Emerging Mkts/Commodities

My investment method will involve investing a substantial percentage of my portfolio into areas related to emerging markets and commodities to try and capture some of their growth. The country I intend to concentrate on is China, however I don’t intend to invest directly for the reasons I will go on to explain.

In an academic paper by Elroy Dimson, Paul Marsh and Mike Staunton, it was concluded that:

High-growth economies don’t post the highest stock-market returns. In fact, if anything, low-growth economies seem to have the performance edge. How can that be? In fast-growing economies, the truly rapid growth may be occurring among private, entrepreneurial businesses, not publicly traded companies. At the same time, these publicly traded companies might regularly sell more shares, so they have the capital to finance further business expansion. Even as this new investment capital spurs economic growth, it may not do much for existing shareholders, who have seen their ownership stake diluted.

This research appears to be validated by looking at the position of China in the 2005 Global returns list. Despite growing at over 10% year for last 10 years, £1000 invested is now worth &pound300. Since 1992, China has had the fastest economic growth and the worst stock-market returns.

So, with this in mind, I intend to use the following to play China and Emerging Markets:

• Invest in Commodity companies as these shares will definetly benefit from China’s growth. Jim Rodgers, thinks we are currently in a 15 year bull market for commodities (with China and Inda fuelling this).
• Commodity companies include not only Mines (eg BHP & RIO), Oil (eg BP & RDSB) but also food companies such as Bungee (As China’s population grows it will not be able to feed all it’s people and will have to import food such as soya beans, wheat etc).
• Invest in commodity base economies(using Exchange Traded Funds) such as Australia, Canada and Brazil.
• Invest in Malaysia (Using EWM), this is a commodity based economy but also will grow as it’s market is transparent and it’s currency will follow Chinese yuan.
• Invest in UK, USA companies that will expand into China eg HSBC, Starbucks, Coke.

In the last couple of years the commodity related investments have shot up and are not a bargain as they once were. The advice of Jim Rogers, is to wait until there is a financial set back (as china cannot keep growing at the same rate without overheating or bird flu pandemic) and then buy into commodity related investments.