Investing Implications from the G20 Summit

While much of the headline-grabbing numbers from the G20 communique were more hype than reality, there were some important parts that should benefit some specific stocks. As editor of Morningstar's InternationalInvestor newsletter I regularly provide commentary about important economic activity.

My Takeaways from the Summit
The G20 statement emphasized $1.1 trillion in spending to combat the global crisis, which was received well by stock markets around the world. However, most of this was money that had already been pledged. The United States and China had already announced very large stimulus packages. Even much of the $250 billion increase in funding for the International Monetary Fund (IMF) had already been committed. Japan had previously stated it would supply the IMF with $100 billion and the European Union had announced it would add EUR 75 billion (roughly $100 billion). So the true incremental addition was about $50 billion, though $40 billion of that was to come from China. While $40 billion is a relatively small amount versus China's currency reserves of around $2 trillion, it was an important gesture. Historically, China has claimed it is a poor country and can't be expected to participate in such global financings. While this is a true statement on a per capita basis, China has by far the largest reserves in the world.

This gesture, along with Chinese Central Bank governor Zhou Xiaochuan's comments about changing the world's global currency from the dollar to Special Drawing Rights (SDRs), demonstrates China's plans on being more vocal going forward. China is concerned that the U.S. will try to inflate its way out of all the debt it is accruing to tackle the economic crisis. As one of the largest holders of U.S. Treasuries, China is sending a signal to Washington to be careful.

One implication here is the West must get used to having less control over international bodies and that economic growth will be driven by countries outside the G8. The fact that these negotiations were made by the G20, a group that was only created about five years ago, instead of the G8 confirms the importance of emerging markets in driving global growth.

Beneficiaries
The creation of $250 billion worth of SDRs, which are to be used to help finance global trade, could help world trade at the margin. One item exacerbating the global recession has been banks pulling back on funding international trade due to their financial troubles. There have been companies with orders to ship goods but without the financing available to send them to the appropriate destination. Exports have plummeted worldwide, and this lack of financing has made it worse. This additional funding should reduce this bottleneck and help jump-start some trading, which should benefit exporters.

 UTi Worldwide 
One company that should benefit is UTi Worldwide. UTi is a freight forwarding and logistics company. It facilitates the transport of goods--typically from Asia to end markets in Europe or the U.S.--within the supply chain from producer to seller. UTi deals with the regulations and permits needed to transport goods from one country to another. Thanks to its relationships with truckers, railroads, and shippers in multiple countries, the company can consolidate shipments for travel, allowing for bulk cost savings. As the global recession has reduced trade, the need for UTi's services has declined. Thus, anything to improve trading conditions should benefit the firm.

 NII Holdings 
Another benefit of the SDR announcement is that it has further reduced the pressure on some emerging-market currencies. Since the end of March, the Brazilian real and Mexican peso have strengthened 7% and 8%, respectively, against the U.S. dollar. One company that will particularly benefit from the rebound in these currencies is NII Holdings.

NII is a niche provider of telecom services in Latin America. Mexico and Brazil comprise about 75% of its revenue, so it has been hurt by the weakness of the peso and real. The firm is the former Nextel International and runs Nextel's push-to-talk technology in several countries south of the border. However, as a former part of Nextel it is still headquartered in the U.S., which means it reports results in dollars. As the dollar strengthens, the revenues it generates in local currencies are worth less when translated into dollars. The strength of the dollar wiped out most of the firm's revenue growth in the fourth quarter of 2008 and again in the first quarter of 2009. However, as most costs are in local currencies, the only real hit is that the firm has a net debt position of about $600 million. Also hurting first-quarter results was slowing growth in Mexico, whose economy has been hurt because it relies heavily on exports to the U.S. as well as exports of oil, both of which are down dramatically.

However, we think these issues are temporary. NII's push-to-talk technology has been well-received by small businesses, and its technology is much better than that offered by its competitors. While these competitors are much larger than NII, they have struggled to offer a compelling alternative service. They have primarily focused on the prepaid phone market, which dominates Latin America. We see Brazil in particular providing significant growth opportunities for NII. In Mexico, Peru, and Argentina the firm holds about 30% of the postpaid phone market (long-term contracts such as are common in the U.S.), but only about 6% of the postpaid market in Brazil. This small penetration rate and the large size of the Brazilian market provide lots of room to grow. If you adjust for currency movements, the stock is trading for about 3 times enterprise value to earnings before interest, taxes, depreciation, and amortization. For a company growing revenue and subscribers by 15% per year, we think that's ridiculously cheap.

In addition to the monthly newsletter I write a weekly update on important macroeconomic news from around the world, which I send to subscribers. To learn more about the InternationalInvestor newsletter please see below.