The Main Themes
By Yiannis G. Mostrous
FALLS CHURCH, Va.–As 2006 draws to an end, I’ll gradually review the main themes that have been driving SRI’s investment decision-making this year. The majority of my recommendations are based on long-term themes enhanced and altered according to the opportunities presented by the markets. Special attention is paid to new opportunities–on a global scale–and I make a constant effort to incorporate these new ideas into the SRI arsenal of investments.
Today, let me remind long-term readers and inform newer ones of the main ideas that led to the creation of the Silk Road Investor.
My long-held view is that the world economy is going through a transformation, the outcome of which will be a change in economic growth leadership. This leadership will be assumed–in due course–by the East, and although the process will not be a smooth one, it’s irreversible. Consequently, the new, rising economic powers will challenge US supremacy, and although the US will remain a very important player in the global economic stage, it will gradually lose its status as an economic hegemon.
A combination of new developments–the rise of China and India, the re-emergence of Russia and the revival of the Japanese economy–are the main catalysts for this new global economic order. Investing in these changes will offer superior results to the patient, well-positioned investor.
A look at the emerging market economies around the world shows not only that these “21st century nations” have experienced strong growth during the past 10 years, but that, since the Asian crisis of 1997, Asia’s performance in particular has been stellar and its economies are on a much stronger footing. Ten years ago, these economies had current account deficits; now the majority of them have current account surpluses.
Their share of the global economy has grown from 31 percent in the early 1990s to 38 percent today. Given that their economic transformation is still in the early stages–after all, China’s urbanization ratio is about where Japan was pre-’40s–expect these numbers to continue to improve over time.
It’s imperative that you understand and appreciate that you are to make the most of this gigantic shift in the global economy.
Asia is of particular interest because it’s expected to lead economic transformation and growth for years to come. Asia-ex Japan is currently in a long-term bull market that commenced at the bottom of the Asian crisis in 1998 (see the chart below). Note all comparative charts are normalized for easy comparison–i.e., base equals zero.
Source: Bloomberg
Japan is another investment theme that should develop into one of the biggest surprises of the decade; my view is that Japan is in a secular bull market that commenced in 2003.
As I’ve noted on numerous occasions, I expect growth to continue as the Japanese economy gradually moves out of deflation while consumers return in strength, thus allowing Japanese firms more pricing power. I also expect Japan’s GDP growth to surpass that of the US and the EU in 2007. For more on Japan, please see SRI, 14 June 2006, Complications, SRI 9 August 2006, Look Out Below and SRI, 18 October 2006, Working For Abe.
Russia, another long-time favorite, is currently in the sweet spot: It’s a net oil exporter, has good GDP growth, isn’t dependent on foreign capital flows, is relatively stable politically, boasts reasonable–if not cheap–market valuations and, above all, enjoys solid exposure to the biggest growth story of our time, Asia. For more on Russia, please see SRI 28 June 2006, Speaking Of Bears and SRI, 19 July 2006, My Friend, The President Of The United States, George W. Bush.
India is by far the most-exciting growth story among global emerging markets in general and Asia in particular, one that I identified as early as 2001.
Although India’s never exhibited as strong growth characteristics as the rest of Asia and can’t match China’s reported growth rates, it’s also avoided the boom-and-bust cycles so prevalent in the region’s developing economies. For an investor interested in achieving serious long-term returns, this fact is of paramount importance.
And because India still represents only 2 percent of global GDP and 1 percent of world trade, it’s been less important to investors, even after accounting for the strong interest shown by investors since 2004. For more on India, please see SRI, 25 October 2006, A Genuine Growth Story.
My goal today is to make it easier for readers–particularly new subscribers–to follow SRI Portfolio changes as I add and remove stocks to position for 2007. And, more important, I hope to connect the ideas that led to the creation of SRI with the new and exciting investment themes that will be introduced and those of recent vintage, like the Singapore story (see SRI, 4 October 2006, Portfolio Shuffle and SRI, 11 October 2006, Testing…Testing).
Looking Ahead
Next week I’ll return to the regular format: providing global market and economic commentary, investing themes analysis and portfolio management.
In the interim, note that my views on the global markets haven’t materially changed since last discussed here (see SRI, 1 November 2006, Thai Thoughts). As I noted November 1, “[A]lthough you can’t deny that there will be a global economic slowdown in 2007–and you can’t predict the magnitude of the hit to the market–my views remain benign, in the sense that the markets can stay strong for the foreseeable future. In other words, let’s deal with next year’s problems next year.”
Asia, Japan, Old Europe and Russia are still my favorite markets, as you can deduce based on the composition of the SRI Portfolio. The Portfolio remains concentrated in domestic-oriented companies (particularly when it comes to Asia and Japan), while most of the remaining recommendations stand to benefit from the global economic changes discussed above.
Technical Issues
SRI has one main portfolio, the Long-Term Portfolio, and an alternative portfolio, Alternative Holdings-Permanent Hedges. Investors should look first to the Long-Term Portfolio for asset allocation in the markets covered here.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended but haven’t added to the Long-Term Portfolio; for example, Lukoil provides extra exposure to a favored theme.
A new feature has been added to the Web site. On the left-hand side of the screen, under the title “Portfolio Performance,” readers can get a snapshot of the SRI Portfolio’s return versus other major indexes. You’ll also find an explanation of the way I view the investment process. (This is especially helpful to new readers.)
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. We plan to enhance the Portfolio table with extra features as soon as our IT guys give us the OK.
Many readers have requested information on brokers that can better execute SRI recommendations. Click the headline “Resources” and see “Brokers & Services.”
E*Trade is a mainstream broker that can now handle some international trading online. Commissions are slightly higher, but the Web site is particularly easy to use and includes solid news and quote feeds for most foreign markets.
According to a recent The Wall Street Journal article, Fidelity has seen a fourfold increase in customer requests for international stock purchases. As a result, it’s beefed up its customer service staff to handle the transactions. You can buy foreign stocks through Fidelity by calling the broker directly.
If you”ve had positive experiences buying foreign stocks with other brokers, please drop me an e-mail and I’ll include them in an upcoming issue. And if you plan on getting into some of my non-US traded stocks, be sure to check out your current broker’s capabilities.
Geopolitics
I”ve long stressed the importance of geopolitical issues and the role they play in shaping the investment environment. As the world becomes a more-complex place, global political developments are becoming increasingly important in the investment decision process.
Take the time to read SRI”s Geopolitical & Investing reports, including The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia (8 February 2006) and Still Playing The Great Game: Business, Investments And Politics In Central Asia (2 August 2006).
FALLS CHURCH, Va.–As 2006 draws to an end, I’ll gradually review the main themes that have been driving SRI’s investment decision-making this year. The majority of my recommendations are based on long-term themes enhanced and altered according to the opportunities presented by the markets. Special attention is paid to new opportunities–on a global scale–and I make a constant effort to incorporate these new ideas into the SRI arsenal of investments.
Today, let me remind long-term readers and inform newer ones of the main ideas that led to the creation of the Silk Road Investor.
My long-held view is that the world economy is going through a transformation, the outcome of which will be a change in economic growth leadership. This leadership will be assumed–in due course–by the East, and although the process will not be a smooth one, it’s irreversible. Consequently, the new, rising economic powers will challenge US supremacy, and although the US will remain a very important player in the global economic stage, it will gradually lose its status as an economic hegemon.
A combination of new developments–the rise of China and India, the re-emergence of Russia and the revival of the Japanese economy–are the main catalysts for this new global economic order. Investing in these changes will offer superior results to the patient, well-positioned investor.
A look at the emerging market economies around the world shows not only that these “21st century nations” have experienced strong growth during the past 10 years, but that, since the Asian crisis of 1997, Asia’s performance in particular has been stellar and its economies are on a much stronger footing. Ten years ago, these economies had current account deficits; now the majority of them have current account surpluses.
Their share of the global economy has grown from 31 percent in the early 1990s to 38 percent today. Given that their economic transformation is still in the early stages–after all, China’s urbanization ratio is about where Japan was pre-’40s–expect these numbers to continue to improve over time.
It’s imperative that you understand and appreciate that you are to make the most of this gigantic shift in the global economy.
Asia is of particular interest because it’s expected to lead economic transformation and growth for years to come. Asia-ex Japan is currently in a long-term bull market that commenced at the bottom of the Asian crisis in 1998 (see the chart below). Note all comparative charts are normalized for easy comparison–i.e., base equals zero.
Source: Bloomberg
Japan is another investment theme that should develop into one of the biggest surprises of the decade; my view is that Japan is in a secular bull market that commenced in 2003.
As I’ve noted on numerous occasions, I expect growth to continue as the Japanese economy gradually moves out of deflation while consumers return in strength, thus allowing Japanese firms more pricing power. I also expect Japan’s GDP growth to surpass that of the US and the EU in 2007. For more on Japan, please see SRI, 14 June 2006, Complications, SRI 9 August 2006, Look Out Below and SRI, 18 October 2006, Working For Abe.
Russia, another long-time favorite, is currently in the sweet spot: It’s a net oil exporter, has good GDP growth, isn’t dependent on foreign capital flows, is relatively stable politically, boasts reasonable–if not cheap–market valuations and, above all, enjoys solid exposure to the biggest growth story of our time, Asia. For more on Russia, please see SRI 28 June 2006, Speaking Of Bears and SRI, 19 July 2006, My Friend, The President Of The United States, George W. Bush.
India is by far the most-exciting growth story among global emerging markets in general and Asia in particular, one that I identified as early as 2001.
Although India’s never exhibited as strong growth characteristics as the rest of Asia and can’t match China’s reported growth rates, it’s also avoided the boom-and-bust cycles so prevalent in the region’s developing economies. For an investor interested in achieving serious long-term returns, this fact is of paramount importance.
And because India still represents only 2 percent of global GDP and 1 percent of world trade, it’s been less important to investors, even after accounting for the strong interest shown by investors since 2004. For more on India, please see SRI, 25 October 2006, A Genuine Growth Story.
My goal today is to make it easier for readers–particularly new subscribers–to follow SRI Portfolio changes as I add and remove stocks to position for 2007. And, more important, I hope to connect the ideas that led to the creation of SRI with the new and exciting investment themes that will be introduced and those of recent vintage, like the Singapore story (see SRI, 4 October 2006, Portfolio Shuffle and SRI, 11 October 2006, Testing…Testing).
Looking Ahead
Next week I’ll return to the regular format: providing global market and economic commentary, investing themes analysis and portfolio management.
In the interim, note that my views on the global markets haven’t materially changed since last discussed here (see SRI, 1 November 2006, Thai Thoughts). As I noted November 1, “[A]lthough you can’t deny that there will be a global economic slowdown in 2007–and you can’t predict the magnitude of the hit to the market–my views remain benign, in the sense that the markets can stay strong for the foreseeable future. In other words, let’s deal with next year’s problems next year.”
Asia, Japan, Old Europe and Russia are still my favorite markets, as you can deduce based on the composition of the SRI Portfolio. The Portfolio remains concentrated in domestic-oriented companies (particularly when it comes to Asia and Japan), while most of the remaining recommendations stand to benefit from the global economic changes discussed above.
Technical Issues
SRI has one main portfolio, the Long-Term Portfolio, and an alternative portfolio, Alternative Holdings-Permanent Hedges. Investors should look first to the Long-Term Portfolio for asset allocation in the markets covered here.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended but haven’t added to the Long-Term Portfolio; for example, Lukoil provides extra exposure to a favored theme.
A new feature has been added to the Web site. On the left-hand side of the screen, under the title “Portfolio Performance,” readers can get a snapshot of the SRI Portfolio’s return versus other major indexes. You’ll also find an explanation of the way I view the investment process. (This is especially helpful to new readers.)
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. We plan to enhance the Portfolio table with extra features as soon as our IT guys give us the OK.
Many readers have requested information on brokers that can better execute SRI recommendations. Click the headline “Resources” and see “Brokers & Services.”
E*Trade is a mainstream broker that can now handle some international trading online. Commissions are slightly higher, but the Web site is particularly easy to use and includes solid news and quote feeds for most foreign markets.
According to a recent The Wall Street Journal article, Fidelity has seen a fourfold increase in customer requests for international stock purchases. As a result, it’s beefed up its customer service staff to handle the transactions. You can buy foreign stocks through Fidelity by calling the broker directly.
If you”ve had positive experiences buying foreign stocks with other brokers, please drop me an e-mail and I’ll include them in an upcoming issue. And if you plan on getting into some of my non-US traded stocks, be sure to check out your current broker’s capabilities.
Geopolitics
I”ve long stressed the importance of geopolitical issues and the role they play in shaping the investment environment. As the world becomes a more-complex place, global political developments are becoming increasingly important in the investment decision process.
Take the time to read SRI”s Geopolitical & Investing reports, including The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia (8 February 2006) and Still Playing The Great Game: Business, Investments And Politics In Central Asia (2 August 2006).