Investors are always looking for new opportunities but some investors are fearful to venture outside of the political familiarity of North America. After all, why would you want to invest internationally when you aren't sure what policies and decisions other governments are going to make?
At the PDAC Conference (March 3rd to March 7th in Toronto), investors heard Frank Holmes talk about this issue. He spoke about international investing opportunities in places where investors might be cautious about investing.
Mr. Holmes is the CEO and Chief Investment Officer of U.S. Global Investors, Inc. (NASDAQ: GROW) and the co-author of The Goldwatcher: Demystifying Gold Investing. We've provided highlights of his talk below. Where possible, quotations are used directly from his presentation but may have been slightly edited without changing the meaning.
In his half-hour talk, Mr. Holmes covered a lot of subjects. He talked about growth in E7 countries (the 7 most highly populated countries in the world, primarily China and India), covered something called the Fear Trade and the Love Trade, and he discussed media negativity and how it impacts investor trading.
The growth in E7 countries is outpacing the G7 countries of the world. Right now, this growth is primarily population growth but this population growth will drive market growth.
Mr. Holmes said: "It's important to see where the world is shifting. The world's population has increased and the [developing nations] are building out their economies." Along with population growth, these countries are also experiencing a growth in GDP per capita, with a growing middle class. "The middle class is growing in China and India," said Mr. Holmes. "There are 100 million people making $100,000 per year [in China and India]." That population growth leads to an increased need for oil, electricity, infrastructure, vehicles, and more; mostly because the growing middle class wants to achieve the American Dream. "China and India want the American Dream…. At a certain GDP per capital, all of a sudden car sales take off… GDP per capita changes consumption patterns… In China; most cars are paid for in cash and the biggest seller of cars in China is General Motors… bought by the rising middle class."
This increased population growth and financial growth creates increased demand for products and infrastructure and urbanization: "Louis Vuitton was up 60% last year [because of economic growth in the E7 countries]. Coach Purses has 50% of their growth in Asia. So does Yum (that owns KFC). Gap Stores announced a rationalization of stores in America. They are shutting them down in America and opening them up in China." And beyond consumer goods, there are other sectors seeing demand from the E7 countries: "The 7 most populous countries in the world are outpacing the G7 in demand for products and, in particular, commodities… There is a high correlation of rising GDP per capita and the consumption of gold… In China, about 80% of all home sales are cash… Copper stayed where it is because there are supply issues and a huge demand cycle [from increased electricity demand in the E7 countries]."
The E7 countries are seeing huge growth and Mr. Holmes doesn't see it slowing down any time soon: "So do you think China is going to implode? It's a country where most real estate and cars are paid in cash. They have 300 million people speaking fluent English. Do you know that the Shanghai stock exchange embraced common law (instead of civil law)? The best stock exchanges in the world are based on common law. They're acquiring any kind of intellectual capital. Last year, China set a record in patents. There is a high correlation of success in the next 20 years in countries that have patent protection and where there is a registration process for patents. We're seeing this in China; we've been seeing it in India."
In spite of this amazing growth, investors are reluctant to put money into these countries and Mr. Holmes attributes it to fear generated partially by the media. He says that a fear of the E7 countries (especially China) keeps investors from clearly seeing the opportunities.
So, how can investors understand and take advantage of investing opportunities? One of the best ways is to understand what Mr. Holmes calls The Fear Trade and The Love Trade.
The Fear Trade is the fear caused by "mismanagement of government, poor fiscal policy, and runaway monetary policies," explained Mr. Holmes. He cites the debt rollover as an example.
The Love Trade "has to do with the heart," explained Mr. Holmes. Examples include cultural forces, such as the custom to give gold during Indian holidays, which has a huge impact on gold prices. "The Love Trade is highly correlated to GDP per capita in emerging countries," said Mr. Holmes.
When these two forces – the Love Trade and the Fear Trade – appear together, important things happen in the market. "Every time you've seen gold go to an all-time high, it's because the love trade and the fear trade show up together." Then he gave two examples:
"When QE2 was announced, it was the beginning of the Season of Lights in India, which is a huge consumption period for gold in India... Gold fell until August. And in August, you had the beginning of Ramadan, which is the Love Trade [and at the same time you had] the Fear Trade from the debt crisis in Europe and the US."
(Investors can read a lot more about these two forces on the US Global Investors website, especially this resource: http://www.usfunds.com/media/files/advisors-library/2012/12-137-IA_Comm_PopularityGold.pdf?CFID=5107688&CFTOKEN=40270366).
While investors avoid the growing countries and tend to invest in G7 countries, Mr. Holmes hints that government policies are keeping the US from growing as fast as the E7 countries.
Of monetary policies (which include interest rates, inflation, and money supply), Mr. Holmes said: "The money supply in the economies that are growing the fastest is 16%, and that has slowed down from 28% but now it's starting to turn. Compared to the G7 countries, it's barely at 5%. There is a significant difference because there are high correlations between money supply growth and the demand for commodities."
Of fiscal policies (taxing and spending), Mr. Holmes said: "60% of deficit spending is our entitlements so it should continue. And the shocking cost of regulation will go to $12,000 per person (in America) this will make emerging markets more attractive because they can make products with the same ISO standards without all of the regulatory burden."
Throughout his presentation, Mr. Holmes outlined other factors that suggest continued growth in the E7 nations. "There's stronger job creation… There's a thirst to build infrastructure… The peak of urbanization is at least 10 years away for China and India. China is moving inward with tax free zones and they're building super railroads. In the 1950's, Eisenhower built 25,000 miles of interstate highways in America. For this infrastructure build-up, America consumed 50% of the world's commodities. China is now doing that. All of this creates a super-cycle for commodities and for American products. "
So what should investors do? Mr. Holmes advised investors to ignore the apathy and negativity in the media. Of the European debt crisis, he said: "The GDP of Greece is the size of Philadelphia but it gets all the drama." And of the E7 countries, they have, he said: "50% of the world's population and they are growing at 3 times the G7 countries… We need to put this into context and then look at opportunities for investing."
There are many opportunities in the Asian markets, as well as in commodities that will feed the E7 growth as they pursue the American Dream.