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| Opportunities & Exposures: Investing |
Here Be Dragons
Dan Denning
12/01/2005
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From the 17th floor of the Nanjing Hilton where I stood last June, you can
clearly see that China has an energy problem. Actually, it is what you cannot
see that is most revealing. China gets nearly 80 percent of its electricity from
coal-fired power plants. Those plants spew a dense fog of pollution, which I
could look into—but not through—from my hotel room.
For China’s economic
planners, using homegrown coal—when possible—makes more sense than paying the
going market rate for oil or natural gas. It does make sense economically. The
environmental drawback is the thick pall that hangs over many of China’s coastal
cities. In fact, growing civilian discontent over the pollution from China’s
grow-at-all-costs economy is something you should keep your eye on as an
investor. According to Chinese government statistics, there were 58,000 riots or
protests against the government last year. This type of unrest could eventually
threaten political stability in the world’s fastest-growing economy.
| There is no doubt that what’s going on in China and all of Asia is the
single best investment opportunity of our lives. |
Economic
growing pains and geopolitical risk aside, there is no doubt that what’s going
on in China and all of Asia is the single best investment opportunity of our
lives. A new region of opportunity exists. Figuring out where to look and what
to buy is another matter.
If you spend time in Asia, one investment theme
becomes apparent: energy. The Energy Information Administration, a research arm
of the Department of Energy, estimates that the world will need some $16
trillion worth of energy investment in the next two decades to meet its energy
needs. In the oil market alone, Asian countries, including China, will nearly
double their oil consumption from approximately 20 million barrels per day now
to more than 40 million by 2025.
Despite the great run oil stocks have had in
2004 and 2005, a deep current of skepticism about oil prices runs under Wall
Street. This skepticism is misplaced. There is no bubble in energy stocks.
Demand is growing and supply is not. The world’s energy infrastructure is old
and stretched thin. Billions of dollars and years of work are needed to
discover, tap and move new oil to U.S. refineries and consumers.
Many investors hold a misconception that to
make profits from foreign markets, they are obliged to take dangerous risks in
thinly traded markets with thinly traded stocks. But the companies supplying
Asia with its voracious appetite for raw materials are Western companies. These
companies, such as BHP Billiton, operate and profit in Asia but are listed on
exchanges in New York, London and Sydney. Some large Asian companies, like Korea
Electric Power, are listed on U.S. exchanges.
This makes it simple for
investors to make profits in Asia without taking any Asia risk. In time, Asia’s
financial markets will develop so that a Chinese company can raise the capital
it needs by listing on a Chinese exchange. Indeed, someday you may see U.S.
companies lining up to list on Chinese exchanges and tap into the vast savings
China has accumulated in its trade with the rest of the world.
But it will
be years before Western investors can safely invest in transparent and liquid
Asian markets with accurate, trustworthy reporting. While there has
certainly been fraud in mature Western stock markets, investors are still much
better off buying locally and investing in global businesses than trying to buy
local businesses in faraway places.
Investors will make remarkable profits in
Asia in the next 10 years—that’s the upside. The downside is that it will get
harder and harder to make money investing in the broad U.S. indices. This is not
1982, when the greatest bull market of all time began. The U.S. economy and the
stock market are not floating on a rising tide that will lift all portfolios.
Quite the opposite. Asia’s rise signals a new epoch in the global economy. The
U.S. consumer is no longer the engine of global growth. U.S. consumers, weighted
down with debt, are not the economic future. Asia is.
| Dan Denning is the author of The Bull Hunter: Tracking Today’s Hottest
Investments. |  |
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