early days of the American republic, fortune seekers were urged to
“Go west, young man!” Unfortunately, with the American
economy now clearly showing its fragility, the rallying cry for today
could be, “Go abroad!”
past quarter century, the center of wealth creation has steadily
moved away from the United States and towards new foreign
competitors, especially the so-called BRIC countries of Brazil,
Russia, India and China, where economic growth rates have greatly
eclipsed the US. In recent years, this economic might has
translated into much higher returns on their respective stock
markets. These movements are creating a wave of real wealth
that wise investors cannot afford to miss.
In the mid
1970s, a transformation began in which the driving force of the US
economy shifted from producers to consumers. Today, measured
by gross domestic product, consumption accounts for some 72 percent
of the US. It is no wonder then, that as economics is so
synonymous with spending, that the stimulus package recently passed
by the US Congress, is skewed heavily (90 percent) in favor of the
consumer (where the votes are) at the expense of producers.
a generation of consuming more than it has produced, the US has
dissipated vast amounts of its wealth.
to allow the citizenry to confront the reduced living standards that
such dissipation requires, successive US governments have instead
produced consumer booms in technology and real estate. Inflated
through a combination of deficit spending, borrowing and massive
depreciation of the US dollar, the bubbles created by these policies
have left future generations of Americans saddled with vast debts and
an anemic currency.
the US has lost much of its wealth, the rest of the world,
particularly Asia, has gained. Since the late 1980s, a wave of
economic enterprise has swept across the world. Under the
leadership of the Reagan-Thatcher-Gorbachev triumvirate, communism
melted, opening the world to free trade, and brought some 2 billion
new consumers to the market. It also brought some 2 billion
hard-working, low cost producers into direct competition with the
Western consumers not only buy their clothes, toys and sneakers from
BRIC factory workers, but they are also likely to use service workers
in those countries to manage help-desk call centers, prepare tax
returns and read X-rays. As a result, growth rates in BRIC
countries has skyrocketed and corporate profits and stock prices
followed suit, far outstripping the average performance of US stock
benefits of the great, new world consumer super boom have flowed
mainly, as should be expected, to producer nations. As an
example, the S&P 500 Average Index rose by some 14 percent gross
in 2006 (Incredibly, some 80 percent of mutual fund managers
failed to equal even this return). Further, when deductions
were made for management fees, transaction costs, 3 percent inflation
and the depreciation of the US. dollar, many American investors
actually experienced a ‘real’ net loss in that year.
By contrast, the BRIC stock markets offered far superior yields in
appreciating currencies with Brazil up 33 percent, India 47 percent,
Russia 71 percent and China 131 percent.
impact of the increased manufacturing power of the BRIC nations, and
even smaller countries like Vietnam, is a greatly increased thirst
for raw materials. As formerly impoverished populations gain
wealth, demand for higher-quality food impinges upon the established
demand of the ‘mature’ markets. These two factors
have greatly benefitted nations such as Canada, Australia and New
Zealand that provide raw materials, energy and food.
result, perhaps a more appropriate and meaningful pneumonic device
for international investors would be BRIC JACS (Brazil, Russia,
India, China, Japan, Australia, Canada and the Smaller nations, such
as Singapore, Vietnam and New Zealand).
investors face a difficult situation. While the American
economy has slowed almost to recession and a property debacle and
massive de-leveraging still threaten, the economies around the world
are still booming. The solution is clear; investors must go
abroad, if not with themselves than at least with their wallets.
Investment portfolios should be constructed not just of BRICS, but
also of the JACS which largely hold them together — macro-economic
mortar so to speak.
dimensions of the changes heralded by the end of the Cold War are
only now becoming clear. The world looks headed for a gigantic
economic boom. Massive economic prizes will go to the producing
economies. Economies that produce less than they consume can
expect some economic and political shocks. Investors should
beware and construct their portfolios accordingly.
is a senior market advisor, Euro Pacific Capital, whch publishes the