Global themes to dominate for decades
The credit crisis is a cyclical problem - put another way it is the sort of thing that happens every so often, has an impact for a year or two, we get over it, and move on. It is part of the ebbing and flowing of economies.
But there are other issues which have significance not just for a year or two, but for decades. In previous issues we have highlighted that China is in the early stages of emerging from a few hundred years of isolation, and India, the world’s largest democracy, is at an even earlier stage of its renaissance. Yet already their impact is staggering, on metal and energy markets, on agriculture and foodstuffs, and the rising prices are now hitting businesses and households globally.
Many focus on the latter alone and see negative influences. Yet they are also catalysts for hugely positive change. For example:
- higher oil prices encourage exploration for new oil resources (e.g Brazil has already made a huge discovery, the biggest in 30 years),
- and a greater commitment to discover and develop alternative sources of energy
- higher food prices are inspiring a new "green revolution"
- and parts of the world with under-developed fertile land (large parts of Africa) will exploit the huge opportunities now opening up, investing in infrastructure, better education, and new skills to help them feed themselves and the world
Of course it will take time for any of these to have an impact, and in the meantime there are serious economic problems to be worked through. Yet our behaviour in the West is already changing, and these changes will be dramatic as we think more intelligently about:
- how we spend our household food budgets (pre-washed lettuce in pastic bags? takeaway coffee in large plastic cups at the price of a mid-sized chicken?)
- what cars we drive and how we drive them
- what energy we use in our homes
These themes are fantastic news for a planet that is creaking from the demands being made of it, and also provide a range of profitable opportunities for businesses around the globe - combine the imperative to better manage our planet with the profit-motive and you have created a positive tsunami which will sweep around the globe for decades.
Recognising this as an investor is important because the fund managers that have already identified a range of global themes are providing superior performance, two good examples being Newton and Neptune.
Both recognised long before the Summer of 2007 that credit markets through many of the developed economies were horribly over-stretched, and they avoided the worst of such problems across the range of their funds. Identification of more positive themes also ensured that they were well exposed to sectors that outperformed.
There is also a range of individual funds that have sought to exploit these themes. Some are quite narrow (such as agriculture or eco funds) or have a wider global reach, such as M&G Global Basics, which we have highlighted on many occasions. These are some of the themes that the M&G fund is currently exploiting in relation to China alone:
- Coal for China. The UK plans to build one coal based power station in the future, whereas China is going to add 544 to its current 2,000.
- Cars for China. Only three people per 1,000 own cars, compared with 477 in the US. Yet China is already the world’s third largest car manufacturer. Hydrogen fuel cells are the future petrol-replacement in these cars, putting huge pressure on platinum resources.
- Travel for Chinese. Only 4% of the urban population has travelled outside China. China will build an additional 97 airports by 2020.
M&G Global Basics - BUY
This is a global equity fund which invests in the “building blocks” of the global economy. Unlike pure commodity funds it has a far wider investment remit. The commodity-related exposure is just 30% (it has been higher when there was more obvious value). The greater emphasis is currently on companies that will benefit from continuing consumer-led growth. This is illustrated in the charts below – though the total number of mobile phones in China is huge, it is still quite low per head of population.
The evidence of the performance of this blended fund is that you can benefit from powerful global themes, without the additional risk of a more focussed commodity or emerging markets fund. For example, it is up 162% since the turn of the decade (as we write the UK stock market index is still down more than 20% over the same period) and even in the year to date this M&G fund is unchanged.
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