The US-based analyst Frederick Sheehan offers some interesting ideas for a long-term global investment strategy for "outsized gains" based on the following themes, most of which are currently "under-appreciated, ignored, or considered too far ahead of the market":
Structural imbalances: America's trade deficit requires foreigners to invest an extra $800 billion in the US, while Americans go further into personal debt so they can continue spending $107 for every $100 they earn. These trends are unsustainable. It's an argument that favours non-dollar cash flow and assets.
Decaying financial structure: Profligate money creation by the central banks, and financial engineering based on derivatives that "has turned all the world into a speculation," means that the world is now "saturated with paper assets."
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One proof is that the extra money is becoming much less effective in creating wealth. In 1981 it took $1.42 of additional credit to generate each dollar of additional national income in the US; today it takes $4.
It's an argument for moving from financial assets to real ones.
Shortage of natural resources: Inadequate supply of metals will persist as producers are wary of investing in new capacity after 25 years of "barely avoiding bankruptcy." There are few friendly places to prospect and there are "nationalistic resource grabs" by governments. Competition is intensifying from the state-owned and financed industries of resource-hungry countries; environmentalism is doubling the time-lag for bringing new mines into production; energy costs have made much mining unprofitable; and ore grades are declining.
Although demand will wane when China's economy ceases to grow at 9 per cent a year, it will remain strong. "Having gained a taste for indoor plumbing, refrigerators and other electrical appliances (one half of urban homes in China now own airconditioners), the demand for commodities and services (water, electricity, gasoline) will not collapse."
Shortage of real productive assets: Natural resources are not the only kind of real assets. The concept also encompasses industrial and infrastructural assets such as ships, drilling rigs, LNG (Liquefied Natural Gas) terminals and chemical plants.
In Canada's oil sands country there is now such a shortage of accommodation that it costs the equivalent of $400,000 to buy a 13-foot trailer (4-metre mobile home).
Nationalization of hard assets: Russia is extending its ownership of and control over natural resources and other industries regarded as strategic, as well as buying companies in other countries giving control over markets, such as pipelines and refineries.
France has announced that cross-border mergers will not be allowed in 11 industries. The US has blocked foreign takeovers of ports and the oil/gas producer Unocal. Foreign companies are under attack and having their assets seized in countries such as Venezuela and Bolivia.
Natural-resource leverage: Countries with large commodity reserves are increasingly using them to apply political leverage to achieve national aims. 85 per cent of the world's oil reserves are effectively under state control.
Financial leverage: There is also considerable potential for countries holding large foreign reserves to use them to achieve political objectives. Foreign central banks alone now hold $3 trillion in dollar deposits and bonds.
Emerging-world's growing power and independence: As well as making huge investments in their own infrastructures, emerging economies are buying up real assets in the mature economies such as fibre-optic networks and toll roads in America.
Emerging-market companies based in the Mideast, Asia and Latin America spent $42 billion acquiring businesses in Europe in 2005 and $14 billion in the US.
Sheehan believes that we should seek to capitalize on these trends by investing in knowledge about assets and companies that best fit the longer-term goal of ownership, buying assets such as physical property or businesses "that control the choke points" (producers, transporters, owners of mining rights), and shifting portfolio content from financial securities to real assets.
The best long-term investments
The investments he favours include the precious and base metals, mines and mineral deposits, farmland, and infrastructural assets such as ships, railways, ports, bridges, pipelines, water mains and even sewerage systems.
He also suggests investment in "services, consumer markets and infrastructure in countries with control of real assets" such as a supermarket chain in Alberta (whose sands contain the world's second largest oil reserves). Or even "countries that no investor will touch," such as all those in Africa. He offers this interesting list of "securities that one would want to own":
Precious metals: Central Fund of Canada is an example of a listed security offering direct ownership of bullion rather than participation in mining companies with their inherent risks.
Newmont is an example of a mining company with reserves in relatively safe domiciles, while Gold Fields, being based in South Africa, a country that is relatively safe for Western investors, may also have the advantage of being able to operate more easily "in countries with confiscatory tendencies."
Base metals: When the leveraged, private-equity-driven mergers and acquisitions boom comes to an end, only the very largest companies may survive. The biggest of them all, Australia's BHP Billiton, "operates in some risky countries," but mainly on home ground or in "safe" places.
Energy: You can invest in physical oil through exchange traded funds such as US Oil Fund; or in listed trusts based on operations in "politically safe territory" such as Germany's Northern European Oil Royalty Trust, the Canadian Oil Sands Trust, US oil and gas trusts such as Mesa Royalty, Williams Coal Seam Gas, Prudhoe Bay Royalty, Cross Timbers Royalty.
Australia's Woodside Petroleum is a play on LNG. Oil refineries such as Valero are essentially a "monopoly business" as there have been no new ones built in the US since 1971. Oil and gas pipeline companies offer dividend yields of 5 to 8 per cent.
Land: Argentina offers the advantages of cheap unleveraged investments with great soil, abundant water, and property rights that have "survived many stress tests." Two stocks to look at are Cresud SACIF and IRSA Inversiones.
Tejon Ranch and St Joe are US companies with big holdings. ING Clarion Global Real Estate is an international fund with an emphasis on yield. Alpine International Real Estate, by contrast, focuses on capital appreciation.
Equipment: Precision Drilling Trust of Canada provides oilfield supplies, rigs and drilling services. Sasol is a specialist in production of liquid fuels from coal and gas, with its South African location giving it political advantage in countries hostile to the US. Germany's RWE is a giant provider of electricity, gas and water supplies.
Logistics: Singapore-based Pacific Shipping is a trust earning income from chartering of container vessels. Hong Kong-based Hutchinson Whampoa is the world's largest port operator, while Jinsui provides shipping, transportation and storage services. Macquarie Infrastructure Trust operates airports and toll roads. Genesee & Wyoming and Florida East Coast Industries run freight rail services in the US and Australia.
Infrastructure: Australia's Sims Group is the world's largest scrap metal company, while Metal Management operates 40 recycling centres in 13 US states. Lafarge is the biggie in building materials, operating in 76 countries.
Other commodities: Fording Canadian Coal Trust earns its income from selling the black stuff. CF Industries Holdings has worldwide fertilizer manufacturing facilities. The listed Australian Wheat Board markets that country's wheat crop. Consolidated Water has desalinization plants in California and the Caribbean.
The Uranium company, listed in Toronto, owns a stockpile of the physical metal, so it's a way to participate without the risks of the highly speculative market in uranium shares (more than 200 new listings in Canada and Australia over the past 18 months).
However, note that Sheehan rightly warns that the above ideas are starting-points for further investigation to judge whether their prices are right, and after understanding and assessing specific risks.
By Martin Spring in On Target, a private newsletter on global strategy
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