Cashing In on the Global Economic Boom

By Jane Louis
18 Dec 2007 at 04:30 PM GMT-05:00

St. LOUIS (ResourceInvestor.com) -- The global population has grown by 300% since the stock market crashed in 1929. The world is booming, and emerging economies are leading the way. China and India together account for 2.45 billion of the world’s estimated 6.6 billion people - equalling nearly 40%. As these economies boom, the rate of infrastructure construction has exploded as well. And because infrastructure is growing, investors can count on resources to rally.

Investing in the global market is becoming an increasingly important theme in the commodities game - just consider the massive profit Warren Buffett made in China. In the presentation “The Year in Resources, Infrastructure and Emerging Markets”, U.S. Global Investors CEO Frank Holmes and his worldwide investment team discussed how this global investment theme is likely to take off, especially now that investors can see the growth in these emerging economies.

Economists have been calling for the global bubble to pop for several years now, according to Holmes, but it has yet to happen. In fact, the U.S. Global Investors team thinks there is much room to grow in the worldwide economic boom.

The proof can be seen in the success stories of global investments, particularly Buffett’s profits, Holmes said.

“I think it’s important to see that top investors have embraced this global theme,” he said.

The population boom in the past 80 years is driving infrastructure expansion in the top emerging economies - Brazil, Russia, India and China - and demand for resources to build that infrastructure is likely to continue to grow in those countries.

“The economic activities of these countries are phenomenal,” Holmes said. Oil and gold particularly have much room to rise during the industrialization of emerging countries, he pointed out.

“Since the turn of the millennium there has been a strong correlation between the economic growth in China and India, and the price of oil and the price of gold,” Holmes said. The correlation with China’s quarterly GDP data is 0.86 for oil and 0.89 for gold, while the correlation with India’s quarterly GDP data is 0.67 for oil and 0.72 for gold.

The price of copper is also highly correlated to industrialization in emerging markets, he said. As market players become aware of this, Holmes predicted that more and more investors will shift their portfolios to include global plays.

“I think there’s going to be a change now,” he said. Because commodities like oil and gold are priced in dollars, volatility in the U.S. dollar will give investors a chance to get in on the dips.

“This is your opportunity to explore how to use this volatility in your favour,” he said.

Emerging Markets: Investing at a Premium

“There’s a huge upside” to investing in emerging markets, according to Julian Mayo, manager of the Eastern European Fund and Global Emerging Markets Fund for U.S. Global Investors.

“Emerging markets together have 84% of the world’s population,” Mayo said. They also account for two-thirds of the world’s FX reserves and almost two-fifths of the world economy, PPP adjusted.

“But the sector still only accounts - despite the bull market for the past few years - for 12% of global market capitalisation,” he said, indicating that there is much room for these countries’ markets to grow.

Along with “virtually no fiscal deficit in emerging markets,” they are great investment choices because their currencies are inexpensive, their households and corporations are unleveraged and they have attractive balances of earnings and valuations, according to Mayo.

“We fully expect…that at some stage in the not-so-distant future, global emerging markets will trade at a premium,” he said.

Global Commodities Outlook

Volatility continues to dominate the commodities market, but playing the dips could result in big gains, according to Brian Hicks, co-manager of the U.S. Global Investors’ Global Resources Fund.

Copper, for instance, saw some prolonged weakness this year, but China pushed prices up by increasing consumption on the metal’s lows. “We think that scenario could happen again,” Hicks said.

Crude had a similar story, he said, with China restocking inventories when oil was trading at $50 a barrel. Despite the current prices above $90, Hicks said consumption will continue to stay strong and the global crude supply-demand balance will remain tight.

Global oil supply is an increasing important issue, he said, but he and fellow co-manager Evan Smith said they are “agnostic” about the idea of peak oil.

“We think the real issue is access to proven reserves,” Hicks said. “We think that’s the major restraint in respect to bringing about more oil supply.”

But the tight market - compounded by the possibility that OPEC could reduce output - is bullish for crude, especially since global emerging market demand will likely offset lower consumption in developed countries.

“Production is going to be capped at around 85 million barrels a day,” according to Hicks. “We’re still very constructive going forward.”

All in all, the commodities boom has “plenty more distance to go,” Smith said.

Infrastructure Growth Set the Explode

The commodities boom has strong support from increasing infrastructure construction in both emerging and developed countries. The U.S. Global Investors estimate worldwide infrastructure needs will be between $30 trillion and $41 trillion by 2030 - including $1.6 trillion in the U.S.

“Any way you look at it, the opportunities are amazing,” said Jack Dzierwa, global strategist for U.S. Global Investors.

Dzierwa noted that China has earmarked $420 billion and India has allocated $500 billion-$600 billion for infrastructure development under their current five-year plans. He said politicians are very supportive of infrastructure growth because their electorates’ quality of life is at stake.

“Infrastructure has become a popular topic both between investors and policy makers,” Dzierwa said. He said the U.S. Global Investors team is looking for different ways to expose investors to the opportunities infrastructure development offers. “We are looking for companies that have capacity to participate in the theme on a global scale.”

The trick to making big gains off the global markets play is to stay updated on macro-economic themes, according to Holmes.

“The secret is following government policies,” he said. “Government policies are the precursor to the global capex.” After identifying the global capex, investors should then look at sectors and stocks.

Right now, Holmes said, there is a huge capex for global infrastructure building and energy. And according to the U.S. Global Investors, now is the take to advantage.