Betting on Countries, Not Stocks

 |  Includes: CH, EWZ, FXI, GXG, ILF
by: Elliott R. Morss

In recent articles, both on this subject and on Gary Shilling’s 2010 recommendations (Gary should stick to real estate), I have argued for investments in Southeast Asia, Latin America, and South Africa. There have been two primary reasons for this position:

  • the heavy overload of debt in the US, Europe, and Japan, and more importantly,
  • the projected rapid economic growth rates of these emerging market countries.

Here, I will not repeat my detailed arguments but instead want to bring your attention to a remarkable interview Monday night (February 8th) with Eike Batista on the Charlie Rose show. The interview will be available in the next 12 hours on the Rose web site. It is one hour long. I urge you to listen to it in its entirety.

Batista’s father ran Cia. Vale do Rio Doce which is the world's largest iron ore exporter. His father would not let any of his children get involved in Vale - “no nepotism”. Batista, with his own investments in iron ore, Brazilian infrastructure, and oil, is on a growth path to be the world’s richest man in less than a decade.

But what makes his interview exceptional is his view of global growth. He points out that Brazil now has everything: a great natural resource base (offshore oil discoveries are real – he believes Brazil will shortly have proven oil reserves that will make it the 5th largest in the world, a strong manufacturing sector, and leadership that understands how to work with business. Brazil was affected in a very minor way by the Western banking collapse and the ensuing global recession. Why? In part because only 14% of its GDP is exported, and in part because of its growing middle class.

A lot of Batista’s business is with the Chinese. He is building ports and other facilities to ship iron ore, soy, and soon oil to China. He his great admiration for what is happening in China: “A billion-person middle class – they quickly became the low cost/high quality producer of everything: they are unstoppable.” But China is natural resource poor and they need to buy them from Brazil and other natural resource rich countries.

He sees Brazil, Chile, and Colombia as the solid economic countries in Latin America; he is not happy about the “populism in Argentina (too bad, such a rich country), Ecuador, and Venezuela. He is sympathetic to the revolution in Bolivia (“it had too happen – Bolivia has been exploited for 400 to 500 years”). He said Peru has to develop a greater concern for its poorer people before it will be stable politically. And he is decidedly not enthusiastic about Mexico.

I feel pretty much the same way about Latin American countries as a result of the studies I did with my students last November at the Business School at the University of Palermo in Buenos Aires on how they were dealing with the global recession. On Mexico, see my posting here.

Batista was not enthusiastic on economic prospects for the US, Europe and Japan. He believes the tremendous debt overhang will plague these countries for more than a decade. He noted that Brazil had its own problems with overspending, inflation and debt back in the 1960 - 1990s period (at one point, debt service payments exceeded 80% of exports). It took Brazil more than 10 years to break the cycle and he expects it will be the same for Western nations.

He noted that it takes a long time for investors (and the rating services) to regain confidence once it is lost.

I repeat: if you want to understand the future of the global economy, listen to Batista’s interview in its entirety.

I will post specific investment suggestions for countries in Latin America, Southeast Asia, and South Africa in the next two weeks.

Disclosure: No positions