybeans and meat as they get richer. But one
day, the world will surely embrace alternatives
to fossil fuels that emit less carbon.
And Brazil already has the leading edge, in the
form of ethanol from sugar cane.
Emerging Market Opportunity #4 —
Follow the emerging middle class and
what they spend their money on
What a difference August made. Our largest
portfolio, LSI Dividend Stock Portfolio rose 10%,
the LSI Growth Stock Portfolio gained 7% and
the ETF Portfolio appreciated 6% during the
month.
What's behind this boom?
An internal growth wave that follows the
commodity and export volume boom I have been
pointing to.
Here are the three forces driving Latin American
stocks now:
Force #1: The region is undergoing an economic
rebound.
After a brief downturn in late 2008 and early
2009, a strong recovery is now under way.
The region is still dominated by Brazil, with its
nearly 200 million people and by far the largest
economy in the region. We have had great
returns from the small-cap ETF in Brazil (BRF),
up 52% since being added. In August I added
another ETF that is even more focused on the
Brazilian consumer.
I'm still very excited about the other countries
too. The growth leaders in Latin America next
year are likely to be from Argentina, Chile and
Peru. These countries are forecasted to grow 6%
next year, slightly faster than the 5.5% regional
average for the period 2004 through 2008.
What's going on is simple: Tens of millions of
Latin Americans have climbed out of poverty
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and joined a swelling lower-middle class. With
that comes increased demand for everything
from AAA batteries to wireless phones.
While Latin American politicians squabble about
the U.S. role, regional integration and a
common market; the region's businesses are
quietly creating a new reality.
Witness the emerging cohort of multilatinas,
companies like Vale (NYSE:VALE), Gerdau
(NYSE:GGB) and America Movil (NYSE:AMX) that
are making acquisitions and building regional
enterprises that span the Americas.
These are cash-rich companies with an appetite
for growth and a long-term view.
Force #2: This is no longer the era of banana
republics with weak finances.
The major countries in Latin America are
democratic and attracting capital. Brazil,
Mexico, Chile, Colombia, Panama and Peru all
have investment-grade credit ratings. Their
governments, households and companies are
less indebted than those in many developed
countries!
Even Argentina is seeing an improvement as it
has agreed to pay old defaulted bonds, allowing
it to realistically discuss issuing new government
debt.
If the region can keep up the growth of the past
few years, income per person will double by
2025, to an average of $22,000. By then Brazil
may be the world's fifth-biggest economy,
behind only China, the United States, India and
Japan.
Traditionally Latin America’s middle class was
employed in the public sector. The new lower-
middle class is more entrepreneurial, though
many of its members work at least partly in the
informal economy.
They aspire to acquire the six C’s: Casa, carro,
cellular, computadora, cable y cinema. (A home
of one’s own, a car, a cellphone, a computer,
cable or satellite television and trips to the
cinema).
I know what you’re thinking, “How much of this
demand is financed?” Well the fact is, very
little!
Total credit to the private sector in Latin
America has averaged just 31% of GDP over the
past four decades, less than half the amount for
East Asia and the rich world, according to the
IDB.
Admittedly this constraint is starting to weaken
though, mainly in the form of consumer loans
and mortgages.

Force #3: Ultimately, the consumers in these Yes, Latin America is under-banked, which also
emerging countries benefit as their per capita presents more interesting opportunities ...
income grows.

What does it take to become wealthy?

Brazilian Businessman Eike Batista
"In mining, you go to some crazy place, you set up a camp, you
start looking for water and energy and this way you can build
anything. That's the mind-set. That's my life. That's how I learned
to build things from zero," said Batista, a 51-year-old Brazilian
businessman.
Batista settled down in Brazil in 1980 to start an independent gold
mining and trading company in the Amazon, negotiating with
wildcat gold diggers. He ranks among the top billionaires in Brazil
and expects one day to become the richest man in the world.

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Emerging Market Opportunity #5 —
Quality Latin American financial stocks attract
buyers
One thing has become clear to me over the last
thirty years: Find the leading, best capitalized
banks with the least number of lending credit
and investing portfolio problems, and you’re
bound to do well.
For example, JPMorgan (NYSE:JPM) is one of the
highest quality traditional banks in the U.S. If
you had invested $10,000 in September 2005 and
reinvested dividends, you would have netted
$2,634 — a 26% gain. In contrast you would have
lost 3% in the S&P 500 during the same time.
However, if you had invested that same amount
in one of Latin America’s oldest and largest
public banks, let's say Banco Bradesco
(NYSE:BBD), your ending balance would be
$31,995 — a 219% return in five years!
But I have been generally resisting financials in
the last year or so, during a period of rising
interest rates.
Fortunately, interest rates have stabilized. And I
now see an opening for Latin American bank
stocks that will result in many of these names
being added to institutional and individual
portfolios over the coming months.
I believe Latin American banks will become core
portfolio holdings — not just takeover stories or
trading ideas. There are so many of these that I
think the best way to get into them is through a
new sector fund for financials, Global X Brazil
Financials (BRAF).
In addition to this ETF there is one stock that
currently sells at less than 70% of book value, a
third of where its peers sell at. That’s why I
think Bladex (NYSE:BLX) deserves to be in the
Growth Portfolio as the environment and
company have improved enough for the discount
to be reduced.
Emerging Market Opportunity #6 —
Brazil’s domestic growth: Too hot to handle?
Latin American dividend-paying stocks,
especially the utilities, posted a great June. It
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seems no matter what the world’s economic
outlook is, people still need water, electricity,
food and housing.
The uncertainty in the U.S. and European
economies and the massive surge in supply of
dollars are affecting Latin American financial
markets in some unexpected ways.
Brazil’s policy of limiting gains in the real is also
preventing the government from taking
advantage of the cheapest international
borrowing costs in years. The Brazilian
government has sold only one international issue
this year raising $788 million in April. The bond
yields 4.6%, less than the local real-denominated
debt — a huge potential interest savings of over
8% if they want to issue more debt.
The key point here is that Brazil does not need
more U.S. dollars. With an investment grade
rating and only $60 billion of debt outstanding,
the country is in a better credit position today
than it’s ever been.
Yet the government may need to start borrowing
from places like China to pay for expanded
services ...
With more than 200 million people, the demand
for housing will fuel the Brazilian economy for
the next few years.
And the 2014 FIFA World Cup and 2016 Olympic
Games to be hosted by Brazil have placed the
country's deficient infrastructure in the
spotlight, especially its insufficient airport
capacity and urban transportation facilities.
Add to this the planned investments in major
infrastructure projects, worth $450 billion
between 2011 and 2014, and you have a recipe
for strong inflation.
The 1Q 2010 GDP showed the strongest economic
growth and investment in 15 years.
Consequently, the government is trying to cool
off its own China-like growth.
In fact, the Brazilian central bank is widely
expected to raise its benchmark rate to 11%
soon, with an eventual rise to 12% this summer.
Could the Brazilian economy cool too quickly?
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What if the U.S., Europe and other industrialized I wish I could tell you there’s another Brazil out
nations cut their spending? We’ll be watching there — but there isn’t. So if you’re not holding
closely to see how Brazilians and others at least one Brazilian investment, I believe you
throughout Latin America and the emerging should consider taking a closer look.
world react to what could be another recession
in the U.S.

In the meantime, the Chinese are buying up

natural resources companies and aggressively
investing in Latin America’s growth.

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Copyright © 2010 by Weiss Research, Inc.

Published By: Weiss Research, Inc.

Publication Date: November 2010

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