Yesterday, in Part I, I pointed out that geopolitical issues are every bit as important as economic issues in determining how to invest. That is true even for U.S. companies trading on U.S. markets, and certainly must be done for investment opportunities beyond U.S. shores. I discussed my misgivings about corporate governance, corruption, bribery, lack of transparency, and populist and socialist regimes that view corporate success as government largesse. I used as my example the BRICs – Brazil, Russia, India and China – as the best-known of the “emerging” economies. They aren’t the only emerging economies, but are representative of the larger group that includes nations like Kenya, Nigeria, Indonesia, Vietnam, Romania, Lithuania, Colombia and many more.
The same is true of the “ABC”s I’ll cover today. I could as easily have reviewed Israel, Norway, New Zealand, Chile, Singapore, Taiwan, Korea, South Africa or a number of others. I chose to use natural resources, proximity to markets, and intellectual capital in my selections. Norway, Chile, and South Africa have extensive natural resources and intellectual capital, and Israel, New Zealand, Singapore, Korea and Taiwan more than make up for their lack of physical resources with their intellectual resource base and entrepreneurial cultures.
There are many natural-resource-laden nations where literacy is below 50%, governance is non-existent, violence is widespread, corruption is rampant and transparency is actually opaque. Still, the BRICs need what they have so they’ll overlook genocide in Sudan or anarchy in The Democratic Republic (though it is neither) of the Congo. Africa has far better examples than Congo and Sudan. That’s why the “B” of the ABCs is in Africa.
The A is Australia, the B is Botswana, and the C is Canada. Like Congo and Sudan, the ABCs provide the natural resources the BRICs desperately need to keep their restive populaces fed, housed, clothed and employed. But ABCs are nations with good governance, education, and transparency. All have freely elected governments answerable to the electorate. If you were a BRIC and needed coal, which would you rather trust, anarchic Congo or democratic Botswana? If you need oil, would you rather trust the populist rhetoric and crumbling economy of Venezuela or the 150-year-old stable democracy of Canada? You can find uranium in Kazakhstan, but why? There’s even more in Australia. I’ll engender little argument in my choices of two stable Western democracies, staunch US allies, and democratic capitalist nations like Australia and Canada. But Botswana? Please read on. I’ve spent time in all three nations and I believe you may agree with my conclusion after reading a bit further.
There is a fine website, doingbusiness.org, that has compiled a matrix of how many days and “procedures” (forms to fill, trips to various agencies, etc.) it takes to start a business in various countries. If you click by country, it shows you the exact hoops you must jump through “officially” (not counting bribes and favors.) Countries range from 1 day, 1 stop in business-friendly New Zealand and (while it varies from state to state) 6 procedures and 6 days in the U.S. to 13 procedures and 694 days in Suriname. It’s only 136 days but *20* procedures in Equatorial Guinea. There are 19 procedures required in Chad. I’m thinking “not real business-friendly.”
How do the BRICs stand up?
In India, you have to visit 13 bureaucrats, but can still get going in just 30 days. In China, it takes 14 different visits to bureaucrats and 40 days. In Russia, it’s only 8 “procedures” and just 29 days. If Putin likes you. If you aren’t Chechen. Or Jewish. Etc. In Brazil, as befits a nation where each bureaucrat has his hand out, it is a mind-numbing 18 procedures and 152 days.
The ABC countries are not without sin in this department. True, Canada requires just 1 procedure, filed electronically, with as little as a 1-day turnaround. And Australia has 2 whole procedures and 2 days out of your life. But Botswana requires 10 procedures and as much as 78 days waiting time (probably a legacy from their days as a British colony!) Still, in the “Ease of Doing Business” ranking, Botswana beats every single one of the BRICs. Doing Business compiles other data like investor protection, cross-border trading, enforcing contracts and so on and puts it all together in a best to worst “Ease of Doing Business Rank.” Of the countries I’ve mentioned in this article, Singapore is #1 in the world, New Zealand 2, the U.S. 3, Canada 8, Australia 9, Norway 10, Japan 12, Korea 23, Lithuania 28, Israel 30, South Africa 32, and Botswana 38. Others include Chile 40, Romania 47, Columbia 53, Taiwan 61, Kazakhstan 70, Kenya 82, China 83, Vietnam 92, Nigeria 118, Russia 120, India 122, Brazil 125, Indonesia 129, Sudan 147, Venezuela 174, and, dead last in the world, #181, is (Dem Rep of the) Congo.
In addition to fair and business-friendly business practices, good corporate governance, democratic institutions, intellectual capital and knowledgeable work forces, the ABCs have immense developed and yet-to-be-developed natural resources. They also have relatively low populations so unlike, say, China, which also has lots of mineral and petroleum resources, the ABCs can actually afford to export huge amounts beyond their native consumption.
Here, in a few sentences or so, is what I like best about each of our ABCs:
Australia. Look at a world map. Australia sits equidistant between the two great markets of India and China. (A distance just slightly greater than that from Seattle to Miami.) Both China and India desperately need more coal, more iron ore, more gold, uranium, nickel, aluminum, natural gas and oil. “The Lucky Country” is the world’s largest exporter of coal. And they have massive amounts of iron ore, gold, silver, uranium, nickel, aluminum, diamonds, natural gas, oil and more. Australia is a stable Western democracy, a staunch ally of the U.S., and a capitalist economy with an appropriate social net. Why should I buy a coal company in China, or worse, in Congo, when I can buy a company in well-governed and far safer Australia that supplies the BRICs with the materiel they need to build and modernize their nations?
Botswana. No one who has spent any time in Botswana, as I have, will be surprised by my choice. Just as RSA (South Africa) was under-appreciated by investors for years, so, today, is Botswana. China, India and every other nation with too few resources for their burgeoning populations will be turning to Africa. And I believe Botswana is the example they will strive to find. Every African dictator and his cronies will benefit from China’s insatiable quest for oil, minerals and food. But only the African nations that are well-governed like Botswana and neighbor South Africa will see its people benefit as well.
Botswana is the model for what those of us who care about Africa want to see succeed. Bono can raise all the money he can to hand to African rulers, but what does that do for the adoption of free elections, the rule of law, intellectual and physical property rights, the enforcement of contracts, and direct foreign investment? A nation like Botswana that seeks private business investment will be accountable to their global partners. Others that only get handouts from do-gooders or do-gooder governments are accountable to no one but their Swiss bank accounts.
London is currently the world’s diamond capital. DeBeers controls almost half of the world’s diamonds and it keeps its biggest stash in London. But it just completed a joint venture with Botswana creating a new diamond processing and storage facility there. After all, bigger-than-Texas Botswana produces the most gem-quality diamonds of any nation in the world. Why store in London when the diamonds are mined in RSA and Botswana? (By the way, diamonds have more and more industrial uses, like for oil drilling bits. While Botswana is #1 in gem-quality diamonds, Australia is #1 in industrial diamonds. And Canada is #3 in both gems and industrial diamonds.) In addition to diamonds, Botswana’s 2 million people have 200 billion tons of coal, extensive and not-fully-explored copper, nickel, potash (for fertilizers), iron ore, and silver. It is Africa’s longest continuous multi-party democracy and welcomes Western tourists and businesses.
Canada. As if the two previous suppliers for what the world, especially the developing world, needs and wants weren’t enough, here’s Canada: untold (literally – much of the country hasn’t even been explored for minerals and oil) riches in metals, natural gas, oil, fertilizer and renewable timber in amazing abundance. Ample water, peaceful neighbors, and diamonds, gold, and silver. Just 34 million people in a nation a smidgen under the size of the U.S. Did I mention uranium deposits? Aluminum? Copper? A well-educated workforce that holds its own in hi-tech? Oh, and they speak English. Just like they do in Australia. Just like most do in Botswana. And Canada didn’t go goo-goo over subprime and other garbage (and neither did Australia, Botswana, Israel, Singapore, et al) so their economy is in better shape than ours. Their bankers don't need money from the taxpayers' pockets to lend for expansion.
The future may or may not belong to the BRICs, a thesis so generally accepted that no one questions it. I can't buy into it. I believe the future more likely belongs to the suppliers to the future, no matter which nations are ascendant and which in decline. Foremost among these I count nations like Australia, Botswana and Canada. For me, good governance, transparency, intellectual capital, natural resources and the rule of law trump a hot tip on an unknown quantity any day.
DISCLOSURE: No positions yet. As / if the markets decline, I'll jump on EWA and EWC and consider FXA and FXC.