Editor’s Note: As a special feature this week, we’re running an interview that Investing Daily editorial director John Bishop recently conducted with Dimitre Genov, co-manager of Artio Global Equity (JGEIX, 800-387-6977). In the interview, Genov provides his views on the European debt crisis, some tips for selecting foreign stocks, and discusses some of his fund’s most compelling holdings. Our usual “What’s New” and “Portfolio Roundup” features appear immediately following the interview. –Benjamin Shepherd

What risk does the turmoil in Europe pose to the global economy?

We’re dealing with a structural problem in Europe as some countries in the southern part of the continent grapple with large debt burdens. These countries, most recently Greece, have chosen to deal with these problems with austerity measures. Unfortunately this approach hurts the local economy because it requires higher taxes or lower wages and leads to asset inflation. The European Central Bank and the International Monetary Fund extended Greece a line of credit recently, so they kicked the can down the road for a few months. But this is not a permanent solution for Greece.

Ultimately there will be some form of restructuring, whether it’s an extension of maturities, a reduction in the interest payments or a reduction in principal repayment. European politicians are trying to buy time. They want the region’s banks to strengthen enough to withstand a potential reduction in the value of Greek debt. They want these economies to strengthen so they can withstand austerity packages.

Much effort has been expended to maintain the euro and the eurozone. But if countries such as Greece, Ireland or Portugal cannot deal with their excesses through austerity or increase their competitiveness through growth, there will be a mechanism that will allow them to exit the EU. That will certainly lead to inflation in these countries and rapid devaluation of their new local currencies.

The global markets are interlinked. Events in Greece have an impact on European banks, which also affect US banks and the US economy. A large portion of the economy in Asia is export-driven, and Europe is an important trading partner with many Asian countries. If European growth slows, that will certainly affect Asia’s export-oriented economies.

How should investors navigate this treacherous investment climate?

Governments in the developed world are overextended, and potential austerity measures could slow economic growth. Developed-world economies will muddle through at best. Our focus is mostly on the emerging markets, particularly in Asia.

This is hardly an undiscovered trend; emerging markets have performed strongly for the past decade. In 2000, emerging markets represented 20 percent of global gross domestic product (GDP), and that figure rose to 35 percent by 2010. Emerging markets are expected to represent 55 percent of global GDP by 2030. There will be ups and downs, but from a structural standpoint, emerging-market governments are underleveraged and there’s significant opportunity to boost domestic consumption in these countries.

What attributes should investors look for when selecting a foreign stock?

Investors should look for companies with exposure to these growth markets. We seek companies that are market leaders because once a company starts to gain market share that process often lasts several quarters, or even longer. By the same token, we avoid companies that are losing market share. We want to see companies with strong balance sheets and management with a vision, whether that’s introducing new products, focusing on core businesses or returning capital to investors.

Hang Lung Properties (Hong Kong: 0101) is a leading owner and operator of shopping malls and office complexes in Hong Kong and China. The company emerged as a major player in the Hong Kong residential and office market in the 1960s, but management early on had the vision to move into China. The firm sold some of its mature Hong Kong properties in the late 1990s and bought land in top-tier Chinese cities such as Shanghai. Hang Lung has built premier shopping malls and office centers in key markets. Many of these properties are fully rented to premier tenants at rates much higher than market reds. The rental contracts are also tied to tenants’ revenue; as revenues increase, rents increase as well. It’s effectively a play on rising Chinese consumer spending.

It’s very rare to find a real estate company that doesn’t have leverage. Usually real estate managers and owners lever up and buy land. This company has net cash on its balance sheet. It raised money in an offering last year and has assets in Hong Kong that it can use to buy land and develop premier retail properties. Hang Lung is looking to buy land in second- and third-tier Chinese cities where retail spending is on the rise. Management has identified 75 cities that are potentially fertile ground for expansion. 

By owning shares of Hang Lung, we effectively own hard assets without leverage. These assets are denominated in renminbi. If you believe the Chinese currency is undervalued, then the value of these assets will eventually rise, providing another layer of downside protection.

We like developed-world companies that export to emerging markets. For example, our portfolio has been underweight Japan, which has benefited our performance over the last several years. But our remaining Japanese holdings participate in emerging-market growth through exports. Komatsu (Japan: 6301) sells construction and mining machinery and truck equipment. The company operates on a global scale and a sizable portion of their exports go to China and emerging markets, where the mining and construction industries are booming.

Unicharm Corp (Japan: 8113) makes diapers for children and adults, about 20 percent of which are exported, mostly to China. Investors often complain that Japanese managers don’t behave like owners. They pile cash on the balance sheet rather than buying back stock or paying dividends. Unicharm’s management owns significant shares of the company, so their interests are aligned with shareholders. The company has demonstrated an ability to increase value for investors.

You also own sizable stakes in Russian banks. What’s your investment case for Russian banks?

Valuations in Russia are very attractive, particularly for consumer-oriented names. For example, Russian banks trade at roughly 1.5 times price-to-book, making them attractively valued compared to similar names in emerging markets. The penetration rate of retail deposits in Russia is about 40 percent, which is quite low compared to other countries.

Additionally, one bank, Sberbank Rossii (Russia: SBER03), controls about half of the country’s deposits. Russia’s banking sector is fairly consolidated, which provides additional opportunities for mergers and acquisitions. This consolidation allows large players such as Sberbank to run a more profitable business—there’s less competition and scale is important in the banking industry. Unlike Western banks that run complex trading operations, Sberbank is primarily engaged in traditional banking services, which mitigates the risk somewhat.

Although Russia’s economy was hit severely in 2009, before that the country’s GDP had grown at about 4 to 5 percent each year. Unemployment is fairly low at about 6 percent. Russian credit default swaps indicate that bond investors are less worried about a Russian default than a default in Spain.

There’s some political risk to investing in Russia, which is one of the reasons that valuations are so low. Liquidity can also be a problem. Corporate governance represents another risk to investors. Minority investors aren’t always treated fairly, though some companies are better than others. Sberbank is partly owned by the Russian state, so an investment in Sberbank isn’t without risk, but the valuation and opportunities offered by this investment offset that risk.

What’s New

With August producing only nine new exchange-traded funds (ETFs), September has set a raging pace with 34 new ETFs launched so far.

PowerShares Fundamental Investment Grade Corporate Bond (NYSE: PFIG) is an unusual corporate bond ETF because its index is weighted according to fundamental data such as company size, sales, cash flow and book value, rather than float size. Of course, such data are far more relevant than float in determining a firm’s ability to service its debt. This approach also helps the ETF avoid value traps among investment-grade corporate bonds. The ETF also sports a low 0.22 percent expense ratio.

RBS Oil Trendpilot ETN (NYSE: TWTI) takes a unique approach to tracking the oil market. The ETF tracks the 100-day simple moving average of its benchmark, the RBS 12-Month Oil Total Return Index–consisting of the current month’s NYMEX West Texas Intermediate (WTI) futures contract as well as the futures contracts for the 11 subsequent months. If the index closes below the moving average for five consecutive trading days, the ETF shifts its portfolio  to cash. Conversely, if the index closes above its moving average for five consecutive trading days, the ETF shifts its portfolio back to being fully invested. As a result, the fund won’t be a proxy for the spot price of WTI, but its longer-term approach will follow the general trend of oil prices while reducing volatility from shorter-term price distortions. The fund will charge a mixed expense ratio of 1.10 percent when tracking its benchmark and 0.50 percent when in cash.

The final two new launches last week came courtesy of UBS Global Asset Management and its ETRACS line of exchange-traded notes.

ETRACS ISE Solid State Drive Index ETN (NYSE: SSDD) and ETRACS Monthly 2X Leveraged ISE Solid State Drive Index ETN (NYSE: SSDL) track an index comprised of firms involved in the manufacture of solid state drives (SSD) and their components. Solid state drives, which store data on microchips and have no moving parts, have become increasingly popular due to their higher storage capacities, greater reliability and faster retrieval times relative to traditional hard drives. Demand for SSDs has surged due to the popularity of laptop computers, as  SSDs are less likely to be damaged if you drop or jostle your machine.

While the 0.65 percent expense ratios charged by both funds are reasonable, their narrow focus is unlikely to gain much traction among investors.

Portfolio Roundup

The Global ETF Profits Model Portfolio’s 0.8 percent loss over the trailing week marked a significant underperformance relative to our two major benchmarks. The S&P 500 gained 2.5 percent, while the MSCI EAFE Index rose 2.4 percent. Both benchmarks rose on news reports that a consortium of global central banks are moving to provide liquidity to European banking institutions, while the US Federal Reserve is widely expected to intervene once more in the US bond market.

• The Federal Open Market Committee is expected to announce that it will launch “Operation Twist” later today. The Federal Reserve plans to sell shorter-dated Treasury bonds and use the proceeds to purchase longer-dated Treasuries in a bid to drive down yields at the long end of the curve. The move is aimed at lowering mortgage rates and encouraging greater business investment since capitalization rates should become more attractive. Despite sitting at the pivot point of the curve, a launch of Operation Twist should be bullish for iShares Barclays 3-7 Year Treasury Bond (NYSE: IEI), which should benefit from falling yields. Continue buying iShares Barclays 3-7 Year Treasury Bond at current prices.

If you enjoyed this week’s featured interview, you’ll find more conversations with fund managers along with picks from their top-performing portfolios in Louis Rukeyser’s Wall Street…

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