An Alternative Way to Capture Emerging Market Growth

Many countries outside the United States operate state-controlled companies. Most are giant behemoths, employing millions of people between them. These companies – among the world’s largest corporations – are primarily in the banking and energy sectors. Some, like the giant oil and gas company, Saudi Aramco, aren’t open to investors at all. But many are. Some fund managers shun these companies. With the governments that control them wielding various degrees of power over their daily operations, shareholder interests aren’t always viewed as a top priority. But some managers view them as proxies for the growth of the emerging market countries in which they operate. Many are huge “cash cows,” throwing off billions in profits each year. Some emerging market funds have some of these companies as core holdings in their portfolios. Let’s take a look at five you might want to consider adding to yours. Not too surprisingly, at least to me, four of them are energy companies. Monster Oil The largest is PetroChina Company Limited (NYSE: PTR). It’s the publicly listed arm of China’s state-owned oil monolith. It’s the biggest of the Chinese oil companies, and it employs over 500,000 workers. It’s the classic state puppet, with 86 percent of it owned by China National Petroleum Corporation (CNPC). CNPC controls its management, elects its board of directors, and decides on the amount and timing of any dividend payments. But PetroChina is widely viewed as the proxy for China’s oil and natural gas sector. It holds sixth place in the Forbes listing of the world’s largest listed companies. PetroChina is expanding rapidly, and is actively seeking acquisitions and investments in oil around the globe. There’s plenty of upside here, especially as car sales continue to explode in China. Monster Bank Our second state-owned monster is a bank. But not just any bank: it’s the Industrial and Commercial Bank of China (HKG: 1398). Traded on the Hong Kong and Shanghai exchanges, ICBC is more commonly known is the largest of the four big Chinese banks. Holding down the seventh spot on Forbes‘ list, ICBC employs 387,000 people. It has a staggering 440 million holders of credit and debit cards. Investment managers are split when it comes to investing in Chinese Banks. Jim Chanos, the billionaire short-seller, told Bloomberg News a few weeks ago that: “The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. The banking system in China is extremely fragile.” Chanos is shorting the Agricultural Bank of China. Others aren’t as bearish as Chanos, and ICBC, China Construction Bank Corporation (HKG: 0939) and other large Chinese Banks are held in a number of mutual funds. Brazilian Giant From the subhead, you’ve probably guessed the third company is Petroleo Brasileiro SA (NYSE: PBR), more commonly known as Petrobras. This giant South American oil and gas exploration and production company is the world’s deep-water expert. It has to be, since that’s where most of its oil and natural gas deposits are located. Last year, Petrobras launched the biggest stock issuance in the history of the world, raising $70 billion in the process. It plans to use the capital to fund its $250-billion offshore oil and natural gas exploration and development program. The company employs about 77,000 and by value represents about 10 percent of the Brazilian Stock exchange (the Bovespa). It clocks in at number nine on the Forbes list. The true extent of its offshore reserves are really an unknown, but are estimated somewhere between 50 and 500 billion barrels. While the Brazilian government owns 48 percent of the Brazilian giant’s common stock, it retains 64 percent of the company’s voting stock. Petrobras’ profits have suffered in recent years, primarily due to currency volatility. Despite the “managerial autonomy” the government insists that Petrobras has, it’s sued to generate jobs and to control energy prices within Brazil. Nonetheless, Petrobras could eventually rival Saudi Arabia in overall oil output in as little as 10 to 15 years. It bears watching. The King of Natural Gas This company has often been described as a “state unto itself.” It’s Russia’s Gazprom OAO (PINK: OGZPY), the largest company in the country. This state-run monopoly owns the largest gas transportation system in the world, supplying natural gas to Russia. European countries have become increasingly reliant on it, too. Employing over 400,000 workers, Gazprom accounts for over 80 percent of Russia’s natural gas production, and about 10 percent of its economic growth. Given its gas monopoly status, and its 50.002 percent control by the Russian government, Gazprom has been the focus of political concern of the countries it sells to. The central government, through its “representatives” controls investments, financial plans, and cash flows. They also control the valves that supply gas to Europe. Back on January 1, 2006 in one of the numerous natural gas price disputes with the Ukraine, Europe was shut off from Russian gas for three days. Gazprom is 15 on the Forbes list, and is a mainstay of funds that focus on the BRIC nations, emerging market countries (particularly European ones), and Russia. Gazprom will figure prominently in the world’s supply of natural gas, and will soon be one of the largest exporters of liquefied natural gas (LNG). China and Energy… Again The fifth company on our list is another Chinese energy giant. Sinopec Shanghai Petrochemical Co. (NYSE: SHI) is also engaged in the petroleum and chemical industries. The company owns and operates over 30,000 gas stations in China. That’s more than BP plc (NYSE: BP) has worldwide. It’s 55 percent owned by the state-owned Sinopec Group. Employing over 400,000 people, Sinopec owns China’s best oil and petrochemical assets. It – like PetroChina – is seen as a great play on China’s seemingly endlessly growing demand for energy. The company is also branching out across the globe. Its most recent play was taking a 30-percent stake in the Brazilian arm of Galp, a Portuguese oil company. So there you have five of the largest state-owned companies in the world. If you have an appetite for risk, and believe oil is going up (it is and will continue to do so), then four of them are companies you could consider taking a small stake in. I’m with Jim Chanos though, in steering clear on ICBC. Time will tell, but China’s banking system could be the next domino to fall. Good investing, David Fessler

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