The Sleuth
Investing Ahead of $90 Trillion -- An Interview with an Emerging Markets Expert
March 17, 2006

Horacio Marquez is one of the most brilliant investment advisors I’ve ever met. He is the editor of Money Map Advantage, an investment newsletter. He is also an Oxford Club investment panelist. Apart from that, Horacio is a partner in an exclusive hedge fund dealing in Chinese equities, fixed income and derivatives.

Being in the forefront of the international investment scene, Horacio follows global macroeconomics and interacts with institutional investors. All his experience shows through in his portfolio. Subscribers of his Money Map Advantage newsletter have seen gains north of 30% in the last 7 months. Horacio’s Spanish language newsletter, Club Oxford, retuned over 50% last year.

I chatted with Horacio this morning while taking a break from the Investment U conference at Del Ray Beach, Florida. We sat by the hotel pool and talked about international investing. I have all of Horacio’s ideas, forecasts and stock picks for you in this article.

Here is my interview with one of the most knowledgeable and experienced investment advisors...

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Sala: What asset classes do you like this year?

Horacio: Equities. I would invest in international equities without a doubt. Let me tell you why. Japan was in deflation for 10 years but is slowly emerging out of it.

In the US, consumers and corporations are saddled with an incredible amount of debt. The US went into a debt binge that was facilitated by government policies in the 90s. That caused a precipitated recession in 2001-02. Thankfully government policies of tax cuts and the Fed lowering interest rates to 40-year lows created an environment that allowed corporations to come out of the debt trap and recapitalize themselves. That allowed the economy to come out of a hole.

Europe is also in the pits -- extreme labor rigidities don’t allow economic growth beyond 2%. Europe is about to become what GM is now -- a dominant position in global economy that is melting away. The Europeans have recognized that -- they’re changing, they’re expanding the European Union and they’re accepting formerly communist block countries into the Union. By doing that they’re creating a much larger economic zone that allows for better scale economies. Also former communist block countries are much more capitalistic than old Europe. So those labor markets are putting pressure on other European markets. So jobs are shifting to emerging Europe.

Sala: So how do these changes taking place in the US, Japan and Europe bode for the stock market?

Horacio: Tremendously well. Take the emerging market of Eastern Europe. As capital flows from old Europe into these new eastern European economies for infrastructure, manufacturing and outsourcing -- GDP has grown, that too in a non-inflationary manner. This increasing GDP per capita and resultant increasing price of homes has caused a global financial deepening.

With stability in these emerging economies -- receiving constant inflows and investment -- trade flows are growing. Emerging market banks, therefore, are able to expand credit. This is a sustainable eco-boom. And the boom is generating demand for consumer goods and products from the US, Europe etc.

Sala: It’s almost like a shift of capital from Western to Eastern Europe.

Horacio: Yes, it’s investing ahead of $90 trillion in capital flows. It is estimated that about $90 trillion of foreign money will flow into emerging markets in the coming years.  Brazil, Russia, China and India are recipients of this money.

Sala: So how do we invest ahead of this $90 trillion?

Horacio: The $90 trillion is future capital that flows into various countries. It’s going to China; Morgan Stanley just announced that its investing a couple of billion dollars into China for real estate. Wal-Mart is expanding left and right in China. All Fortune 500 companies that are in manufacturing have shifted to China. So local companies benefit. Their profits will go through the sky.

Sala: Is China the largest recipient of this foreign money?

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Horacio: Right now it is. But energy investments in Russia are huge. A lot of foreign money will flow into Russia in the future. Already Conoco Phillips is buying 20% Luke Oil. Other major oil companies are in a global desperate search for oil.

Sala: Will Russia overtake China?

Horacio: No. China is more business friendly than Russia.

Sala: What emerging markets will you invest in right now?

Horacio: Brazil and Japan. Brazil benefits from the tremendous commodities boom. Japan is just coming off a multi-year low base.

Sala: What stocks do you like? And what stocks can we buy to invest ahead of that $90 trillion?

Horacio: Banking, banking and banking. Let me tell you why. The main disaster in the Japanese economy in past decade was deflation. And during a [period of] deflation, the banking sector is penalized. When you have reflation, as is happening in Japan now, banks benefit. Because they are highly leveraged, the yield curve steepens and banks are the first to benefit from the economic recovery.  And Japan is also befitting from Chinese growth.

My preferred pick is MitsubishiUFJ (MTU: NYSE). It’s a top Japanese bank. It’s the largest bank in the world by assets.

Investing in MTU right now is like investing in Citicorp in 1991. If you had bought Citicorp in 1991, by 2000 you would have made 32 times your original investment.

MTU is starting off at a lower base than citicorp in 1991, it could result in a 10 bagger. That’s a reasonable expectation.

If you have kids going to college, that’s how you pay for college -- MTU.

In Brazil, I like Banco Bradesco (BBD) & Uni Banco (UBB), both NYSE. As Brazil lowers interest rates, its economy accelerates and the yield curve steepens, net interest margins and top lines for Brazilian banks will increase tremendously. Both banks will accrue tremendous profits as a result of Brazil’s growth. To help things along, FDI and portfolio investments are extremely strong in Brazil right now.

So I’d buy MTU, BBD, UBB, put it in an IRA and sit tight. That’s how I’d invest ahead of the $90 trillion.

Regards,

Sala Kannan

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