October 5, 2006 –
I know that I haven’t written enough about global markets especially since I can probably count the number of U.S. stocks I own on one hand, so to address this anomaly, I am going to write about international markets today.
Most analysts when they speak of global economic output, measure output in terms of Gross Domestic Product. (GDP). When presented in terms of GDP, emerging markets only account for less than 1/3 of the world’s economic output. But then again, what does “emerging” mean? If you look at some of the world’s leading emerging market indexes, they include countries such as South Korea. If you’ve been to Seoul recently, their wi-fi infrastructure is probably at least five years ahead of the United States, yet it’s categorized as an “emerging” market. But that’s beside the point. Look at global economic output in terms of purchasing-power parity (PPP) and emerging markets account for over ½ of the global economic output.
What is PPP? Basically if U.S. $5,000 would last you three days in Tokyo but three weeks in Buenos Aires, your PPP is much greater in Buenos Aires. In Thailand, a 7-series BMW will roughly cost you between $150,000 to $250,000 whereas in the U.S. the same car will cost you between $75,000 to $110,000. So in terms of BMWs your PPP is much greater in the U.S. than in Thailand. However in terms of food and clothes, your PPP in Thailand would be phenomenally greater than in the U.S. This is what purchasing-power parity means. In Asia and the Pacific Rim, most people speak only of the developed markets of Australia and Japan and the emerging markets of China and India. In Europe, it’s the developed UK market and the emerging Russian and Turkey markets. In Latin America, it’s Brazil and Mexico.
While it would be foolish to ignore Australia, Japan, China, India, Brazil and Mexico when seeking investment opportunities, there are more countries and continents that lurk beneath the radar screen that provide good risk-reward setups in investment opportunities as well. Currently because of the political corruption in Russia (just consider the fate of Michael Khodorkovsky, Yukos Oil, and Yukos Oil’s largest investors to understand the risk of investing in Russia) I am not entering Russian markets. Currently, India and China are making significant investments in Africa.
This past summer, Chinese Premier Wen Jiabao agreed to loan Ghana $66 million do advance communication and other infrastructure. Furthermore, Jiabao agreed to loan Egypt $50 million along with an additional $10 million grant. India, too, is getting in on the action. India’s state-run oil exploration firm Oil & Natural Gas Corporation has agreed to invest $6 billion in Nigeria to help build infrastructure. Africa, though it is not on any individual’s radar screen for investment opportunities, is apparently not escaping the attention of China and India. Digging deep down the rabbit hole in Africa now before anyone else does may yield some phenomenal future returns.
Furthermore, in Asia, there is almost no focus on Vietnam and Singapore for providing investment opportunities; in North America, everyone focuses on U.S. markets to the detriment of Canada; in Europe, focus is on the U.K to the detriment of Germany. However, I believe that all of these additional markets yield exciting, strong investment opportunities as well. So the moral of the story is don’t keep your focus on the media favorites. Widen your perspective as much as possible to find the investment winners that no one is discussing now but that everyone will be discussing five or ten years down the road.
There is always much more than what meets the naked eye. Global economic output looks drastically different, as you pointed out J.S., when you view this statistic using GDP (Gross Domestic Product) versus using PPP (Purchasing Power Parity). But most people only give credence and support to that which meets the naked eye (in this case, the statistic media tends to overwhelmingly focus on). I experience the same frustrations when trying to explain the concept of “chi” to someone that has never trained in martial arts, yoga, or tai chi. Everyone understands the mechanics of the muscular system because it is easily seen. You work out more, your muscles become more rippled, defined, and larger. But you train more in martial arts, your chi becomes stronger, but yet, no one can see a “bigger” chi, so people tend to disregard chi as a non-existent entity.
I remember during one training session several years back when I was working with a stocky muscular young man who weighed about 105 kilos or so. We were working on a non-lethal technique that was designed to warn an aggressive opponent to “back off” without harming him. The technique depended on using “chi”, not strength. Use of chi would allow effective application of the technique were use of strength would not. Basically, in practicing this technique, your partner would walk aggressively directly at you. The defense would be to receive the person with both of your hands at chest level and in a circular motion, expel him in the same direction from which he came.
The motion was not a shove, but a gentle yet forceful circular motion. A shove might escalate the situation, whereas the circular motion would just expel the person and let him know that you were in control. The first time I practiced this technique, I literally lifted this person off the ground and expelled him back several feet with no effort. Amazed and wide-eyed, he staggered back to me and exclaimed, “How did you do that? Do that again.” He couldn’t believe that someone smaller than him was so easily moving him. But that’s because as a neophyte to the martial arts, he didn’t understand what he couldn’t see — the power of chi.
In investing, you must discover chi. The power that lurks below the surface of information channels that can propel your investment decisions into the next tier above.
