The economic outlook for the West is far from rosy, but that doesn’t mean investors should worry. Opportunities are plentiful if you know where to look and how to avoid the pitfalls, says Dan Denning
Europeans and Americans are in the fight of their economic lives, and they may not even know it. Pressure comes from China and India in the labour markets, from Russia and Iran in the energy markets, and from the West’s own unfavourable demographics. It all leads to the greatest economic story of our lifetimes, the ‘money migration’, the vast movement of capital and opportunity that will see the Far East become the engine of the global economy. But you wonÂąt have to leave home to invest and profit from it. In fact, you’d better not.
By 2015, a recent Merrill Lynch study predicts, Chinese consumers will have replaced American consumers as the ‘engine of global growth’. Credit Suisse First Boston says that spending by Chinese consumers will quintuple to $3.7trn in the next ten years. Zhou Xiaochuan, governor of the People’s Bank of China, recently told reporters that China’s economy is ‘still growing at over 9%’, but that ‘we still need to control investment. We also need to encourage domestic consumption.’
It doesn’t look like the Chinese need much encouraging. Chinese retail sales grew by nearly 13% in May. Japanese electronics manufacturer Hitachi says it will sell 100,000 new plasma-screen televisions in China this year, up 900% from last year’s total. Beleaguered American car manufacturer General Motors says it sold 247,232 cars in China in the first five months of this yearThatÂąs 12% more than in the same period last year.
Contrast that with GM’s fortunes in the US. GM’s market share in the US is down 2% this year, it’s cut North American production by 10% and May sales were down 7%. Yet GM is not even the worst-off American automaker. Ford has reported 12 consecutive months of falling sales. It has twice lowered profit forecasts this year. And like MG Rover, Ford is laying off workers. The company plans to lay off 5% of its North American workforce this year.
Production, consumption, and tomorrow’s fortunes
The rise in Chinese consumption, alongside the death spiral of North American automakers, is all you need to know about the direction the world’s headed in. Anglo-Saxon countries (Great Britain and America) made their fortunes and empires by producing what the world needed. Their economies grew and their currencies strengthened.
Today, the East is following the same model. It’s a simple model, really. Produce more than you consume. Save. Invest. Repeat generation after generation. In the Western world, however, the economically fatal notion has taken hold that you can consume your way to wealth. ‘Spend and grow rich’ is the unofficial model.
You are witnessing the failure of that model. But what will the shift in the world’s economic balance of power mean for investors? There are three effects of ‘the money migration’ that present you with its most profitable opportunities.
First, the debt-addicted economies and stockmarkets of the UK and US will crash and muddle their way through a period of painful downsizing. The biggest risks will be at home. The biggest profits will be elsewhere. Second, the bull market in energy especially natural gas is deeper and stronger than most investors realise. There are no sure bets, but this is a good one. Third, the Far East has the best prospects for balanced economic growth in the next 20 years. Fortunately, it has never been easier for you to profit globally while investing locally. WeÂąll show you how.
Dr. Marc Faber, editor of The Gloom, Boom & Doom Report, says: ‘Our children will not only face the grim reality of having to pay for the pensions and healthcare benefits of an increasing number of retirees, but will also face far more competition from countries which, under communism and policies of isolation, were not able to compete with the West but are now rapidly integrating into the global economy.’
Debt is the death of the West
In 2004, the United States racked up a total trade deficit of $614bn, or 6.4% of GDP. Over $161bn of that deficit was with China alone. It’s probably going to get worse before it gets better. The US has already acquired a $54bn cumulate trade deficit with China this year. At this pace, the China deficit will be $192bn and the total current-account deficit will approach $800bn this year.
Theoretically, there’s no limit to how large a deficit can get as a percentage of GDP. But in practical terms, a country simply cannot get rich accumulating deficits and consuming more than it produces. Spending more than it makes will lead to insolvency for America, and the UK as well. GM, for example, has $292bn in debt. What used to be the worldÂąs most well-known manufacturer virtually synonymous with America now makes most of its money (when it makes money) through its credit-card operations.
The UK isnÂąt much better off
Dr Faber elaborates in his latest report: ‘Some signs of stress have already emerged in the UK. According to official figures, the number of people declaring bankruptcy reached record levels in the first quarter of the year. With consumer borrowing now standing at more than ÂŁ1trn, the recent rises in interest rates have led to a growing number of individual insolvenciesThe Department of Trade and Industry estimated that the number of bankruptcies jumped to 13,229 between January and March, up 1.6% on the previous quarter and 28% higher than a year ago. Personal bankruptcies are now more than a fifth higher than during their peak in the early 1990s, when the economy was still emerging from recession and almost a million households were in negative equity.’
Debt wears many masks: pension obligations that will not be met, mortgages that will be defaulted on when housing prices fall, and credit-card bills unpaid. All of those consequences conspire against stockmarkets in the UK and the US. Economies driven by consumption don’t perform well when consumers are broke.
Investors who are focused only on US or UK shares may be in for a tough summer, and an even tougher decade. But even if most stocks will suffer from the effects of various debt-induced crises, some will excel. Those are the ones you want to own, which profit from the migration of wealth from West to East.
The last month has seen Europe’s decade of simmering economic misery come to full boil. The European Union, as a political project, is on the rocks. The euro currency may not be far beyond. And whatever happens in Europe, the structural problems that leave it with economic growth less than inflation rule it out as an investment destination of the future.
I could write another whole book on why investing only in American shares is a bad strategy for the future, but I’ll keep it simple. This is not 1982. Not all stocks are rising. The economy has too much debt, too few savings, and too little awareness that there are three billion people on the other side of the planet now competing for the same scarce resources that we in the West have had to ourselves for the last fifty years.
During my travels through Asia (China, India, Japan, Singapore, Thailand) and Australia, I was impressed with the energy and ambition I saw. It would be a mistake to say people in China want what we in America or the UK haveBut it would be fair to say they want a material improvement in their standards of living.
Beyond energy, Asia’s future
Of the worl
d’s three large economic zones, the Far East is the one best positioned to produce and consume its way to wealth. Much of the world’s productive capacity has already moved East, thanks to the cheap labour. But the day is soon coming when Eastern economies will do more than sell trinkets and goods to the West.
Soon, Asians will start spending their savings and joining the ranks of the newly wealthy. It’s a simple human desire to enjoy a little more comfort than you’re used to. In economic terms, it will mean that the Asians begin trading more among themselves, buying each others manufactured goods and various services.
That would be bad news for Western investors, who face an entirely different economic future. But don’t go rushing off to buy shares on the local exchange in Bangkok. Asia faces one major challenge to its economic future, a lack of liquid and transparent capital markets. ItÂąs simply not possible, nor advisable, for most investors to try and buy the shares of the fastest-growing Asian companies.
Fortunately, you don’t have to. For at least the next ten years, the companies driving the growth and expansion of the East will be Western ones. These are the companies selling Asia the goods and services it cannot yet produce on its own. One of my favourites is Australian-based mining giant BHP Billiton (BHPXE) (it just bought a company in possession of the worldÂąs largest-known uranium reserves). Another is US Gulf-Coast refiner Valero (VLO). With the crunch in refining capacity, Valero will be in a strong position until the US builds more refineries. But that doesn’t happen overnight. Another core holding for the ‘money migration’ is Korea Electric Power (KEP). Kepco is helping the Chinese build out their electric infrastructure, which includes four new nuclear plants due to be completed before the Beijing Olympics in 2008. It is also a non-oil way to invest in the worldÂąs great need for energy.
There are many other great companies out there, all of whom trade in London and New York and can be bought from the comfort of your own home, in the same way that you buy shares today. And given that you can buy them locally, but profit from global bull markets, itÂąs an easy solution to a large global problem. Think East. Buy West.
Dan Denning is editor of Strategic Investment(www.strategicinvestment.com) and the author of The Bull Hunter, released by John Wiley and Sons in the UK this month
Category: Economics