Another Good Year?
BIG PICTURE - I'll start off the New Year by throwing some light on the global economy and predicting what the coming 12 months may bring. But first, a brief recap of the forecasts I made last January. Exactly a year ago, in the newsletter titled "The Rising Liquidity Wave", I argued that Year 2007 would prove to be yet another profitable year for assets. I made the case that commodities and emerging-markets would provide the best returns. And contrary to popular wisdom, I stated that even US stocks could surprise to the upside. Well, as it turns out, my assessment was correct and our preferred investment themes provided fantastic returns.
Over the year ahead, I believe that natural resources, emerging-markets (Brazil, Russia, India and China), Asian infrastructure companies and the US technology sector are likely to deliver exceptional returns. Yes, I am very aware that the current boom in stocks is already 5 years old and getting "long in the tooth" and this may deter many investors from participating in the bull-market. However, in my opinion, the global liquidity environment, easing interest-rates and low bond-yields still remain supportive of further advances in equities and commodities.
The bears may argue that the US economy is in a dire situation with the deflating housing bubble, the derivatives time-bomb, ongoing sub-prime crisis and credit crunch. According to these folks, all these factors will inevitably cause a slowdown in US consumption or a banking crisis, thereby creating a big headwind for the rest of the world. My own view is that this prognosis of the global economy is extremely US-centric, hence not reflective of the actual developments taking place today.
In order to obtain a true reading of our planet's pulse, it is important to note that the global economy is transforming rapidly with the balance of power shifting (yet again) from the West to the East. Both China and India are booming and so far, the much-advertised slowdown in the industrialised nations has not had any impact on these economies. It is interesting to note that Asia for many centuries was the world's most dynamic economic centre. With the advent of the Industrial Revolution in the UK, it declined in stature through the 1800's and early 1900's. However, thanks first to Japan and the Asian Tigers, and now to a revived China and India, it is poised to reclaim its title of the "Economic Heavyweight Champion of the world".
Commencing in 1960, Asia began its breakneck economic growth and over the next 35 years, the continent (excluding Japan) grew at an astonishing annualised real rate of 7.4% or nearly twice as fast as the global economy as a whole. During that period, China and the four Asian Tigers expanded at a stunning annual rate of 8.8%, doubling their economies every 8 years. As a result, by the end of 2005, emerging-Asia's share had already surged to 29% of world GDP on a purchasing power parity (PPP) basis, with China and India accounting for a staggering 20% of the world's economy. Now, assuming that both China and India continue to grow at an average annual rate of roughly 8% for the next 20 years, with neighbouring economies expanding by 7%, it is estimated that Asia would account for an astounding 50% of world GDP by 2030!
Needless to say that such rapid development will have a huge impact on the demand for natural resources. Already, China is the largest user of aluminium (25% of global consumption), copper (23% of global consumption), zinc and lead (both 30% of global consumption). And given the fact that the Chinese have recently unveiled massive programs to improve infrastructure (roadways, airports and seaports), you can begin to comprehend that in the years ahead, China will require a lot more industrial metals.
Now, some may dismiss my positive outlook by arguing that China's fate is ultimately dependent on the US economy, which is clearly slowing down. However, these skeptics should remember that today the US only accounts for roughly 20% of Chinese exports which are still rising (Figure 1). So, a decline in US consumption and the ensuing slowdown in its imports may not cause the Chinese economy to come to a screeching halt. Furthermore, it is worth noting that today, Japan, Europe and the US combined account for less than 50% of China's exports. In other words, due to globalisation and the integration of the world's economy, China now exports more to the developing nations and on top of this their market-share is still rising.
Figure 1: Chinese exports at a record-high!
Apart from China, a number of other Asian nations such as India, Vietnam and Thailand are also growing at a blistering pace and this should act as a shock absorber against any economic slowdown in the West. In other parts of the world, Brazil, Russia and a host of Middle-Eastern nations are becoming wealthier due to the commodities boom and I would argue that we are witnessing the biggest-ever synchronised economic expansion in the emerging markets.
The recent mini-crash in the markets was swift but let there be no doubt that Pilot Bernanke and his comrades are waging an all-out inflationary war on the imploding housing market and all this is not lost on precious metals. Seasoned investors are well aware that the central banks are committed to trashing their currencies due to competitive pressures - no nation wants a strong currency. Accordingly, the rich and famous are converting their paper savings to gold. After all, history is littered with several fiat, paper currencies which eventually became worthless due to debasement. And gold has always been the anchor during inflationary storms. Thus, it should not come as a surprise then that the king of metals is trading at a record-high.
I first started buying gold in 2001 when it was trading close to US$300 per ounce. Since then, it has risen a lot but I happen to believe this bull-market still has room to run. After 28 years, gold has just broken out to a new record-high and this is extremely bullish and considering that it is now in uncharted territory, we could see strong momentum-led buying as the public starts to take notice.
In summary, given the conditions prevalent today, I am willing to bet that our preferred investment themes (natural resources and the BRIC economies) will have another good year. There may be periods of panic and sharp corrections, however I suspect price levels will be higher by the end of this year.