Emerging Markets Growth: Profiting From Continual Demand for Commodities

by: Goombarh

Bull Markets and the Supercycle, Commodities Bull and the Emerging Markets - these are all catch-words that characterize our stock markets at the present time. My contention is that the present bull status of our Bull Markets is brought on by some sort of a "Supercycle" that is igniting growth throughout our world economies. Then more specifically, the Emerging Markets in the world are growing and developing the infrastructures of a modern world, and thereby need more basic raw materials which are the driving forces behind the present Commodities Bull.

Recently, reader CB informed me about a Supercycle Report from Standard- Chartered (pdf). Standard-Chartered is a bastion of a bank that has long roots in the emerging markets. It was formed in the 1969 merger of the Standard Bank of British South Africa and the Chartered Bank of India, Australia and China. The report is superlative and in depth about the "Supercycle" growth in the world's economies.

For a taste of the report's contents, following is the opening paragraph in the overview section:

One of the present big issues is who will compensate for the US consumer, often the driver of global demand? Of course, the world should not rely on a heavily indebted American consumer, but it adds to the worries about global demand deficiency. Yet, not only has the world economy rebounded to its pre-recession levels, helped by policy in the West and spending in the East, but on our analysis, the rate of change in consumer spending in China is already high, albeit from a much lower base than US consumption. Assuming nominal consumer spending growth, for instance, of 11% in China and 4% in the US, the increase in China’s consumer spending will overtake the US by 2017-18 in USD terms. The scale of that country is huge. But, as should be made clear from this report, the super-cycle is much more than a China story. Moreover, the lesson of this crisis is not just the need for a more balanced global economy, as we allude to below; it has also reinforced pressure on more emerging economies to move up the value curve, and this is likely to prove another feature of the years ahead.

Paraphrasing the above opening, the author recognizes two main ideas:

  1. The US consumer is the present driver of global demand, through the growth of 4% per year, whilst the Chinese consumer's growth demands are 11% per year. This situation is expected to change by 2017, when the Chinese consumer will overtake the US consumer and be the main driver of global growth.
  2. This supercycle growth is more than just China's growth, as most emerging economies are growing and moving up the value curve, desiring more middle class goods and services.

What is that term that is taught in business schools, beware of your own "self-validation"? I surely hope that this is not the case, where I am merely seeking confirmation for my own opinions. This report is must consumption for any investor, as the research appears to be solid and is based upon the Standard-Chartered Banks exposure in the emerging market areas. This author heartily recommends this report.

One main point is that this Supercycle that the report refers to, started in the year 2000 and is forecasted to extend until the year 2030. Therefore, the growth that is portended is not a short term phenomenon, but a fundamental trend extending over multiple decades.

As you may have realized, the metals and commodities sectors have been on a strong rising trend over the past year. There is the present fear that this commodities growth may have reached the top and that a downward spiral may ensue.

The growth forecasted by this report means that the emerging markets will remain drivers for the world economies for another generation to come. This report does validate the authors' preference for investing in the metals, commodities and precious metals sectors and does provide a measure of comfort that these sectors are supported by an underlying major growth trend.

This growth from the emerging world is driving continual demand for basic metals and commodities such as coal, copper, iron ore, aluminum and may be even driving the demand for precious metals. Some possible investment vehicles that may keep rising in response to these demands would include the following:

  • EEM - Emerging Markets Index ETF
  • SLX - Steel producers ETF
  • KOL - Coal producers ETF
  • JJC - Copper Metal ETF
  • COPX - Copper Producers ETF
  • AA - Alcoa Inc.
  • CLF - Cliffs Natural Resources
  • AWC - Alumina Ltd. (Australian ADR)
  • GLD - Gold metal ETF
  • GDX - Major Gold Producers ETF
  • GDXJ - Junior Gold Miners ETF
  • SLV - Silver metal ETF
  • SIL - Silver producers ETF

There is a remarkable chart in the middle of the report that may just sum it all up...as they say "a picture is worth a thousand words". (click to enlarge)

World Middle Class.jpg

From the chart, note the large concentric dual green and transparent circles, that indicate the Asia Pacific middle class as of 2009 and the prediction for 2030. The green is the present size and the transparent circle is the expected growth by 2030. The author will leave the reader to ponder the implications of the second circle's sheer size and the resulting growth implications.

Disclosure: The author is long junior metals and commodities suppliers. I have no positions in any stocks mentioned, but may initiate a long position in EEM, SLX, KOL, JJC, COPX, SIL, AA, AWC, CLF, GLD, GDX, GDXJ, SLV over the next 72 hours.

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