Emerging Global Markets Becoming "too Big to Ignore"
By Jane Louis
12 Jul 2007 at 05:07 PM GMT-04:00
St. LOUIS (ResourceInvestor.com) -- Global emerging markets are becoming “too big to ignore,” according to U.S. Global Investors, Inc.
In “The Half-Time Report: A Mid-Year Look at Commodities and Emerging Markets,” a U.S. Global Investors presentation, CEO Frank Holmes, along with members of the portfolio management team, discussed how the world’s most quickly developing countries are affecting commodities demand and what this could mean in the future.
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Although 2006 started slow, both commodities and global emerging markets outperformed the S&P 500 by June. China and India have been the two leading countries in global economic growth.
China’s gross domestic product, in fact, is just 3.1% below the United States. China has actually picked up a lot of the United States’ slack in GDP, which has “helped maintain the global boom,” according to Holmes.
“Economies like China and India, the politicians know very well that to stay in political power, they must create jobs,” Holmes said. “The sustainable process for creating jobs is infrastructure. That leads to a higher GDP growth.”
GDP growth is also pushed by industrial production and output in these countries, specifically of commodities like oil and copper, he said.
Commodity trading is important to emerging countries because volatility can be used to their advantage, according to Holmes.
“Whenever the dollar is weak and a commodity is strong, you get exaggerated moves in that particular commodity,” he said.
In the gold market, for example, the dollar is inversely related to gold 80% of the time, Holmes said.
“When you see gold rising rapidly over any 60-day trading period and the dollar has been falling, the power of a correction is massive,” he said.
According to Julian Mayo, investment director at Charlemagne Capitol Ltd., emerging markets contain 84% of the world’s population and 38% of the world economy, PPP adjusted.
In addition to using a volatile market to their advantage, these countries have many opportunities because their fiscal deficits are decreasing to the point where they have almost vanished, Mayo said.
“Emerging markets’ debt is very well priced, which in turn has very positive implications for the long term valuations of within global emerging markets’ equity,” he said.
“You’re paying a discount and getting a premium in terms of the growth prospects of those markets.”
Brian Hicks, CFA of U.S. Global Investors, Inc. and co-portfolio manager for the Global Resources Fund, analyzed commodities on the global market and placed copper at the top with 21.01% growth in the first half of 2007.
The oil sector is also doing well despite high prices, he said.
“The rally in oil prices over the last few years has really been due to a demand-led rally rather than a supply shock,” Hicks said. “…Over the past 10 years, we’ve had positive demand growth. That’s in spite of oil prices going up nearly threefold. The IEA recently came out with their midterm outlook, and over the next five years, they predict an average annual compound growth rate of 2.2%. That’s above the 1.7% that we’ve seen in the prior ten-year period, much of that being driven by the emerging market economies.”
Limited access to oil reserves constrains global supply. More than 80% of the world’s reserves are constricted for geopolitical reasons and are likely to stay that way because of the high revenue they can bring in their countries, according to Hicks.
“A lot of the countries that have the most oil reserves are the countries that are difficult to invest in,” he said.
Holmes, Mayo and Hicks all agreed global emerging markets are likely to be a long term trend.
“The investment theme of global emerging markets is the most powerful in the stock market today,” Hicks said. |
