Well, it’s summertime and the living is easy, unless you are in the subprime bond business. If you are in farming, commodities, trade, and many other industries, the living is much easier. With this email we point out that fast economic growth in much of the world is leading to stock markets currently rising fast in many countries.
We have already had good rallies in countries like India, Brazil and Korea; and their rallies are continuing. Further rallies are expected in Singapore, Hong Kong, Indonesia, China, Philippines, Turkey and others in coming weeks.
Indian Market Index (Bombay Sensitive 30 Index, July 9, 2007)
These rallies are due to the decline of the U.S. dollar and the outperforming economic growth in these nations versus the more developed nations. Those events are sending ever more investors into the global markets. Our U.S. centric money manager friends often call us for ideas of how to invest in these markets. The calls are becoming more frequent as foreign markets continue to attract more money which had been previously focused in bigger, more established markets.
Hong Kong Market Index (Hang Seng Index, July 9, 2007)
Remember that these emerging or newly emerged markets can be volatile. We do not like to chase stocks in these markets, but we do like to buy on dips.
BASE METALS GETTING GOING AGAIN
After resting for a few months, base metals stocks are once again moving upward. The investment world is realizing that the demand for base metals is a multi decade demand cycle. Rome was not built in a day and neither will the Chinese and Indian infrastructures.
GOLD IS READY FOR ITS SEASONAL BOUNCE
Gold often bottoms in late July or August, and moves up into the fall and winter. Two major stock brokerage firms wrote large institutional reports about this phenomenon in the past week.
"CHINA SOVEREIGN INVESTMENT BODY TO GET FIRST FUNDS"
This was the headline reported Friday June 29th the Financial Times. It is very important for global markets as the Chinese are seeking more return on this pool. A pool which could eventually be worth trillions of dollars. China had a total surplus of about $1.2 trillion at the end of March 2007. Not all will be invested in this fund, but the fund will start with $200 billion.
They are moving from low yielding treasury bonds and other fixed income investments into global stocks, bonds and maybe commodities. Their first investment was $3 billion into Blackstone, the large investment group which just went public in the U.S. After the Chinese invested, the IPO created a substantial paper profit for the Chinese.
We expect the Chinese sovereign fund to be aggressive, and this will lead to a more aggressive outlook for global markets. Many other countries already have sovereign investment funds, and they are generally responsible global stock and bond investors. Of course, these investment funds are held by those countries with surpluses, countries with deficits like the US, do not have such funds.
INFLATION – THE NEXT BIG THING…..HOW TO CAPITALIZE UPON IT AND PROTECT YOURSELF FROM IT
Inflation will be the world’s next big economic problem, and the inflation of the coming years will cause many to seek shelter in stocks and commodities to protect oneself from the inflation. Whenever inflation exists, the prices of goods and services rise as people begin hoarding.
CHINESE INFLATION WILL LEAD TO HIGHER PRICES WORLDWIDE ….WHEREVER CHINA EXPORTS
Chinese inflation is heating up to about 3%. According to the Financial Times Lex Column on Saturday June 30, 2007. "…including negative real interest rates (after tax) which have helped fuel the Shanghai stock market bubble. Higher prices have also led to a series of modest tightening measures, with more likely to come."
Negative real interest rates mean the cost to borrow after tax is less than the rate of inflation. This creates incentive for speculation to keep ahead of inflation.
Like most managed economies, the leaders of China do not want to admit that inflation can happen, so they ignore it and end up reacting to it late. This feeds inflationary psychology if not handled promptly, and the inflationary psychology manifests itself in speculation in stocks, real estate and other assets in order to keep ahead of rising prices.
China is the world’s largest exporter, and most of its exports go to Asia; secondly to Europe, then the U.S. and Latin America. Since China’s low prices will have to rise to maintain profit margins, and since Chinese prices are lower than most other countries anyway, everyone can expect Chinese goods to pressure prices higher in their country. Global inflation is a feedback loop and complicated to explain. Suffice it to say that inflation in a major producing country can easily spread to all of their customers.
China is a repository of world growth, and it will be a continued presence for the better (and maybe a little for the worse) for the foreseeable future.
Brazil is a growing and fast developing a major economy that is often forgotten.
Currently they are in better shape with commodities and manufacturing booming, plus home ownership is taking off. They are a power in the manufacturing of aircraft, steel, computers and many other machines.
INDIA…..THE THEME IS STRONG AND ACCELERATING GROWTH
The Indian stock market is doing very well. There we have been focusing on capital goods, machinery and equipment suppliers. Indian economic growth is heading higher. Today it is only slightly below China, and is second fastest in the world for a large country. India will continue to grow fast.
The Indian monsoon which is very important to rural income is normal thus far. We are about one third of the way through monsoon season. If the monsoon continues normal, India will continue its rapid growth rate. If the monsoon is poor, then the political forces will demand handouts to farmers and slow the growth rate. In either case Indian growth will be rapid.
We are finding opportunities, and we believe our themes are in sync with what is happening in the global markets. If you are interested in hiring Guild Investment Management to manage your portfolio, please contact us. Thanks for listening.
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