Home > These Two Emerging Markets Just Got A Lot More Enticing (GXG, EWY, EC, CAT, TSN)
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These Two Emerging Markets Just Got A Lot More Enticing (GXG, EWY, EC, CAT, TSN)

November 15th, 2011

Martin Hutchinson: With U.S. economic growth on the wane and the European Union (EU) on the brink of collapse, there’s never been a better time to increase your exposure to emerging markets.

And two fast-growing developing economies just became a lot more enticing.

I’m talking about Colombia and South Korea – both of which just signed free trade agreements (FTAs) with the United States.

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Both treaties date back to the last days of the Bush administration – when bilateral trade deals were fashionable – but had gotten hung up in Congress.

To some extent, free trade agreements merely deflect trade from other paths. However, since the EU has signed a trade deal with South Korea and is negotiating one with Colombia, there are both defensive and trade-building reasons for these deals.

South Korea is a trillion-dollar economy and one of the United States’ most important trading partners, with two-way trade totaling $74 billion in 2008. And Colombia’s potential as a trading partner is enhanced by its geographical position – close to both the East and West Coast U.S. markets.

Both countries are growing quite fast. In fact, Colombia is expected to clock growth of more than 5% in 2011 and 2012.

The Biggest Beneficiaries

The South Korean deal offers the most potential to U.S. exporters, as the deal is expected to add about $10 billion to U.S. exports and gross domestic product (GDP).

U.S. exporters of agricultural products, which are projected to double from their current $2.8 billion, will be the primary beneficiaries. However, U.S. auto manufacturers and banks will also have a chance to break into the market.

On the other side, Korean exporters of cars, trucks and computer equipment will benefit from better access to the U.S. market.

Colombia has a thriving agricultural sector, but U.S. meat exports should jump significantly. Pork exports, for example, are forecast to grow 72%. IT companies and chemicals producers also will gain improved access to the Colombian market. But the greatest potential will be unlocked in the heavy equipment sector, as Colombia races to develop its mineral resources.

Reduced sanitary inspection barriers will improve the trade flow both ways. That will increase demand for Colombian coffee and flowers. But the big breakthrough will be in Colombia’s energy sector, as the country’s oil is an increasingly important export to the United States.

Now let’s take a look at some of the specific companies that will cash in on these deals.

Of the big U.S. companies that stand to gain from the new FTAs, Tyson Foods Inc. (NYSE:TSN) and Caterpillar Inc. (NYSE:CAT) are in the most promising position.

Tyson Foods is the largest U.S. poultry producer. It also owns the largest beef producer, Iowa Beef Producers. Tyson is a $7 billion company with a price/earnings (P/E) ratio of 8.8, which means it’s reasonably well valued.

Caterpillar should benefit, as well – especially from increased demand from Colombia’s extraction sectors. Of course, it’s a $54 billion company trading at 14-times earnings, so it’s pricier.

Playing foreign companies is a little trickier, but there are still some good options available to U.S. investors.

Samsung Electronics Ltd. Co. (PINK:SSNLF) and Hyundai Motor Co. (PINK:HYMTF), the two most obvious Korean beneficiaries of the FTA, are quoted only on the Pink Sheets and trade very thinly.

For that reason, I think you’re better off with the iShares MSCI South Korea Index Fund (NYSEARCA:EWY). It has a $3.5 billion capitalization and a P/E of 6.76. This exchange-traded fund (ETF) should do well considering the recently-signed FTA is expected to give a 0.6% annual bump to Korea’s economic growth. South Korea recently signed an FTA with the EU, as well.

As far as Colombia goes, the most obvious beneficiary is Ecopetrol SA (NYSE:EC). The Bogota-based oil company is expanding rapidly as a result of Colombia’s very attractive offshore and onshore oil deposits. It has a market cap of $84 billion and a P/E of 12.

As with South Korea, this FTA should increase U.S. investment in Colombia and further speed the country’s already rapid growth. The largest ETF, the Global X FTSE Colombia 20 ETF (NYSEARCA:GXG) is thus a good bet. It has a market capitalization of $135 million and a P/E of 17.

There is one more company that will benefit, and it by far is the best choice for U.S. investors. It’s a big-time exporter that’s beginning to get a lot of attention from company insiders. And even though it’s strung together five consecutive profitable quarters, the stock remains relatively cheap.

However, I’m saving this one for Money Morning Private Briefing subscribers. If you’re already a member, then my in-depth analysis of this company was made available to you this morning. If not, then you can sign up to get this pick and access to dozens of others by clicking here.

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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