 The
Raging Bull!
Puru Saxena
18 October 2007
We are witnessing a generational
bull-market in natural resources. The boom is due to the ongoing
urbanisation and industrialisation of vastly populated developing
nations in Asia and Latin America. And central-bank sponsored
monetary inflation is adding fuel to the already raging fire.
It is interesting to note that despite all the "end of
the world" forecasts by numerous analysts, my preferred
assets continue to power ahead.
Today, some highly intelligent
economists are shouting "bubble' and claiming that this
uptrend built on the easy monetary policy cannot last forever.
However, I am of the view that we are not in a "bubble"
yet and this bull-run is due to the very real fundamental forces
of supply and demand. Wherever you care to look in the commodities'
universe, you can see that supplies are extremely tight and failing
to keep up with the rising demand coming out of emerging Asia.
In the business of investing,
it usually pays to observe the market and one should avoid becoming
fixated with pre-determined conclusions. After spending over
a decade in the investment-management business, I have learnt
never to fight the trend. And the trend for commodities and the
emerging-markets is up. For sure, as night follows day, this
bull will mature and then die. However, between now and judgement
day, fortunes will be made by patient investors.
Now, there is no doubt that
the over-leveraged US economy is slowing down, however new consumers
in the emerging-markets are underpinning the synchronised global
expansion. Recent IMF statistics reveal that global exports
continue to soar, reaching a record US$13.5 trillion; representing
a gain of 138% since 2001. On the other hand, over the past
12 months, US imports (including petroleum) came in at US$1.9
trillion representing just 14% of the world's total exports!
So, you can see that America's influence on the global economy
is gradually diminishing as other regions of the world become
stronger.
Skeptics of the ongoing bull-market
may want to take note of the fact that today only 20% of China's
exports go to the US. In other words, 80% of China's exports
are shipped to other parts of the world. Therefore, the much
anticipated slowdown in US consumption may not throw the Chinese
economy into a severe recession, thereby hurting the demand for
commodities. Already, China has surpassed the US as the world's
second largest exporter and its exports have grown by 27% over
the past year. At current growth rates, China is projected to
overtake Germany as the world's biggest exporter in 2008. A
recent study by the China Academy of Social Sciences predicts
that the Chinese middle class would more than double in size
to 520 million by 2020. In case you are wondering, that gigantic
number is bigger than the combined populations of the US, UK,
Germany and France! Another report forecasts that China would
surpass the US as the world's second largest consumer of luxury
goods within 10 years and may become the world's largest luxury
market by 2025.
Along with China, the commodities
boom is being sustained by India. Together, they make up 40%
of the world's population and despite low per-capita consumption
levels they already consume more than 50% of the world's coal,
iron-ore, steel and other key natural resources.
It is interesting to note that
since the commencement of this uptrend in natural resources,
demand growth has emerged from Asia and Latin America. On the
contrary, demand growth from the industrialised nations has been
sluggish. Now, for the sake of discussion, let us assume that
the US economy slows down considerably over the coming quarters
and does not grow at all. In other words, its GDP growth becomes
zero. If that were to occur, zero growth would imply that instead
of growing, US consumption would remain at last year's level.
Would that be a disaster for commodities? Hardly, given the fact
that Asia and Latin America are still growing at a healthy pace.
Now, let us assume that China's economy slows down as well and
instead of recording above 10% growth, its GDP expands at 5%
over the coming 12 months. All other things being equal, that
would imply that in the following year, China would still need
5% additional commodities compared to the past year -
a bullish omen.
The ongoing bull-market in
the world of tangibles is also having a positive impact on precious
metals. As per my expectation, after the Fed cut its interest-rate,
gold has broken out to a new high while the US Dollar has declined
significantly. I am of the opinion that we are on the verge
of a massive rally in precious metals and this advance is likely
to continue until spring next year. So far in the ongoing boom,
gold has underperformed relative to the industrial commodities.
However, this is due to the fact that up until now the public's
inflation expectations have been managed well by the manipulated
figures released by the central banks. Somewhere ahead, the masses
will wake up and realise that inflation is significantly higher
than the official estimates and that is when gold and silver
will rise in a parabolic manner.
In summary, even if I tried,
I could not possibly imagine a more bullish environment for all
types of commodities (energy, metals, food and water). The classic
ingredients of rising demand, tight supplies and monetary inflation
have all come together at once. How much you benefit from the
secular trend will depend on your patience and perseverance as
this bull rages ahead albeit erratically.
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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