Thematic
investing, or investing based on emerging themes, is fraught with some
danger. Many people invest in the latest hot theme and get burned soon
enough. Others mindlessly put their money into a company based on a
theme without regard to valuation or quality of management – another
sure-fire way to end up in the red.
And
let’s face it: the future is inherently uncertain. If picking
future investment themes was easy, everyone would be sipping pina
coladas in Bora Bora. The best investors know this and place their bets
according to probabilities. That is, they invest when the odds are in
their favour and invest large amounts when those odds offer significant
upside with minimal risk.
The
question then becomes this: which investment themes might give you the
best odds of success over the next decade? It’s a tough question. If
there’s one thing for which I have a high degree of conviction, it’s
that the world is currently drowning in debt and that debt will need to
be cut, one way or another. If that’s right, you’ll want to avoid
sectors which have benefited most from the three decade long expansion
in credit. The finance sector is an obvious one and the bear market here
is likely to last decades. The tech sector is another – think of all
the tech start-ups and others which will evaporate when the silly
venture capitalists funding them don’t have access to cheap and abundant
money. There are many other sectors which will suffer too.
In
other words, you’ll probably want investment exposure to themes which
may still thrive in a world of shrinking credit. There won’t be many of
them but there are a few ideas. Asian outbound
tourism has been, and should continue to be, a strong theme which
transforms the global tourism sector. Privatization of state-owned
assets appears a sure thing – in the developed world as well as China –
given bloated government balance sheets. Acquirers with deep
pockets should benefit. Low to mid-end consumption should do well as
developed world consumers tighten their belts while Asian ones start to
spend more with increased wages. Finally, gold is likely to thrive as
the credit boom turns to bust and faith in government policies and
currencies is shaken.
Asia outbound tourism
I remember reading a research report by a sell-side analyst in Indonesia in early
2006 looking at the potential boom in visitors to the beautiful beaches
of Bali due to a growing influx of Chinese tourists. It was considered
then a far-flung theory as Bali was still suffering from a series of
terrorist bombings and Chinese tourists only accounted for about 6% of
total visitors to the island. Since then though, Balinese tourism has
surged and the Chinese have played a significant part in that. China now
tops Japan as the country with the second-largest number of visitors to
Bali behind Australia. And Chinese tourists account for nearly 12% of
total visitors to the island, double that of 2006.
Back
then, there were no airlines offering direct flights from China to
Bali. Now there are several. That’s not counting the many charter
flights which the Chinese take to the island. In Bali today, there are
also slews of foot massage shops, jewellers, status artwork and
other items catering to Chinese consumers, Chinese
restaurants and Chinese speaking guides.
These
trends are not only happening in Bali, but in every tourist destination
across the world. Chinese tourists are driving growth and their needs
are being increasingly catered too. And those needs are very different
to tourists from the U.S., Europe or Japan. For instance, Chinese
tourists spend much more money on shopping vis-a-vis hotels. Various
studies suggest two-thirds of Chinese overseas tourists spend more than
20% of their budgets on shopping with 25% spending greater than 50% of
their budgets on shopping.
The
trend of increasing Chinese outbound tourism looks set to continue. In
2012, the Chinese outbound tourism market became the world’s largest,
moving ahead of the U.S. and Germany. The number of annual Chinese
outbound tourists now totals 83 million, up almost 8x since 2000.
The
great thing about this trend is that it appears to be in its infancy.
Think about how the Japanese, having fully recovered from the ravages of
World War Two, took to the skies from the 1970s and transformed tourism
destinations such as Hawaii and Australia’s Gold Coast. They
also transformed the airlines, hotels, amusement parks, travel agents,
restaurant chains, spa and beach resorts as well as duty free stores
which catered to them.
The
same thing is likely to happen as China and other Asian countries catch
the travel bug. The companies which best fulfil their needs will be big
winners.
I
like the Macau casino operators in the long-term even though valuations
are somewhat stretched at present. Macau accounts for almost 30% of
Chinese outbound tourism and that number should increase as transport
infrastructure to the territory improves. Among the casino companies,
U.S.-headquartered Las Vegas Sands (NYSE:LVS) is probably the pick of
the bunch.
I
also like Hong Kong retailers as a play on Chinese tourism. Hong Kong
is still the dominant destination for Chinese tourists and is likely to
remain so. Though be wary of some of the high-end retailers
who’ve benefited from the lavish spending habits of corrupt Communist
Party officials. That may not last.
Finally,
hotel operators with significant Asian exposure should do well.
Thailand conglomerate, Minor International (SET:MINT), is my preferred
stock in this space.
Privatisation of state-owned assets
In
2011, the world’s biggest private equity firms were busy raising
money to take advantage of over-indebted European countries needing to
shed state-owned assets to stay afloat. Wholesale asset sales never
really happened though as these countries papered over cracks, with the
help of a few trillion dollars from the European Central Bank.
Europe’s
problems haven’t gone away though. And the problems aren’t limited to
Europe, as governments in the U.S., U.K, Japan and China have similar
issues. Put simply, all of them have too much government debt. And one
way or another, that debt will need to be cut back. Whether
through write-downs, austerity, inflation or a combination of all of
them, the debt will be reduced.
One
way to cut debt is through the privatization of state-owned assets. I
think that this will be one of the enduring investment themes of the
next decade. Ironically, it seems probable that the paragon of
communism, China, will be the first to accelerate the sale of
government-owned assets in an effort to reduce the influence of
state-owned enterprises (SOEs) and encourage competition.
Which
companies will benefit from the broad-based sale of state-owned assets?
Well, most would point to private equity firms such as Blackstone and
TPG. But I’d suggest otherwise as these firms rely on outside funds and
in a credit-deprived world, these funds will dry up.
Instead,
I’d look to conglomerates with deep pockets and minimal debt to take
advantage of asset sales. Some of the large North American companies
such as Berkshire Hathaway (NYSE:BRK-A) and Brookfield Asset Management
(NYSE:BAM) should be in poll position.
In
Asia, it’s a bit trickier as the private companies bidding on
state-owned assets will need high-level government connections to be
successful. Particularly in Japan and China.
Low to mid-end consumption
In
the West, excess debt and declining real wages have resulted in
consumers cutting back on spending since 2008. That’s been bad for
high-end retailers but good for businesses such as dollar stores. It’s
a trend which is likely to continue for many years to come.
In
Asia, the situation is very different. Consumer balance sheets are in
great shape, barring South Korea. Savings are abundant while debt is
minimal. Better yet, wages are growing rapidly, even in slowing
economies such as China, India and Indonesia. Excess savings and rising
wages augur well for future spending.
Moreover,
you have countries such as China which are encouraging people to
spend more. It’s part of China’s strategy to re-balance its economy away
from being over-reliant on investment for economic growth.
As
a consequence, low to mid-end consumer companies across the globe are
likely to do well going forward. In the developed world, consumers will
continue to trade down. In the developing world, you should have people
spending more, albeit still at the lower end given most of the region,
including China and India, remains poor.
I’m
not an expert on consumer companies in the developed world but discount
operators should outperform from here. Dollar store companies in the
U.S., U.K. and Australia have recently underperformed on hopes of
economic recovery, which may provide some interesting potential entry
points.
In
my neighborhood of Asia, Hong Kong headquartered, Giordano (HKSE:709),
is one of the best low-end clothing retailers in the region and is
inexpensive at current levels. Other exceptional consumer brands worth
looking at include Chinese beer giant, Tsingtao Brewery (HKSE:168), and
Thailand television operator, BEC World (BSE: BEC).
Gold
Preference for having gold in an investment
portfolio- Gold has two things going for it. First, if you think that
debt contraction is probable in future as I do, that brings risks to the
world’s financial system. After all, the still thinly-capitalized banks
own much of the debt which will need to be restructured/written down.
Therefore, it’s be wise to own assets which sit outside the financial
system. That’s where gold comes into play.
Secondly,
the current policies of the world’s central banks may be preventing the
contraction in debt which needs to occur to cleanse the financial
system. In my view, central bank moves to reflate the credit bubble are
likely to lead to a larger credit bust down the track. In many ways,
gold is the anti-central bank. The less faith that you have in central
banks, the more gold that you should own.
As
for the best ways to play gold, exchange-traded funds (ETFs) and stocks
both have counter party risks, though I do find the latter attractive
given they’re arguably the most hated assets on the planet. Physical
gold is my preferred way to play this theme though as it’s the least
risky of these options.
Agriculture
If
a prudent investment strategy involves holding physical assets outside
of the financial system, then agriculture should also be considered.
Unlike many of the hard commodities, agriculture has a serious
supply-demand imbalance which should result in prices remaining elevated
for years to come.
Agriculture
inventories are at multi-decade lows. That means inventories are being
drawn down as consumption exceeds production. Global agricultural
production has only increased by 2.1% per annum over the past decade and
the OECD forecasts that growth rate will decline to 1.5% over the next
ten years.
The
principle reasons behind the lack of supply are limited expansion of
agricultural land, increasing environmental pressures, rising production
costs and growing resource constraints.
Meanwhile,
demand continues to grow solidly primarily due to growing populations,
higher incomes and changing diets (higher calorific intakes) in
developing markets. On the latter, for example, it’s well known that
meat consumption increases as a country becomes wealthier. The OECD
predicts that the developing world will account for 80% of the growth in
meat consumption over the next decade.
While
droughts in recent years and subsequent surges in agricultural prices
have grabbed television headlines, it’s worth remembering that these
events merely exacerbated the already tight supply in soft commodities.
And it seems that tight supply will only worsen unless there are major
technological breakthroughs to improve agricultural productivity.
As
for where best to get investment exposure to agriculture, I’d
suggest you look at commodities where supply-demand imbalances may
further deteriorate, such as sugar, coffee and potash.
Infrastructure
In the U.S., good arguments
have been made for an urgent upgrade of creaking infrastructure.
Increased spend on infrastructure could create jobs, improve security at
ports and electricity grids as well as keep the U.S. competitive with
China - all of which could be financed at exceedingly low interest rates
thanks to Mr Bernanke’s quackery. But political gridlock means it
probably won’t happen.
In
the developing world, the problem is not of repairing infrastructure,
but building it. Some countries such as Singapore and China are host to
some of the world’s best highways, airports and ports. Others such as
India and Indonesia remain in the dark ages.
For
instance, Indonesia spends just 1.7% of GDP on infrastructure,
compared to China’s 8%. More than 40% of Indonesia’s roads remain
unpaved. The country has only 11 miles of railway line per person, less
than half that of Thailand, India or China.
Anyone
who’s been in a traffic jam in Jakarta can attest to the underspend.
Are traffic jams in Jakarta the worst of any capital city in the world, I
wonder?
The
likes of Indonesia don’t have any choice but to improve infrastructure,
and fast. Otherwise, supply bottlenecks will choke economic growth. The
cement sector in Indonesia is an oligopoly and a great way to play to
the increased infrastructure spend to come. Indocement (JSE: INTP) is
the pick of the bunch.
