Here are my five favorite megatrends as I presented them to my audiences at the Money Show in Las Vegas this week.
1. The Global Cell Phone Revolution
No technology has ever spread farther and faster than the cell phone. While it took television took 30 years to reach 70% of households, the cell phone achieved this level in less than a decade. While penetration have rates reached 80+ percent in the U.S. and 100%+ in markets like Scandinavia and Israel, they have barely hit 40% in Latin America, 15% in India, and 10% in many countries in Africa. But the growth is breathtaking. India adds 6.9 million subscribers -almost the population of Manhattan -every month.
In the the developing world, cell phones are genuine drivers of economic growth. Harvard economist Robert Jensen recently calculated that every extra 10 percentage points of cell phone penetration leads to about .5% growth in GDP. Cell phones also appeal to the under 25 demo! graphic that makes up the bulk developing economies' populations. Finally, with voice, email, Internet access, cameras, and Mp3 players, cell phones have morphed into far more than voice communication devices. Top pick: America Movil (AMX)
2. The Commodities Super Cycle
With nickel and corn hitting record highs over the past few weeks, commodities are back in the headlines. According to Ji m Rogers, the 20th century his seen three secular bull markets in commodities (1906-1923, 1933-1955, 1968-1982), each lasting a little over 17 years. Rogers believes that we are currently smack dab in the middle of yet another secular bull market in commodities that began in 1999.
The reasons are clear. Demand is accelerating for commodities across the globe. Over the past decade, China had become the #1 consumer of copper, steel and iron ore in the world- consuming more of both than the U.S. and Japan combined. On the supply side,, no major oil field has been discovered in the world for the last 35 years. Virtually no new mine shafts have been opened in the last 20 years. As a results, long neglected commodities giants have morphed into som! e of the most valuable companies in the world virtually overnight. Top pick CVRD (RIO)
3. Europe's Reagan Revolution
Thirty years after the launch of Margaret Thatcher's free market revolution, the economic policies of European governments are increasingly echoing the ideas of the Re! agan rev olution. The recent election of Nicolas Sarkozy as French president last Sunday is yet another nail in the coffin of the European welfare state.
Even socialist Sweden is starting to abandon its much vaunted Nordic model. Sweden's new prime minister, Fredrik Reinfeldt has begun to partially dismantle the Swedish welfare state by reducing taxes, privatizing state assets, and promoting entrepreneurship. There is tremendous leverage in an economies when policies change. In 2007, Europe will grow faster than the U.S. in 2007 for the first time in recent memory. Powerful multinationals, macroeconomic reforms, and strong Euro will ensure that investor in Europe will enjoy strong returns for years to come. Top pick: Swedish ETF (EWD)
4. The Explosion in Financial Services
Hundreds of millions of citizens of developing countries aspire to the lifestyles and consumption habits of American and Western Europeans. These new lifestyles need new types of financing. Fifteen years ago, banks in developing countries offered little more than savings accounts. Today, they have transformed into modern financial institutions that! offer mortgages, automobile and personal loans, as well as as! set mana gement and other high value added services.
Today, top Indian banks are growing 30% a year as far as the eye can see. Ditto for banks focusing in Latin America and Eastern Europe. Chinese banks have catapulted themselves overnight into the ranks of the world's most valuable financial institutions. The share prices of the banks can appreciate five or tenfold over the course of a decade. Top pick: ICICI Bank (IBN)
5. Africa: The Final Investment Frontier
Africa today evokes images of grinding poverty, natural disasters and appalling infrastructure. This conventional view, however, is surprisingly inaccurate. For the third year in a row, sub-Saharan African countries grew on average by 6% and are nudging toward 7% this year. Take India and China out of the equation, and sub-Saharan Africa is actually growing faster than Asia.
Another surprise:! the handful of few investors who can access African stock markets are making a mint. Between 1995 and 2005, African stocks showed compound annual growth of 22%.
Betting in Africa is the ultimate contrarian play. It's hated, it's undervalued, it's difficult to invest in. It reminds me of how much of how former Communist Eastern Europe and Russia were viewed in the early 1990s. That's why early investors in Russia have made 25x on their money in the last 10 years- If that's not an incentive to look at Africa, nothing is. Millicom International (MICC)
Investing in Megatrends: Change is the Only Constant
Megatrends keep going until- well, until they stop. Consider the case of outsourcing. Cheap labor from China and India was supposed to be panacea for global labor shortages for years to come. Harvard economist Richard B. Freeman argued that the only thing that could cause a real shortage would be "a global pandemic that kills millions of people.” This increased supply of labor would keep wages down- and corporate profits up - for decades to come.
Here's where Freeman got it wrong. Wages and cost of living adjust upward! much mo re quickly than the 30 or 40 years he expected. Turns out that companies only enjoy the advantages of low cost labor at best for a three- or four-year window. Nor is supply quite as plentiful as thought. Precious few Chinese and Indian university graduates have the skills to play ball on the multinational playing field. Those that do, can write their own (expensive) ticket. The exuberance toward outsourcing- and the companies who base their business on it- is fading fast.
And there in lies the art of megatrend investing. You've not only got to recognize the trends, but also recognize when they are running out of steam.