Forbes International

INVESTMENT
Special Feature
REPORT

6 Emerging
Markets
Investments
for the
LONG RUN
E
merging market stocks have had a rough ride since the
start of the year. After a 36% gain in 2007, Morgan Stanley
Capital International’s Emerging Markets index is off 27%
since the beginning of 2008.
But these numbers don’t tell the whole story. Individual stock
markets in emerging countries don’t move in lockstep. While
China and India have both lost more than 30% this year, some
smaller markets like Colombia and Israel are actually in positive
territory. And more than a dozen emerging markets, ranging
from Qatar to the Czech Republic, have outperformed the U.S.
on a relative basis in the most recent downturn.
With this sort of volatility rearing its ugly head, many
investors are starting to bail out of emerging markets. For long-
term investors, this is a big mistake.
It’s often said that the four most dangerous words in invest-
ing are “this time it’s different.” Anyone who bought Chinese
stocks at their peak last fall is learning that lesson the hard way.
So I’m not going to tell you that things are different this time.
Emerging markets are still a risky investment class, as Russia’s
war with Georgia reminds us all too well. But the case for invest-
ing in these countries remains compelling, and the recent pull-
back is a great opportunity to start looking for bargains again.
For starters, emerging markets continue to offer a rare com-
bination of growth and value. Usually investors need to choose
between one or the other. But the beauty of emerging markets is
that you can have your cake and eat it too.
If you’re a value investor, emerging markets are hard to resist.
Emerging markets are now selling for about 11 times next year’s
earnings forecasts. That compares to a price-earnings multiple
of 16 for the U.S. market.
If growth is your thing, emerging markets look just as tempt-
ing. The International Monetary Fund expects the gross domes-
tic product of emerging markets to grow at a 6% clip in the next
five years, or twice the developed world’s pace. According to
consensus forecasts, that will help drive 15% to 20% growth in
corporate profits in emerging markets. It’s not uncommon to
find high-quality emerging markets firms that are delivering
sales and earnings growth of 50% or more on a regular basis.
A second reason to be optimistic is that the economic funda-
mentals in emerging markets are the strongest they have been in
years. After being tested under fire in the Mexican peso crisis in
1994, the Asian meltdown starting in 1997, and the 1998 Russian
debt default, these markets are in fighting shape, even though
commodity prices have softened of late. In many cases, current
account and budget surpluses have replaced deficits, interest
rates are low, and inflation is under control.
Third—and perhaps best of all—there are more world-class
companies to choose from in emerging markets than ever
before. There are more than 300 developing market companies
with market caps in excess of $1 billion, versus just two dozen or
so back in the 1980s, according to Antoine Van Agtmael, the
money manager who first coined the term “emerging markets”
in 1981. In his excellent book, Emerging Markets Century, Van
Agtmael notes that companies such as Korea’s Samsung
Electronics, Mexico’s Cemex and India’s Infosys Technologies,
represent a new generation of blue-chips. Despite their emerg-
ing market roots, these are truly global companies.
Above all, it’s important to keep things in perspective. All
investing, whether it takes place in Boston or Bangladesh, is
based on a fundamental trade-off between risk and reward.
There is no such thing as a free lunch. If you want to enjoy the
30%+ returns that emerging markets have delivered, you must
be willing to stomach a few nasty corrections like the one we’ve
seen this year. The good news is that over the long haul, investors
have been well paid for taking that risk (see chart), but not if you
bail out at the first sign of trouble.
Emerging markets now account for about half of the world’s
economic output and more than 80% of its population. And
yet, stock markets in the emerging world still account for less
than 15% of the total global market capitalization. There is a lot
of upside left before these markets reflect their true contribu-
tion to the global economy.
Bottom line: Don’t give up on emerging markets just
because we’ve seen some volatility this year. But you do need
to pick stocks carefully. This special report features 6 emerging
market investments from Forbes International Investment
Report model portfolios that I believe will be long-term win-
ners despite the market’s short-term pessimism.

$35,000
Growth of a $10,000 Investment in
$30,000 Emerging Markets over 5 Years

$25,000

$20,000

$15,000

$10,000

$5,000

$0
Fe 3

Fe 4

Fe 5

Fe 6

Fe 7
3

N 4

N 5

N 6

N 7

08
Au 4

Au 5

Au 6

Au 7

Au 8
M 4

M 5

M 6

M 7

M 8
-0

-0

-0

-0

-0
-0

-0

-0

-0

-0
0

0
0

0
g-

b-

g-

b-

g-

b-

g-

b-

g-

b-

g-
ov

ov

ov

ov

ov
ay

ay

ay

ay

ay
Au

Data source: MSCI Barra. 1

Net Serviços de Comunicação
Brazil, Cable Television BUY
Brazil’s Net Serviços de Comunicação (nasdaq: NETC) is the Net Servicos (NASDAQ: NETC, $10)
largest cable television company in Latin America, reaching 2.5
million subscribers and 1.4 million broadband Internet cus-
tomers. The company has a 46% market share in cable television
and 15% share in broadband.
But NETC has barely even scratched the surface. Less than
10% of Brazil’s 190 million population has access to cable tele-
vision, and the so-called “triple play” bundles of internet, tele-
phone and cable TV services that are common in the U.S. are
just now becoming affordable for many Brazilian consumers.
Net Serviços is an early pioneer in this area.
Last year, NETC reported full-year revenue growth of 29% to
$1.5 billion on strong subscriber growth. The company’s cable
television subscriber base grew 16% in 2007, and its broadband
subscriber base surged 65%. EBITDA (earnings before interest,
taxes, depreciation and amortization) grew 26% to $410 million.
NETC should continue to benefit as the penetration rate of
cable television and broadband services rises in Brazil. Plus,
there’s also room to get its existing customers to spend more.
Many of the services that have driven revenue growth for devel-
oped market cable operators are just getting started in Brazil. For
example, High Definition (HD) services are still in their infancy. Source: Prophet.net
As demand for these services catches on, as it has in more mature
markets, NETC should be a prime beneficiary.

HDFC Bank
India, Banking
BUY
While India’s technology outsourcing boom has been well HDFC Bank (NYSE: HDB, $92)
chronicled, its banking sector has gotten considerably less atten-
tion. This is unfortunate, because banks offer one of the best
ways to tap into the growth of India’s booming middle class.
HDFC Bank (nyse: HDB) is the country’s leading mortgage
lender. It also offers credit cards, auto loans, and investment
products, which will all be in demand as India’s middle class
continues to grow. Retail lending accounts for more than half of
the bank’s lending portfolio and that proportion is rising.
The real attraction is HDB’s strength in home lending, which
the bank pioneered in the Indian market. The potential for
growth here is simply enormous. Consider mortgage balances
as a proportion of GDP. At a mere 3%, India has one of lowest
mortgage penetration rates in the world. Granted, it will take a
very long time for India to catch up to the 50%+ threshold that
is the norm in the U.S. and Europe, but there’s no reason India
can’t quickly close the gap with a market like Thailand, where
mortgages are 9% of GDP.
HDFC reported outstanding results in its latest quarter,
which ended in June. Net revenues rose almost 50% compared
to the same quarter a year ago. The bank’s net interest margin
of 4% compares favorably to the banking industry standard of
about 3%. Non-performing loans were a scant 0.5% of customer Source: Prophet.net
assets. The bank currently operates 1,229 branches in 444 cities in India. Short-term, HDFC will remain vulnerable to volatility
in emerging market stocks and general concerns about the financial services sector worldwide. But if you believe in India’s mas-
sive growth potential and the development of its middle class, HDFC is an essential long-term emerging markets holding.

2
T. Rowe Price Africa & Middle East Fund
Middle East & Africa, mutual fund BUY
In the past year, there has been a surge of interest in so-called
frontier markets. The T. Rowe Price Africa & Middle East Fund
T. Rowe Africa and M.E. (TRAMX, $11)
(ticker symbol: TRAMX) is one of the few actively managed
mutual funds that invests in this exciting new asset class.
Launched in September 2007, the fund has a broad mandate to
invest throughout Africa and the Middle East. The fund owns
stocks in countries ranging from Nigeria and South Africa to
oil-rich Gulf states such as Qatar and the United Arab Emirates.
The $650 million fund (assets) is run out of London by Chris
Alderson and a team of some of the most experienced emerging
market fund managers and analysts in the business. One of the
biggest arguments in favor of investing in frontier markets is
their lack of correlation with the rest of the world. While Middle
Eastern and African stocks may move in tandem with other
global markets in the short run, over longer periods the correla-
tion of the Middle East to the S&P 500 has been less than 10%,
whereas global emerging markets are about 70% correlated with
the S&P 500. A second argument is valuation. It is not uncom-
mon to find high-quality companies in the Middle East and
Africa selling at multiples of 10 to 12 times earnings, depsite
excellent long-term growth prospects.
Source: Prophet.net

Philippine Long Distance Telecom

Philippines, telecom BUY
If China is Asia’s ultimate growth story, the Philippines must surely qualify as the region’s biggest turnaround story. Long
plagued by political instability and disastrous economic policies, the Philippines is finally getting its act together. President
Gloria Macapagal Arroyo, an economist by training, has taken a series of bold steps to overhaul the country’s economy since
her election in 2004. By closing egregious tax loopholes and introducing a sales tax, Arroyo has helped bolster the country’s
finances. Economists expect GDP growth of nearly 7% this year and foreign investment capital is pouring into the country.
Inflation is well below 3% and the country is running a current account surplus of close to 6% of GDP. Once considered the
“sick man of Asia”, the Philippines now looks surprisingly robust. Philippines Long Distance Telecom (nyse: PHI), which
trades on the New York Stock Exchange, is one of the easiest ways for investors to get broad exposure to the local economy. But
don’t be thrown off by the “long distance” part of the name.
Philippine Long Distance (NYSE: PHI, $57) The company provides a full range of telecom services, and is
the leading provider of wireless telecom services in the
Philippines with nearly a 60% market share. Its mobile sub-
sidiary Smart Communications has nearly 30 million mobile
subscribers.
At a recent $57, PHI is trading at 11 times estimated 2009
earnings and less than 7 times EBITDA. Investors in PHI also
enjoy a dividend yield of more than 5% as an added bonus.
Wireless penetration rates in the Philippines are among the
lowest in Asia, suggesting considerable room for future growth
before the market becomes saturated. Roughly half of the
Philippine population owns a mobile phone, compared with
penetration levels of more than 90% in countries like Singapore
and South Korea. There’s an even bigger opportunity for PHI’s
broadband business, which accounts for just 5% of the compa-
ny’s revenue at the moment. PHI has just 500,000 broadband
Source: Prophet.net customers, in a nation of 90 million people.

3
Wimm-Bill-Dann Foods
Russia, Food and Dairy Products BUY
Winston Churchill’s famous description of Russia as a “riddle, wrapped in a mystery, inside an enigma” rings hauntingly
true today. The events in Georgia are a grim reminder that political risk cannot be ignored when investing in emerging mar-
kets. But as risky as Russia may seem in this respect, investors have been rewarded for accepting those risks. In the past ten
years, Russian stocks have risen more than 1,000%. Obviously it wasn’t something to bet your life savings on, but for a small
part of your portfolio it was worth taking a calculated risk. There is no question that Russia can be a difficult, indeed danger-
ous, place to do business. And the situation in Georgia is heartbreaking from a humanitarian and diplomatic perspective. But
those are not reasons to avoid all Russian stocks. Investors who focus only on the bad news coming out of Russia are missing
out on some high-quality companies with excellent growth opportunities.
Wimm-Bill-Dann Foods (nyse: WBD) is a case in point. In
Wimm-Bill-Dann (NYSE: WBD, $xx) a research report in March, the Boston Consulting Group
named Wimm-Bill-Dann Foods (nyse: WBD) as one of just
three Russian companies on an exclusive list of “Local
Dynamos.” BCG’s list includes emerging market companies
with a dominant presence in their respective markets, and a
history of successfully competing head-to-head against much
bigger multinational rivals.
WBD is Russia’s largest food and beverage company. It has
a whopping 76% market share for dairy products like milk
and yogurt. It is the #3 player in beverages, mainly fruit juices,
and it has the #1 market share for baby food in Russia. In
developed markets, selling baby food and fruit juice is a
mature, if not mundane business. But in Russia, these can still
be considered relatively attractive growth opportunities.
Last year, WBD’s full-year revenue rose 38% to $2.4 billion.
EBITDA, also up 38%, came in at $301 million. Net income
Source: Prophet.net for the year was $140 million, a 29% increase. The momentum
continued into the first quarter of 2008, with revenue up 35%,
driven by a +67% surge in baby food sales. Despite good fun-
damental performance, shares of WBD are off nearly 50% since January. Concerns about high prices for milk, WBD’s most
important ingredient, and the conflict in Georgia have weighed heavily on the stock. While I can’t predict commodity prices,
and I certainly can’t predict what the Kremlin will do next, I’m pretty confident that demand for WBD’s products will remain
strong for many years to come. It’s not often that you find a company delivering nearly 40% growth in a low-tech business
like baby food. In my mind, the long run opportunity in WBD outweighs the short-term panic over Georgia.

Cellcom Israel
Israel, Mobile Communications BUY
As is the case with most countries in the Middle East, Israel rarely comes up in discussions of global “safe havens.” But so
far this year, Israel has been a pretty good place to hide from Wall Street’s woes. Israel is one of the few markets in the world
that is in positive territory since the start of the year. Israel is also a unique case in the sense that it straddles the increasingly
hazy line between “developed” and “emerging” markets. The world according to MSCI—the mavens who calculate the most
widely used set of global indexes—says that Israel is an emerging market, although it is being considered for an upgrade, pos-
sibly next year. Rival index provider FTSE takes a somewhat more enlightened view, putting Israel in the developed market
column, but that decision was made only last year. Whatever the index purveyors may say, it’s clear that a nation with nearly
$30,000 per-capita GDP and dozens of world-class technology firms doesn’t quite belong in the same bucket as Sri Lanka or
Colombia. Remember, this is the same place where Warren Buffett made one of his biggest foreign acquisitions, the $4 billion
purchase of Iscar Metalworking. Investors like Buffett know that labels like “emerging” or “developed” should never stand in
the way of a great opportunity. Putting stereotypes about risk aside, Israel offers a lot of interesting opportunities, even for
fairly conservative investors. Cellcom Israel (nyse: CEL) is a prime example. The company is Israel’s largest mobile phone
service provider, with sales of $1.6 billion in 2007. Since February 2007, the company has had a dual listing on both the New
York and Tel Aviv stock exchanges. Discount Investment Corp. Ltd., one of Israel’s largest business groups, owns just over 50%
of the company. With 3.1 million subscribers, Cellcom has a 34% share of Israel’s mobile telecom services market. Roughly
three-quarters of Cellcom’s subscribers are individuals, and the remaining 25% are corporate customers. Israel’s mobile
4
 Cellcom Israel (NYSE: CEL, $13) telecom market is fairly well developed, with a penetration
rate almost 125%. In other words, there are more than 9 mil-
lion mobile phone accounts for a population of 7.2 million
people. Furthermore, spending on telecom services in Israel
accounts for 4.4% of GDP. That’s a higher proportion than
even the U.S. and Europe.
But here’s the strange part. Despite the relative maturity of
the industry, Israeli mobile phone users spend the bulk of
their money on “voice” services, or plain old phone
calls.Value-added content (more expensive stuff like messag-
ing, e-mail, ringtones, etc.) accounts for less than 10% of
Cellcom’s revenue. In Europe, the norm is closer to 20%. As a
result, Cellcom’s Average Revenue Per User (ARPU) runs
about $40 per month versus more than $50 in European mar-
kets with similar levels of mobile phone usage. Part of this is
due to Cellcom’s history as a low-cost alternative to other car-
Source: Prophet.net ries. Cellcom was also somewhat late in rolling out these serv-
ices. But that’s changing. Cellcom’s content-related revenue
surged nearly 50% last year, albeit from a low base. This was in part due to a marketing strategy that draws heavily on
Cellcom’s position as the leading provider of music-related content. With EBITDA of $550 million in 2007— a 35% margin—
Cellcom throws off tons of cash. It has also done a good job keeping expenses under control. And at less than 12 times earn-
ings, and less than 8 times EBITDA, the valuation looks very reasonable.

Forbes International Investment Report advice. There is no guarantee that companies mentioned in this
Published monthly by Forbes Inc. newsletter will produce profits or that they will equal past perform-
60 Fifth Avenue, New York, NY 10011 ance. Although all content is derived from sources and data believed to
Copyright 2007 by Forbes Inc. be reliable, accuracy cannot be guaranteed.
Editor: John H. Christy III, CFA
Price data is provided for reference purposes only. Some stocks, especially
Forbes Newsletter Group those that trade over-the-counter, may trade at wider than average bid-
Vice President and Editor: Matthew Schifrin ask spreads due to limited liquidity. Prices shown herein reflect the best
available information at the time of publication, but their accuracy can-
To subscribe on the Web visit Forbes.com Investment Newsletters not be guaranteed.
( www.forbesnewsletters.com) or call 1-877-733-7876.
Editorial e-mail: jchristy@forbes.net Members of the staff of Forbes International Investment Report and their
families may hold positions in some or all of the stocks listed and dis-
Forbes International Investment Report is not a market timing service cussed in this publication.
nor an actual portfolio. Our model portfolios are shown purely for infor-
mational purposes and do not constitute personalized investment

o Yes, sign me up for a one-year subscription to Forbes International Investment Report. I understand that this newsletter will be sent
to me via email only.
o Enclosed is my check, or money order for $195, payable to Forbes, or charge my o Visa o Mastercard o American Express.
Your satisfaction is 100% guaranteed. If you're not happy with your subscription for any reason, just cancel and receive
a refund on the balance of your subscription term*. No questions asked. (*monthly subscriptions not eligible)
o I would prefer to pay $24.95 per month charged to my credit card.
Name ______________________________________________ Card Number ____________________________________________
Title _______________________________________________ Expiration Date __________________________________________
Company ___________________________________________ Signature _______________________________________________

Address ____________________________________________
To place an order go online to www.forbesnewsletters.com
City,State & Zip _____________________________________
or call 1-877-733-7876 or fax this page to (212) 367-3371
Telephone __________________ Fax ____________________
Email address (required) ___________________________________ To order by mail, send completed order form to: Sian Evans, Forbes Newsletter
Group, 90 5th Avenue, 4th floor, New York, NY 10011