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The Rise of the Rest

February 12th, 2010 · No Comments

Yes, the world economy will probably never be the same again. Power relations have shifted in quite a dramatic fashion..
It’s also why we have shifted our investment strategy to look east and into commodities because when the rest of the world is catching up, the numbers are just too big for that not to have an impact on resource prices.

The Rise of the Rest
By: Dirk Van Dijk

When historians look back at the early 21st Century 100 years from now, the biggest event will probably not be the Financial Crisis of late 2008. The biggest story will probably be the rise of the rest of the world. This change in the shape of the world economy will bring enormous profit opportunities – if you play your cards right. In the next decade, the road to riches will run through Shanghai, Mumbai, Santiago and Sao Paulo.

For the last 200 years or so, the vast preponderance of wealth creation has occurred in North America and Western Europe, with Japan and some of the smaller countries in Southeast Asia being the exceptions, particularly in the last half of the 20th Century.

The vast majority of humanity – those living in most of Asia, Africa and Latin America – were largely left behind. Two centuries ago, the living standards in most of Europe and America were not appreciably higher than the living standards in what we now refer to as the third world. America attracted immigrants mostly because it had land available to farm, but for the most part people were subsistence farmers, just like most people are in India or Latin America today.

The rest of the world though is rapidly catching up. The most dramatic example is China, which regularly reports double-digit economic growth rates and surpassed the U.S. as the largest auto market in 2009. India is a bit behind the curve relative to China, but it too is growing at rates that the currently-developed economies can only dream about.

There is still a lot of room left to grow. Both China and India have populations that are about four times as large as ours. They both are graduating far more engineers than we are. Brazil has a land area about the size of the lower 48 in the U.S. and has vast resources.

China might have sold more cars in 2009 than the U.S., but the total fleet is still just a small fraction of the U.S. car and truck fleet. The cars that were sold there last year will be on the road for a long time to come. China, in particular, has also built up vast foreign currency reserves, but most of the emerging countries are in far better shape now fiscally than they were a decade ago. This trend has the potential to continue for a long time to come; not just a few quarters, but potentially for decades.

This should lead to growing earnings for the companies in those countries and for western firms that can manage to sell their products there. These growing earnings should lead to long-term appreciation in share prices.

So what is the best way to play? Well one could always buy the individual companies that operate in places like China or India, many of which trade here as ADRs. However, the accounting is often unfamiliar, and not everyone speaks Mandarin or Portuguese (English is an official language in India, so less of a problem there).

For many investors a better way to play is through ETFs. There are many good country or region specific ETFs. The average valuations of the holdings, as well as the top ten holdings, are generally available on sites like Yahoo Finance. Pay close attention to the expense ratios though, they tend to be higher than domestic ETFs.

There is another way to play this growth though. The early and middle stages of economic development are much more resource intensive than are the later stages of economic development. As these countries build railroads, they are going to need steel and the iron ore to make it. As the hundreds of thousands of small villages get electricity, they will need copper for the wires.

As these economies grow, so will demand for metals, but there are not a lot of big new iron ore or copper (or nickel, zinc or lead) mines coming on stream. This should lead to high prices and high profits for the big mining companies. All of these commodities will be needed in absolutely heroic amounts.

Above all these emerging countries and their billions of people will need energy. Sadly for the planet, coal will be a huge part of that energy mix. Shipping of coal from Wyoming to the West Coast ports is a big part of the reason that Berkshire (BRK.B) bought Burlington Northern (BNI). To mine billions of tons of coal, more advanced mining machinery will be needed, both in the U.S. to export coal and in those countries to tap their own domestic reserves.

This means that the big mining machinery firms have a very bright long-term future. Demand for oil will also grow, although it will be very difficult for the world to increase its annual output. Flat to declining supply along with rising demand is a very good recipe for higher prices over time.

You have to find the oil before you can produce it, and the peak year for worldwide oil discovery was all the way back in 1964. Most of the big recent finds have been in extremely deep water, Getting to those reserves will not be easy, but it also creates opportunities for some well-positioned oil service firms. Any oil firm that is able to grow its oil production is going to be in a position to absolutely mint money.

Well this is a very big topic and I have only scratched the surface here. It is only one of the world-shaping trends that I exploit in my trading service, the Strategic Investor. I go into much greater depth on a regular basis in its daily commentary and prescribe specific stocks for profiting from the trends. In fact, the next few hours mark the perfect time to check out the service because a special arrangement ends Saturday night, February 6

Tags: China · Commodities · Economy