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| Where The
Chips Fall Global Economics And Emerging Markets |
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| September
2005 |
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| This is how
it starts…. They’ve saved for decades, investing in the very securities
that have been the world’s benchmark for stability. Having kept their currency
artificially cheap (until recently) combined with a Stalin-esque
approach to controlling economic and social policy has created an abundance
of wealth that is being wisely invested around the world. As a significant
consumer goods exporter to the United States, an unbalanced trade account
refuels their industrial and financial machine to the tune of billions
each year. China’s growing partnerships across emerging markets, particularly
in Latin America, strengthen their international influence and reputation.
Now come the bids for corporate takeover—oil companies, appliance manufacturers…
so far no bid has won, but even these strutting displays of financial might
have sent waves of panic and fear across American business. Soon will be
real estate holdings, eventual majority stakes in critical multinationals,
and the subsequent panicked reactions. China already wields tremendous
power to affect global financial markets—and as the Economist recently
reported, their status is bound to grow. |
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| Is this to
be the world’s next superpower? |
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| While
my conscience tells me that a society void of essential liberties replete
with a recent and infamous pattern of human rights abuse cannot possibly
play protagonist on the global stage of economic and political superiority,
the context of their vast market cannot be ignored. |
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| What a difference
a decade makes. |
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| The Clintonian
rise of affluence in America, much like the roaring 20s, was followed
by a subsequent market crash and act of war on US soil. Back then, we cared
about profit, and the Chinese were nothing more than the last bastion of
red communism in a world that was quickly recognizing the virtues of free
market capitalism… and Chinese imports consisted of cheap knock-offs. Now,
the Chinese are exporting everything from high-tech electronic components
to ladies’ underwear….. and cheap knock-offs. |
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| Is the
ascension so different than that of Japan in the 1980s? Corporate America
seemed terrified of the Rising Sun. The media’s constant reporting of increased
real estate holdings and corporate buy-outs fueled the fear, humankind’s
collective motivation for taking action. As we feared a Japanese takeover
then, so we acknowledge a Chinese takeover now. They have been anointed,
such that nearly everyone, from Bernard Shaw to the local shoeshine boy,
has unequivocably crowned China the world’s next superpower. |
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| So How
Did It Get To This? |
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| Consumption.
The mother of all waste. Imagine, for a moment, that you’ve won the Publisher’s
Clearinghouse Sweepstakes. After posing with the world-famous prize patrol
and your oversized check for $1 million on SuperBowl Sunday, you have a
choice to make—satisfy your immediate cravings for consumer goods, or save
for the future…. new cars or no-load mutual funds? |
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| A society,
given its collective accumulation of final goods, capital, and total
resources, faces a similar choice: consume resources today (buy new
cars with spinner rims) or save/invest today in order to consume more
tomorrow (turn the $1million windfall into $10 million). Remember,
once the resources are consumed, they are gone forever—the sweepstakes
will have ended, our cars depreciated, and the money’s all gone with nothing
of value remaining other than good memories and unwanted house guests. |
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| In the
1990s, America sat atop a golden throne basking in the afterglow of global
victory. In just over 200-years, we had gone from a fledgling startup
republic to the most powerful economic force in history; the Cold War was
over, we had given the Internet to the world, and everyone was getting
rich off the dot-com boom. And so the consumption boom began; Americans
were enjoying their new-found standard of living, and it was a long-time
coming. Meanwhile, China kept its heads down… saving, manufacturing, and
investing in economic infrastructure designed to grow their capital in
the future. |
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| Think of
global economics as a poker table, each country having a seat and a stack
of chips. Some stacks, obviously, are higher than others…. and America
was the ultimate high-roller. There’s only a finite amount of chips on
the table, so when one player wins, it’s always at the expense of others.
By establishing shrewd macroeconomic policies and perpetuating a culture
that values hard work, China has grown its stack substantially at the expense
of players like the United States and Western Europe. |
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| With each
passing year, America loses more of its chips to China, yet we still consume
and spend like a high roller. Drunk off our own past successes at the
table, we fail to recognize the diminishing stack before us; we pay for
that which we cannot afford by borrowing from others—notably, China! Our
government is drowning in debt, our society is drowning in debt, and we
have no savings to invest in the future. |
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| Imagine two
players - one in a slump, refusing to acknowledge the losses before him,
and the other, focused and disciplined with a growing stack - where would
you rather invest? |
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| After two
primer articles on investing offshore, I’d say there’s a fair number
of readers who realize that betting on a US victory at the table is comparatively
less rewarding, and for those interested in investing offshore but not
exactly sure which underdogs are playing a smart, focused game, I can offer
a few guiding principles: |
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1)
It doesn’t take much capital to start. Remember, the few thousand dollars
you have to invest is about two years’ wages for the average worker in
an emerging market.
2) Pick
your country first, market second. First decide which country shows the
most promise (more below); then decide which market is the easiest
to penetrate—currency, real estate, equities, etc. |
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| Picking the
right country can be a difficult task from afar, much like picking a stock.
Reading press releases and analyzing financials only provide a limited
perspective on future growth. To truly understand potential, you actually
have to go there, talk to people at all levels, and judge for yourself. |
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| For those
interested, I’ve provided some of my own thoughts from recent trips: |
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| This Ain’t
Your Father’s Carpet Salesman |
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| You may
be aware that I’ve already written an article on Turkey. I’m bullish
enough on its financial prospects that I thought it warranted a few more
words. |
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| Despite
some insipid opposition from the French, Turkey’s ascension into the EU
(if it lasts), or at least a strategic partnership, is likely. As it
prepares for membership, the government is putting its economic house in
order, lowering unemployment, inflation, and interest rates to reasonable
levels. Like other countries, the sheer numbers of its population cannot
be ignored. |
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| Looking
deeper within the numbers, we find that Turkey is home to a highly motivated,
hardworking, and entrepreneurial culture; young Turks are obtaining
advanced degrees, and the comparatively lower cost of doing business in
Turkey will flow business ventures and foreign investment into the country. |
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| Turks are
statistically much younger than their European neighbors, and, like the
Irish, old Europe needs these young bodies to flood the job market
and pay taxes. |
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| Foreign
capital is already flowing into Turkey; Europeans seeking second homes
on the ocean are picking up tremendous deals in Turkey at a fraction of
the cost of European beachfront, and the real estate market can only get
hotter. |
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| Risks:
Turkey
is still more bureaucratic than many places in Europe (more bureaucratic
than the French? Sacré bleu!), and these archaic walls need
to fall. |
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| The New
Old Europe |
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| Czech Republic
is damn popular in Europe. If you can get past the tourists crowding
the streets of Praha 1, you’ll find, as in Turkey, a disciplined, intelligent
population that costs a fraction of the workforce in Old Europe.
Prague is growing its infrastructure with a daring sophistication reflected
in its bold, new architecture that breaks from standard European tradition. |
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| The influx
of multinationals seeking to exploit the increasingly affluent Czech
market and inexpensive labor is apparent across the crowded office parks
and industrial zones of Prague. The Czech Republic is a member of
the EU, though it maintains its own currency (CZK) which tends to move
with the Euro. Financial volatility and macroeconomic indicators are not
an issue here as they are in many other emerging markets, which is what
makes Czech such a safe bet. |
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| Risks:
The Czech government is known for its corruption and kickbacks, though
new controls have been emplaced to improve the situation. It can also be
difficult to expatriate funds out of the country over long distances. |
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| Take An
Investment Trip To Paradise |
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| Brazil…
what’s not to love? Beautiful women, fantastic beaches, low cost of
living. Despite a national political scandal derived from alleged corruption
charges at senior levels, Brazil remains an excellent investment opportunity,
most notably due to the high interest yields. Short term rates are sitting
nicely around 20%, and its currency, the Brazilian Real, has appreciated
significantly over the last year. |
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| Put the
two together and you’ve got a recipe for investment success; consider
this - if you had invested last year in a Brazilian account fetching 20%,
your net return would have been over 70% including the currency appreciation.
If you don’t want to repatriate the investment return, there are some incredible
beachfront deals available in the local currency. |
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| If you
happen to be a stock market lover, the Brazilian exchange has outpaced
US returns significantly in recent years. If you include the gains from
currency appreciation, the return is even more. |
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| Risks:
The tax code in Brazil is, in a word, excessive. Like Argentina, be cautious
of countries trying to tax themselves to financial health - economic cannibalism
doesn’t work. Brazil has been effective in attracting foreign capital from
multinationals seeking to exploit the large market of consumers, though
it can be a difficult market to penetrate. |
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| I would
personally like to see a stable and speedy conclusion to the current political
crisis; a positive step for Brazil would be to repeal some antiquated
laws that mar business development in red tape; favorable commercial legislation
would only sweeten the international appeal to this already appetizing
venue. Its tremendous population certainly warrants increased business
development; given the sheer numbers, industry cannot afford to ignore
it. |
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| Where Have
All The Contras Gone? |
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| Ask any
American about Nicaragua and they’ll likely tell you what a dangerous place
it is. Then ask them if they’ve ever been. For a country that was the
punch-line of every late night political joke 20-years ago, it has managed
to pull itself up through pro-business legislation that favors foreign
investment. The Nicaraguan government has incentivized foreigners to provide
financial and entrepreneurial capital to grow the economy and infrastructure.
Land and labor are ridiculously cheap, and being party to CAFTA, the country
will be forced to focus on core products that it can manufacture efficiently. |
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| Risks:
Nicaragua is a long haul; I think it will be 5-10 years before any significant
investment returns can be had, but right now is truly the ground floor,
and we’re talking ROCK BOTTOM prices. |
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| And The
Winner Is . . . |
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| Panama…
Stable government; pro-business; well-developed infrastructure; unbeatable
location; mature financial, trade, and tourism sectors; foreigner friendly;
low cost of living; dollarized economy… the list goes on and on.
There are some fantastic real estate buys in Panama now, and, while you’ve
missed the ground floor, there are still many years of appreciation ahead.
More to follow. |
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| This list
is by no means exhaustive - there are many more underdogs playing a smart
game at the table—India, Iran (yes, Iran), Qatar, and Ireland to name a
few… all of which will undoubtedly be the subject of future articles.
As always, feel free to contact me with any questions at james@blackknightgroup.com;
I answer every email and do my absolute best to provide a reasonable amount
of guidance to those of you who are interested. Please do not send me a
generic email asking for ‘more information’. Be specific, and remember,
I’m an investor, not a realtor, tour guide, travel agent, used car salesman,
etc. |
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| Recommended
Reading |
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The World
is Flat by Thomas Friedman
Adventure
Capitalist by Jim Rogers
Every week’s
Economist |
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| The following
are James's previous articles for the magazine: |
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