As 2015 kicks into gear, Martin W. Hennecke outlines some top global investment opportunities ? bearish and otherwise
Early in 2014, the World Bank?s International Comparison Program predicted that China would become the world?s largest economy before the end of the year. And they were bang on the money. In PPP-adjusted (purchasing power parity) terms, China enters 2015 in the top position, where it will likely remain for a very long time.
It?s no easy job to compare the gross domestic product (GDP) of different economies, as vouchsafed by the fact that there have been only three such reports in the past 20 years. But the assessment has been made, and as of this year, the US can no longer claim to be the world?s economic top dog.
The QE merry-go-round
Looking back at 2014, it?s interesting to recall that just as the US phased out round three of its bond-buying programme, Japan surprised the market by stepping in to fill the void. At the end of October, Japan announced not just a measured expansion of its own quantitative easing (QE) programme, but that it will be monetising approximately 100% of all newly issued government debt. This move is quite unprecedented in recent history.
To be fair, Japan doesn?t have much choice. It has a debt burden worse than that of Greece, and unlike Greece, it has no hope of Germany coming to the rescue.
Certainly this is something investors should at least bear in mind before going all in on Japan, which is not to say that there aren?t opportunities amid growing inflationary expectations. Keep an eye on the Japanese property market for instance, particularly on the residential side, where prices are historically low.
Meanwhile, in the market of Japan?s arch rival, China, it is not property but equities that are available at historically low prices, that is via Hong Kong-listed H-shares. As of January, these were 30% less expensive (on average) than their mainland-listed, A-share counterparts, according to the Hang Seng China AH Premium Index. This valuation discrepancy is a result of the strong rally we saw last year in Shanghai/ Shenzhen A-shares, in which Hong Kong has not yet significantly participated.
H-shares presently also trade at an approximate 40% discount to the global equity index on a price to earnings (P/E) ratio basis, and only 1.2 times net assets, which means they are among the most attractively priced globally.
Investors should also note that even though Hong Kong-listed Chinese equities and related funds may be denominated in US or HK dollars, their income is ultimately derived from the mainland and in Chinese yuan. Such investments therefore provide Chinese yuan exposure and are not endangered by the (albeit diminishing) political turmoil in Hong Kong.
The energy sector
Speaking of political turmoil, with regards to the Ukraine situation, it?s clear that sanctions, coupled with the oil price crash have put pressure on Russia?s economy and currency.
However, Russia?s relatively low cost of energy production (lowered further by the rouble drop) could put its foreign-currency-earning exporters in a better position than their higher cost counterparts abroad. Moreover, the signing of a new, preliminary gas-supply agreement with China last November, on top of the US$400 billion deal reached in May, suggests a decreasing dependency on Europe. China is looking to reduce its coal usage in order to control pollution and meet its goals under a historic climate agreement with the US.
Natural gas, incidentally, is not the only energy sector China seeks to expand to this end. 1n 2015, according to a Bloomberg report in November last year, China will likely install enough new solar panels in factories, schools and greenhouses to generate as much as 8 gigawatts of power.
China has been the world?s biggest solar-energy market for two years running; and the number of small, new solar-power systems installed during 2014 is estimated to have been 10 times higher than that of 2013.
Demand for solar power may, in turn, be supporting a price recovery of the precious metal, silver ? perhaps the most beaten-down of all commodities at present. This is because silver is a primary ingredient in photovoltaic cells, that are used to catch the sun?s rays and transform them into usable energy.
Finally, it is worth noting that silver?s ?sister metal?, gold, recently received a rather prominent endorsement. Speaking to the Council on Foreign Relations, ex Federal Reserve chairman Alan Greenspan commented that the US bond-buying programme was falling short of its goals with effective demand ?dead in the water?.
Saying that he did not think it was possible for the US to end QE in a trouble-free manner, he suggested that gold was a good place to invest and that its price was likely to be ?measurably higher? five years from now, after having dropped approximately 35% since the summer of 2011.
Indeed, when considering the current low gold price against the backdrop of continued strong Asian demand; the way increased use of the Chinese yuan in global trade is slowly eating into the US dollar?s market share; and rising sovereign debt and inflationary risks across the globe, it seems that Mr Greenspan may well turn out to be correct in his assessment.
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