BRIC giants: the next generation

Gazprom is Russia's equivalent of Petrobras and supplies about one-third of Western Europe's natural gas imports. It also accounts for roughly one-fifth of global production and manages to produce a net margin of over 30 per cent. Crucially many of its energy reserves are easier to access than the pre-salt reserves run by Petrobras and many analysts expect that Gazprom should be able to keep up a long term growth rate of close to 20 per cent – Petrobras is likely to struggle to get an equivalent growth rate of more than 10 per cent. Lukoil is much smaller than its Russian rival and is focused on developing Russia's huge oil reserves although it's also developing a large gas portfolio – Lukoil is also widely regarded as a more conservative company than Gazprom as it tries to build a future independent of the Russian government. Lukoil's main focus of operations is in Western Siberia.

On pure valuation grounds Petrobras looks much more expensive than its Russian peers trading at 21 times current earnings dropping to 10 times estimates for 2011. Petrobras is also likely to suffer from the after effects of the massive equity issuance, with an overhang of new shares likely to persist for many months if not years. Petrobras is also at risk of greater governmental interference in its fortunes and is likely to experience lower short term returns on equity as it ramps up its capital expenditure.

Vale, Bradesco and Itau

Otherwise known as Companhia Vale do Rio Doce or CVRD, is a huge mining company and the world's largest producer of iron ore, although the company is trying to reduce its dependence on the metal by investing in other industrial raw materials. Itau Unibanco is the largest non government-owned bank in Brazil and has been a particular beneficiary of Brazil's fast growing real estate sector where it's been pioneering long-term mortgages. Banco Bradesco is frequently cited as a possible target for a bid from a developed world bank, eager to snap up its large bank network in Brazil, the third biggest. Banco Bradesco also boasts a diverse range of banking services for Brazilian consumers, including insurance services, asset management, and pension plan management. The bank also issues credit cards and provides related services. On valuation terms Vale looks especially compelling although its management has a nasty habit of engaging in value destructive large M&A activity. On balance, though, its shares look compelling as it owns some of the world's most important strategic reserves and isn't especially expensive.

Movil and China Mobile

One set of companies directly benefits from the growing consumer class – the mobile telecoms companies. If investors are looking to buy into companies which directly benefit from growing local wealth, they should probably start first with Mexican giant America Movil and China Mobile.

America Movil has grown at an astonishing rate and has a presence in not only Mexico (where it boasts the number one position) but in 16 other countries in the Americas, and according to one estimate should have 220m wireless subscribers by the end of 2010, with both Colombia and Peru exhibiting especially vibrant growth. Mobile penetration rates are already over 100 per cent in Mexico and Brazil with some analysts putting the potential market at 130 per cent as many rural areas switch over to mobile as the main form of telecom, ignoring fixed line.

China Mobile or CHL is already the world's largest mobile carrier by subscribers, yet it's still managing to increase both subscribers and revenues. Its main rivals are China Unicom and China Telecom – all three companies are competing intensely for 3G revenues, with higher charging structures and average revenue rates per user. For both America Movil and China Mobile the key is data traffic – as consumers start to use their phones to access the internet both companies should be able to ride the 3G bonanza, undercutting fixed-line broadband operators and increasing average revenues per user. Crucially neither company looks especially expensive, given their growth rates and strong balance sheets – China Mobile is trading at 12.7 times current earnings compared to 16 at America Movil. Both companies also pay a fairly generous dividend which has been growing year on year.

China's Big Oil Plays

China's appetite for oil is growing at an astonishing rate. In the 10 years between 1999 and 2009 oil consumption in China increased by 93 per cent and the country now imports 55 per cent of its needs. This surging demand leaves the trio of oil companies dominating the industry in pole position – although each of the companies has its own distinctive features. PetroChina for instance is a part of the CNPC conglomerate, which in turn emerged out of the Ministry of Petroleum with a particular mandate to focus on exploration and production.

Sinopec (also known as China Petroleum & Chemical) has tended to concentrate on refining and transport, although it's now trying to diversify its revenue streams. Last but by no means least most western oil analysts rate CNOOC as the most enterprising of the three – it's never formally been part of the government although it's ultimately owned by a government organisation. CNOOC focuses on offshore oil and gas exploration and is regarded as the most Western of the oil giants – over the last three years normalised net income growth has been moving along at about 13 per cent per annum. In valuation terms PetroChina seems the cheapest of the three companies trading at 13 times current earnings – by 2011, if analysts estimates are hit, Sinopec could be the cheapest trading at just 7.8 times projected earnings. It's worth adding as a caveat though that many of the giant US and European oil companies – with their own extensive interests in the emerging markets – are trading at much cheaper ratings. Exxon Mobil, for instance, is trading at 12 times current earnings, although based on estimates for 2011 it appears more expensive at 10.5 times earnings. One last final note on these Chinese majors – American investor Ken Fisher recently flagged up PetroChina as a buy.

The generation after

Western investors might also want to keep a beady eye on the next generation of titans from the developing world. Three companies in particular stand out – Indian car manufacturer Tata Motors, Brazilian energy firm Centrais Eletricas Brasileiras (Eletrobras) and Chinese airline China Southern Airlines (ZNH). Tata snapped up the Jaguar Land Rover (JLR) group from Ford a few years back and is steadily building a portfolio of international brands to go alongside its market leading position in India, where it makes everything from lorries through to the revolutionary new Nano micro car.

Tata is still on the acquisition trail and recently snapped up an 80 per cent stake in an Italian design and engineering company called Trilix Srl. But it's in specialist segments where Tata's potential is huge – the JLR acquisition is now seen by many analysts as a brilliant deal allowing the Indian giant to snap up a global luxury brand at a fraction of the normal price. Sales of Jaguars in particular are going great guns in emerging markets like China but Tata isn't betting everything on high end cars alone. It'll soon launch its range of commercial trucks in the European markets opening up yet another front in its battle to become a global car giant.

Eletrobras is a Brazilian power giant focusing on electric power and generation – and an obvious play on surging power demand in Brazil. The utility has been aggressively raising money in recent months to expand its network, talking to Chain's state grid utility about building 1000 kilowatt transmission power lines as well as announcing plans to raise close to $4 billion via syndicated loans. Fitch recently upgraded Eletrobras's credit rating noting the company's conservative financial footing and strong cash flow generation.

Last but no means least, the future of aviation – not known for its immensely profitable companies – might be an outfit called China Southern Airlines. In reality the Chinese aviation market is a rigged market with a small number of state sponsored companies (which include China Southern) grabbing ever more business as the country's middle class learn to love the airplane. China Southern has been growing at an astonishing pace for the last few years, expanding its foreign operations into UK's Heathrow airport as well.

Megacap funds

Virtually all the major emerging markets funds – both actively managed or passive, index tracking – will have a sizeable exposure to the mega-caps discussed in this article. And there's one index tracking fund that specifically focuses its portfolio on an index called the FTSE BRIC 50 – this index tracks the 50 largest companies in the Brazil, Russia, India and China space. Details of the companies in this portfolio of EM stocks are in a table below as is its sector bias and country weighting. This exchange traded fund currently charges only 0.74 per cent to track the FTSE BRIC 50 index and is currently distributing a yield that's equivalent to 1.5 per cent per annum. The ticker for the fund is BRIC and the underlying index from FTSE is market capitalisation weighted ie the index will give a heavier weighting towards companies with a bigger market cap.

Top 10 holdings