Global Themes 2008

1) US Recession and Global Credit Crisis

  • The likelihood of a US recession is currently quoted at around 40%.
  • If this occurs, chances are we will already have felt the worst effects by the time we realize it has occurred as two consecutive quarters of negative growth indicating a recession would be announced some time after the fact.
  • The US currently accounts for around 20% of world GDP based on purchasing price parity(ppp) or 28% of world GDP based on USD. However both China and India are contributing more in terms of growth of world GDP, so it is possible we will see the Emerging Economies not severely effected by a US recession. China exports to US account for only 12-20% of it’s exports and a US recession is thought to slow Chinese GDP from around 12% pa to 9-10%; with India expected to be less effected. This is because both China and India have huge and rising internal demand due to the rising wealth of the middle class (see below).

Conclusion

  • Keep some money in cash or safe fixed interest, at least 20% of your portfolio but ideally 40%.
  • Avoid US equities
  • Purchase equities in countries that will be relatively unaffected by the US slowdown – eg : Saudi Arabia, India, China
  • Don’t over borrow, fix in interest rates to reduce risks.

 

2) Globalisation causing urbanisation

China, India, the oil rich nations (Dubai etc) and Emerging Market countries (as per 2007 theme)


China

  • 2008 GDP forecast (IMF) at 10%pa
  • 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, and between 2008 and 2010 China plans to build a further 40 new airports.
  • 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 two new coal powered power stations every week. Urbanisation driven by higher wages in the cities for factory, manufacturing and building construction work.
  • In China a mobile phone is sold every 3 seconds, China Mobile adds over 5 million new customers every month.

India

  • 2008 GDP forecast (IMF) at 8.4%pa
  • Massive infrastructure projects to improve their terrible road and rail systems. An example being Leighton Construction recently winning multimillion dollar contracts.
  • India plans to spend USD 500 billion on infrastructure over the next 5 years.
  • Urbanisation towards the big cities to work in IT or call centres.
  • Hero Honda in India builds a new motor bike every 18 seconds.
  • 55% of the population is under 24 years old.

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.
  • 25% of the world’s cranes are currently situated on the strip between Dubai and Abu Dhabi.
  • The IMF forecasts the oil states to continue to rack up a current account surpluses in excess of US $500b pa. They will spend alot of this building their cities.

Emerging Markets (Asia, South America, Eastern Europe)

  • 2008 GDP forecast (IMF) for Asia is 4.9%pa, South America 4.5%, Eastern Europe 5.6%.
  • The UN estimates that the urban population of the emerging markets countries will grow at about the size of San Francisco per month for the next 25 years.
  • Emerging markets represent 80% of the worlds population,75% of the land mass,66% of foreign exchange reserves and 50% of world GDP ; yet account for only 7% of the MSCI global sharemarket capitalization.
  • By 2025 Emerging Markets are expected to account for two-thirds of world GDP (based on ppp).

Metal Inventories

  • On the London Metals Exchange (LME) most metals are still at quite low levels, typically with less than 26 weeks supply. In particular Zinc levels are very low, while Uranium demand is set to increase dramatically.

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 undervalued trading on PEs of 14 or less as the world still does not realize the magnitude of the two most populous nations (36% of world population) urbanizing at once. 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),Saudi Arabia, who are benefiting from world globalization and urbanisation.
  • Invest in Emerging Markets Infrastructure Funds

3) Interest Rates & World Growth

  • USA at 4.25% - Not likely to change much, may reduce if US heads into recession.
  • Australia at 6.75% - Not likely to change much, may slightly increase due to inflation pressures, or decrease if world growth slows dramatically.
  • Europe at 4.0% - Not likely to change much, may gradually catch up with USA and Australia
  • Japan at 0.50% - Should slowly rise, probably intentionally lag the world
  • World growth is forecast to slow slightly in 2008 to around 4.8% (IMF forecast) whilst inflation pressures remain due to China and India’s relentless demand for commodities, not to mention food and wage increases emerging globally.

Conclusion

  • Avoid countries where rates are rising rapidly or are very high (Turkey 15.75%, Brazil 11.25%, South Africa 11%).
  • China (Olympics in August), India, Saudi Arabia, and South America to lead growth.
  • USA growth to be around 1.9% (IMF forecast) or less (recession?) due to a slow and deflating housing market.
  • Invest in high growth regions of the world that are fairly or undervalued and with political stability.

4) Environmental Changes – Global Response

  • 2007 World Economic Forum in Bali 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.
  • 20% reduction in Greenhouse gases by 2020 Target hopefully to be ratified in 2008 or at least 20% of all energy from renewables by 2020.
  • China to take a stronger role in moving the world to emission targets. USA to hopefully ratify Kyoto after Bush leaves the White House.
  • Carbon Trading Schemes to become more mainstream.
  • Currently 441 Global Nuclear Power Plants, 27 under construction, with a further 80 in planning across the globe.
  • Massive increase in spend on Renewable Energy sector – Wind Energy is the most cost effective (UK to get 50% of their power generation from Wind power by 2020- mostly offshore wind farms). Saudi Arabia to build a trial solar powered city in the next decade.

Conclusion

  • Invest a small amount of your portfolio in renewable energy- Wind, Solar, Hydro, Geothermal, Tidal.
  • Invest in some Uranium companies.
  • Invest in companies that produce electric or hydrogen cars
  • Invest in food and water producing companies.
  • Invest in companies that make money from construction or running of mass transport systems such as rail and other infrastructure.
  • Be cautious with companies that produce coal or other dirty fuels.

5) 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.
  • India has 50% of it’s population under age 25 years old, they will lead world growth in one to two decades from now as China has an ageing population.

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)

6) 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.
  • China now has a staggering $US 1.5 Trillion of foreign reserves growing at around $US 250b pa.
  • Japan has the second largest foreign reserves, followed by a lot of the oil nations.
  • The Oil Nations surplices are growing at around $US 450b pa

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.

7) Technological advances

  • Internet(broadband) to continue to become mainstream use for banking, shopping, research, travel etc
  • TV on your phone, TV on your computer, cheaper flat screen TVs
  • Youtube, FaceBook, MySpace to continue to gain popularity especially as social networking sites.
  • More interactive games such as Nintentendo WII
  • 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, Korea and USA to continue to do well.

8) Global Conflicts

  • 2008 should see a gradual withdrawal of troops from Iraq with Australia and UK leading the way.
  • North Korea appears to be showing interest in joining the West.
  • Potential 2008 hot spots could be Iran, Pakistan, and Afghanistan.

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 2009 Themes

  • The Emerging middle class of China and Asia continue to spend
  • Renewable Energy to save the world
  • Parts of South America and Africa begin to emerge
  • China’s post Olympic slowdown

 

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.