Global Themes 2007

Globalisation causing urbanisation of China, India, and the oil rich nations (Dubai etc)

China

  • China plans to urbanise 400 million people over the next 10 years.
  • China currently builds a city the size of Brisbane every month.
  • In 2006 China was building 35 new airports, and 23 associated aviation structures.
  • China currently builds 40,000 kms of roads and bridges every year.(for example China plans to build a further 50 bridges over each of it’s main two rivers over the next 10 years).
  • China uses 48% of the world’s supply of cement, and 34% of the world’s steel supply. It also uses massive amounts of Copper(22%), Aluminum, Nickel , Zinc and now Oil, Gas, Coal and Uranium.
  • China opens one new coal powered power station every week.
  • Urbanisation driven by higher wages in the cities for factory, manufacturing and building construction work.

India

  • Massive infrastructure projects to improve their terrible road and rail systems. An example being Leighton Construction recently winning multimillion dollar contracts.
  • Urbinasition towards the big cities to work in IT or call centres.

Middle East

  • A US1 Trillion dollar construction boom feed by the profits from oil.
  • In Kuwait they are currently building a 1km high tower in “Silk City” , amidst a new $US 150 billion city.
  • The IMF forecasts the oil states to rack up a current account surplus in 2006 of
    US $480b (3x that of China)

Metal Inventories

  • On the London Metals Exchange (LME) most metals are at or near historic low levels, typically with less than 4 weeks supply and in some cases (Nickel) less that 3 days global supply.

Conclusion

  • Invest in resources especially those that are essential to the building or energy industry.(nb : Be careful to avoid carbon emitting fuels such as coal and to a lesser degree oil that will become costly due to the carbon credit system or may eventually be replaced by cleaner renewable fuels)
  • Remember the first phase of urbanisation is when building and resources boom , the next phase is when the service companies boom. So if you want to get in on the resources don’t wait another 5 years as you may be too late.
  • Currently the big diversified global miners are in my opinion very undervalued trading on PEs of 10 or less, due to fears of a commodity price collapse that will not occur whilst China and India continue to urbanise. Like all commodities we can expect to see fluctuations, and at time sharp corrections, but the trend over the next 5 to 10 years will most certainly be up.
  • Invest in emerging countries (BRIC –Brazil, Russia, India, China) , who are benefiting from world globalization and urbanisation.

Global Money Imbalance

  • USA owes 70% of the world’s debt, or it takes them 6% of the GDP just to meet the interest payments on their debt.
  • Australia and New Zealand have interest payments on their debts at 6% and 8% respectively. Not good , but at least the debt is not as large in dollars terms as the USA.
  • Japan has the largest foreign reserves ,followed by a lot of the oil nations ,and then off course the rapidly catching up China(currently the 5th largest surplus country in the world )

Conclusion

  • Avoid holding assets in $US, as the currency could easily collapse.
  • Hold Japanese Yen or Chinese Yuan or even Euro.
  • A strong benefit of investing unhedged in Asian shares should be an appreciation of your asset value due to currency appreciation.

Population Demographics

  • The world currently has 6.5 billion people.
  • By 2050 it will be approximately 9.1 billion people, that’s a massive increase in just 43 years.
  • USA, Europe, Japan, Australia has aging populations.
  • Asia, South America, and Africa have young populations.
  • Japan’s population is declining.

Conclusion

  • Invest in countries with growing, young populations, as this helps an economy to grow.
  • See urbanization theme. Invest in companies that provide aged care.
  • Be very cautious when investing in a country of declining population (eg : Japan)

Environmental Changes – Global Warming, Pollution and Water Shortages

  • See Al Gore’s movie “An Inconvenient Truth”. THIS IS A TRUE PROBLEM.
  • 2007 World Economic Forum in Davos highlighted the need to take action immediately, and in particular to rapidly reduce green house gases typically produced from car emissions (oil), coal fired power stations that produce electricity , any burning of carbon based fossil fuels.

If we don’t heed the above warnings we face :

  • Melting of the Antarctic and Artic ice caps which will lead to further heating of the planet , massive sea level rises (over 6 metres) ,and massive flood of the world’s low lying areas displacing millions of people from there home and causing the world maps to be rewritten.
  • Additionally we would see increasingly severe storms (eg: Cyclone Katrina) as well as droughts in other areas.
  • Not to mention the massive heat haze, smog pollutions , that will steadily kill millions from breathing in too much carbon dioxide. Just breathing in Mumbai India is equivalent to smoking 2.5 cigarettes per day.
  • Australia is currently experiencing a one in a thousand year drought.
  • In Beijing they typically have one severe dust storm every 30 years, in 2006 they had 12 .
  • In Mumbai in 2005, they had 37 inches of rain in one day killing thousands of people.
  • The 10 hottest years on record occurred in the last 14 years, causing many deaths.

Conclusion

  • Number one is that we accept that global warming, pollution and drought are major world problems that do exist, and will, if unchecked get a lot worse.
  • 2007 should finally see heightened awareness on these issues and politicians campaigning to address these problems, leading to steady change.
  • Invest cautiously in fossil fuel companies such as coal and oil companies. They will still make money, but will find increasing cost pressures by governments penalizing there emissions, and alternative fuels becoming more cost effective.
  • Invest in renewable energy companies – Solar ,Wind , Biofuels, Geothermal, Hydro , but remember they will be long term investments that will take time to become technologically efficient and widely used. But make no mistake, they will be the future of energy for the world , which can be a highly profitable industry (just look at the US $40 billion Exon Mobil makes per year). There is already an Australian company planning to build a solar power station in Victoria which will power 445,000 homes.
  • Cleaner fuels and energy will do well – Natural Gas, Nuclear Power (arguably the most powerful and efficient energy of all, but what about the waste ? )
  • Invest in companies that produce hydrogen or electric (Toyota) cars. Hydrogen fuel stations are currently being developed in USA, Germany, Canada, Netherlands, Spain, Britain, Belgium, Singapore, Japan, and Iceland.
  • Invest in food and water producing companies.
  • Invest in companies or countries (eg : Amazon region) that own a lot of water or trees as they will become increasingly valuable for food and drinking as well as eco tourism.
  • Invest in companies that can make rain by shooting silver iodide crystals into the air as they do in China.
  • Invest in companies that make money from construction or running of mass transport systems such as rail and other infrastructure.

Technological advances

  • Internet to continue to become mainstream use for banking, shopping, research, travel etc
  • TV on your phone, TV on your computer , cheaper flat screen TVs
  • Robotics to continue to develop in Japan
  • More people to work from home , and choose to live in lifestyle locations
  • Voice Over Internet Protocol(VOIP) to erode telecoms profits.

Conclusion

Hi tech countries like Japan, Taiwan and Korea to continue to do well.

Interest Rates & World Growth

  • USA at 5.25% - Not likely to change much
  • Australia at 6.25% - Not likely to change much
  • Europe at around 2.5% - Should rise to catch up with USA and Australia
  • Japan at around 0.25% - Should rise

Conclusion

  • Avoid countries where rates are rising rapidly
  • If inflation (commodity prices don’t explode) expect only Japan and Europe to rise, and a fairly benign year for interest rates.
  • China, India and Vietnam to lead Asian growth.
  • USA growth to be muted due to a slow and overvalued housing market.
  • World growth close to it’s average at around 4.5% , provided no nasty surprises.

Terrorism and War in Iraq

Hopefully both resolve and we have a peaceful year. If we get further severe terrorism or wars then expect volatile investment markets.

Conclusion

If you invest in fair or undervalued markets your investment will recover after a negative sentiment event. It is always wise to have some funds in cash or fixed interest that can be used to buy in when markets are cheap.

Finally

It is recommended that you work with your adviser to discuss these issues and how they may affect your investment performance. As always High Net Worth Financial Advising recommends investing in only fair or undervalued asset classes, where there is a strong likelihood that the above themes may enhance investment returns.

Possible 2008 Themes

  • The Emerging middle class of China and Asia ready to spend
  • Solar power to save the world
  • Parts of South America and Africa begin to emerge

 

NB : The content of this newsletter does not constitute personal advice and is general in nature ,please see your adviser for personal advice suitable to your own needs and objectives.