Global Themes 2011

1) Euro Debt Crisis and GFC recovery

  • The likelihood of a second Global recession is currently quoted at around 20-25%.
  • The US is slowly recovering with GDP hovering around 2.5% pa growth, and Europe 1.5%pa growth. Both weak, but at least slowly improving we hope. China and India are doing well at 10.5% and 9.5%pa growth respectively. They have huge and rising internal demand due to the rising wealth of the middle class (see below).
  • Iceland’s currency collapsed and so might the Euro, or at least the strong countries of Europe such as Germany and France may wish to leave the Euro as they are being pulled down by having to give debt bailouts to the Southern European countries such as Greece and Italy. Soon it may include Ireland and England.
  • US debt is also a huge concern at about 14.5 trillion US dollars, and interest payments alone requiring a massive 14-15% of US GDP.

 

2) Globalisation causing urbanisation of China, India, the oil rich nations and Emerging Market countries
(as per 2007 and 2008 theme)


China

  • China plans to urbanize 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.
  • The Civil Aviation Administration of China (CAAC) said it was planning to build 97 airports across China by the year 2020.
  • Chinese airlines are expected to double their fleet over the next 5 years.
  • Chinese domestic airlines will fly 210 million passengers this year
  • 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 its main two rivers over the next 10 years.
  • China is building massive high speed rail where trains can travel at 431km/hr.
  • 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.
  • Urbanization is driven by higher wages in the cities for factory, manufacturing and building construction work.

India

  • 1.2 billion people, with a middle class of 300 million growing rapidly.
  • 54% of the population is under 25 years old.
  • The second fastest growing economy in the World at 8.5% pa only just behind China and predicted to overtake China soon as the world’s fastest growing economy.
  • USD 277 billion in foreign surplus reserves as of September 2009.
  • India’s domestic consumption as a percentage of GDP is the highest in the Asia Pacific region at 57% of GDP.
  • 44.5 million new mobile phone subscribers during the first quarter of 2009 at the height of the GFC.
  • The Indian economy is driven mostly by domestic consumption and hence its economy was barely affected by the GFC.
  • Booming IT sector, the number one call centre of the World.
  • Booming but not well known manufacturing sector with global companies such as Samsung, Hyundai, Suzuki, Panasonic, LG and Nokia all setting up huge factories in India.
  • Booming Steel and Resources industry headed up by Tata Group. A Global leader.
  • Tata Group’s Tata Motor now sells the world’s cheapest car the Tata Nano for USD 2,000.
  • The Indian Government is currently planning to spend USD 350 billion (YES billion) to upgrade and improve the countries poor infrastructure (roads, bridges, ports and railways).
  • By 2016 India is expected to be the world’s seventh largest car producer (currently eleventh).
  • By 2025 the Indian middle class population is expected to increase 10 fold with a 3 fold increase in household income.
  • Currently 361 shopping centers under construction
  • Massive growth in the aviation, power and tourism industries where they cannot meet consumer demand
  • “Bollywood” now a global force in movies after several global hits such as Slumdog Millionaire
  • Massive infrastructure projects to improve their terrible road and rail systems.
  • Urbanization towards the big cities to work in IT or call centers.

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 forecasted the oil states to rack up a current account surplus in 2006 of US $480b (3x that of China)
  • Other regions that are doing well and emerging include South East Asia, South America, Eastern Europe and Africa.
  • Make sure you don’t miss the emerging markets boom.

Emerging Markets (Asia, South America, Eastern Europe)

  • 2011 GDP forecast (IMF) for Asia is about 5.5%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 world’s 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).

 

3) Interest Rates & World Growth

  • USA at 0.25% - Likely to start to increase if recovery continues.
  • Australia at 4.75% - May increase a bit more due to the strength of the resources boom.
  • Europe at 1.0% - May gradually rise with recovery.
  • Japan at 0.10% - Should slowly rise, probably intentionally lag the world
  • World growth is forecast to grow in 2011 at around 3.5% (IMF forecast) whilst inflation pressures may build due to China and India’s relentless demand for commodities, not to mention food, and wage and currency increases in emerging markets.

 

4) Environmental Changes – Global Response

  • The 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, and 20% of all energy from renewable by 2020 Target, not yet ratified..
  • China to take a stronger role in moving the world to emission targets.
  • World moving to electric or hydrogen powered cars
  • 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 40 years.
  • There are 90 million new people in the world each year. Of course most of these are in the developing countries. Net increase (after deaths) of about 65 million per year.
  • Asia, South America, and Africa have young populations.
  • USA, Europe, UK, Japan, and Australia have aging populations.
  • Japan, Russia, Italy and Spain’s populations are declining.

In the above chart you can see that the growth in the number of people joining the work force in Australia starts to decline around 2006. And by 2010 has dropped quite significantly but it is still a positive. This is suggestive that (excluding immigration) there will be less demand for property and shares than there was previously and is generally weak for the economy, but still mildly positive. That is a slowdown in the growth of potential new consumers.

In Japan, we see the population working turns negative in 1994. This is a very bad demographic that coincided with terrible property and share performances in the 1990s and 2000s as you would expect reading this graph. Japan has one of the worst demographics in the world.
Japan has the opposite demographics to most of the booming emerging economies such as India, Philippines, and Indonesia. It has a declining population.
This is bad for business. Less people equal less business. Property prices and share prices have all been going down for two decades now. Japan is only being saved by its great car companies at present.

In USA, we see the demographics are not good either with the decline starting around 2005, and a significant weakness in growth from 2010 to 2025, and then the Latino effect to improve things after 2025.
Baby boomers in USA, Europe, UK, Japan, Canada and Australia are starting to retire. This is a major demographic group with a lot of money. Investments that will do well from this demographic should be travel and tourism, retirement services in health and finance, and unit developers as they downsize from the family home. Of course this may lead to an excess of family homes on the market. Excess supply will push prices down, as has just happened in the USA and UK.
In summary the past 30 years has seen rapidly declining birth rates in the developed western countries compared to high birth rates in the Emerging countries. Hence the differences in the various charts and one of the reasons I like investments in the Emerging markets.

In China, the demographics are not good also. Luckily for now, in China there are still about 20-40 million Chinese moving from the country to the city each year. But beware once this urbanisation stops, as the one child policy has ruined Chinese demographics.
After the fall of communism the Chinese began to rapidly urbanize their population of 1.3 billion people. This meant about 40 million people per year would move from the country to the city to get better paid work, typically in a factory or construction job. With 40 million new people in cities each year that causes a severe excess in demand and undersupply of housing and land.
So not surprisingly property prices in major Chinese cities have gone up tenfold in the past twenty years.
But as stated above, be a bit careful once the urbanization finishes in China, as China has an ageing population which is not good for share markets or property prices.

In India, demographics are peaking now but still reasonable to about 2025. Also they have a rapid urbanisation similar to China.
Here are a few facts to see why India is booming.
* 1.1 billion people, with a 300 million middle class growing rapidly.
* 54% of the population is under 25 years old.
* The second fastest growing economy in the World at 8.5% pa only just behind China. India is predicted to overtake China soon as the world’s fastest growing economy.

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 14.5% of the GDP just to meet the interest payments on their debt.
  • Australia has interest payments on its debts of 5% of GDP. Not good, but at least the debt is not as large in dollars terms as the USA.
  • China now has a staggering $US 2 Trillion of foreign reserves growing at around $US 250b pa.
  • The Oil Nations surplices are growing at around $US 450b pa

Conclusion

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

7) Technological advances and New Trends

  • Internet now reaches one third of all Chinese and growing very rapidly
  • 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.
  • Unlimited Txt messaging packages
  • Stem Cells—To repair the body tissues, such as damaged nerves, skin, bones, cartilage or blood vessels.
  • Online Shopping – Buy goods and services via the internet with huge discounts, delivered to your door. It is already being done by EBay, Amazon and many others. This is, and will be, huge!
  • Environment – Perhaps the most important new trend this decade is looking after the environment. Again companies and countries that lead the way in cleaning up and preventing pollution will do well.
  • Plastics made from Corn or other organic materials
  • Alternative energy to grow rapidly – Wind, Solar , Hydro and Geo-thermal etc
  • Electric cars are about to take over from petrol cars. Nissan Motors say they will have a fully electric car by 2010, and able to be sold globally by 2012.
    It will have a range of 160km, and can be charged at home via a plug in power point in 6 hours, or in 30 minutes using a plug in ‘rapid charge’. It will use the latest technology lithium-ion batteries, located like pavers under a car's floor.
  • Whilst this may take some years to unfold globally, I am sure you would be wiser to invest in a car company that makes electric cars rather than petrol cars. Think twice about purchasing a petrol car, it may soon be obsolete.

Conclusion

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

8) Global Conflicts

  • 2011 should see a total withdrawal of troops from Iraq. North Korea is looking very dangerous and a Korean conflict is likely. Trade and currency tensions exist between US and China.
  • Potential 2011 hot spots could also be Iran, Pakistan, and Afghanistan.

 

9) Global Population and GDP projections

Projections – An in depth look at Global Populations and Growth
Country Population rankings up to 2050 (thousands)

India is projected to be the most populous country on the planet by 2050 hitting a massive population of 1.572 trillion people. Closely followed by China with daylight third. India and China will make up about 1/3 of the global population of about 9.3 billion people. When you view the tables above and below you begin to realize why the BRIC and Next (N) 11 Emerging countries will become very important in the Global economy—led by India and China.

Projections – Country GDP rankings up to 2050 (billions of USD)

* European Union GDP, is shown for comparison, but not ranked.

Interestingly, but not surprisingly when you look at population growth, India is expected to be the largest improver, going from a GDP of a mere 469 billion USD in 2010 to a massive 27,803 billion USD by 2050. Again it reminds us of how important demographics are.
So by 2050 we should expect to have four economic superpowers- China, Europe, USA and India. The others will have fallen away to become insignificant.

 

10) The Resources and Soft Commodities Boom

The Resources Boom

When you look at the graph below you begin to release why the Resources boom is only just beginning. As a population gets to the $5,000 per capita pa income level and up to about $15,000, the consumption of key resources (especially Copper – see green line in graph below) increases exponentially. At first an individual can buy a bike, then a motor bike, then a car. Drive the car on a freeway/bridge or take the train to work. They also rent a unit, buy white goods, and buy a house. All of these things require increasing amounts of resources. Iron Ore and Coal are required to make steel. Aluminium for cars and windows, Copper for plumbing etc.

Looking at the massive number of people in the world just entering this $5,000-$15,000 (“middle class”) per capita pa income band, such as the Chinese (population 1.3 billion people) Indians (1.2b), Indonesians(240m), Filipinos(93m) etc, then you begin to realize that the resources boom will get a lot bigger and last many years to come. GDP per capita is $45,000 for USA, $4,000 for China, and $1,500 for India here in 2010, but it is rising very rapidly. Note that GDP per capita for China and India is deceptive as many people in the country earn virtual nothing so those in the cities have a GDP per capita a lot higher than the average. The graph would suggest Copper and Aluminium to be the best pick of all the resources.

In the next decade China expects to welcome 300 million to the “middle class”. India expects 300 million, Indonesia 60 million and Philippines 25 million. Adding in the other global developing economies and you can easily see one billion (1,000,000,000) or more people entering the so called middle class all within 10 years. Imagine then, trying to make an extra 1 billion motor bikes, washing machines etc, and the amount of resources that will be required. It is unprecedented in our history.

In conclusion, this graph strongly suggests that we are just at the tip of the iceberg as far as what will happen in the coming 10 years for Global Resource companies. Also the graph below confirms this with the projected continuation of the urbanization of Asia and then Africa. The boom has only just begun.

 

The Soft Commodities Boom

The main concept for investors here is that the world has more and more people each year and less and less arable land and water, upon which to grow food for the rising world population. See graph below.

Remember the world’s population is predicted to grow by 2.6 billion (2,600,000,000) in the next 40 years, or 65 million pa (by 2050 world population expected to be 9.1b). Additionally more land is required to produce beef and other protein foods which become more in demand as populations get richer. More grain needs to be produced to produce protein foods such as Chicken (2kgs protein required to get 1kg chicken), Pork (4kgs) and Beef (7kgs). So the demand for soft commodities and the companies that produce them etc will be driven by two key factors, - a rising number of mouths to feed and a shift upward towards more protein intense foods. This bodes well for soft commodities and the companies in the agricultural sector. See Graph below highlighting the booming demand that will soon come from the Emerging economies especially for grains such as wheat and corn. Imagine if we add the extra demand for corn if we make our plastics from corn.

 

Possible 2009 Themes

  • The Emerging middle class of China, India and Asia grow rapidly.
  • Renewable Energy continues to grow market share.
  • Parts of South America and Africa begin to emerge.
  • Resources and Soft Commodities become increasingly valuable.

 

NB : The content of this newsletter should not be relied on as advice.

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.