A New Way to View Overseas Markets

Earlier this week, I talked about the most important big trend in the world: the growing pressure on our finite natural resources as populations and wealth grow in the emerging economies.

Today, I want to tell about how to play this trend.

As I mentioned on Monday, resource scarcity was one of the topics under discussion at the recent Bonner & Partners Family Office meeting at the Château de Courtomer, France (which serves as the group’s “HQ”).

At Courtomer I argued that a massive rise in the world’s population over the past half-century or so and the explosive growth in wealth in the emerging economies have rapidly depleted our supplies of oil, coal and gas as well as our industrial metals and fertilizer.

And I pointed out that this has been reflected in a massive price rise.

According to recent research published by global investment management firm GMO, “The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. But from 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.”

The magnitude of this price reversal suggests that the downward trend that we saw for the 100 years to 2002 is well and truly over…

…And that a new cyclical trend has emerged – a trend toward permanently higher prices…

Now, is this trend reversal 100% definite?

No. Nothing is.

But would I bet against it?

Absolutely not.

Apart from the overwhelming data backing it up, it’s logical that the more people on the planet there are…and the higher proportion of them that consumes finite resources…the more price pressure those finite resources will come under.

How to Play It…

How can you best position your global investment portfolio to profit?

First and foremost, it involves a shift in the way you think about the emerging markets altogether.

Since 2001, when Goldman Sachs economist Jim O’Neill invented the term, we’ve been conditioned to think in terms of the BRIC economies – Brazil, Russia, India and China.

O’Neill predicted that the combined economies of the BRICs could eclipse the then richest economies in the world by 2050.

And he has a point…

But only two of the BRICs have a surplus of resources relative to their internal demand: Brazil and Russia.

China and India are net importers of commodities. And in an increasingly commodities-constrained world, that’s going to be a major headache.

I’m not saying there aren’t opportunities in China and India. There clearly are.

What I am saying is that, of the BRICs, Brazil and Russia will have the wind at their backs and China and India will be forced to contend with higher-priced commodities – acting as a serious drag on growth.

I prefer to think of the BRAC economies of Brazil, Russia, Australia and Canada.

These are much better placed to grow as prices of natural resources continue to rise.

Some of you live in Canada. So, you are already at a significant advantage. Because not only will the Canadian economy benefit from higher priced commodities exports, but so will the Canadian dollar.

For those of you living in the U.S. or Europe, I strongly advise some long-term exposure to the BRACs.

You can do this easily…and at a low costs…through investing in ETFs that track the stock markets of these resource-rich nations.

I’ve already recommended the iShares MSCI Brazil Index ETF (NYSE:EWZ) and the Market Vectors Russia ETF Trust (NYSE:RSX).

These two big resource-focused ETFs are a great way to add exposure to the Brazilian and Russian stocks markets.

When it comes to Australia and Canada, I prefer to play their resource wealth through ETFs that track the movements of the Canadian dollar and the Australian dollar versus the U.S. dollar.

That’s because the straightforward equities ETFs available have too high a weighting toward the financial services sector (banks in other words).

So, instead consider the CurrencyShares Australian Dollar Trust (NYSE:FXA) and the CurrencyShares Canadian Dollar Trust (NYSE:FXC).

These will rise in value as the Australian and Canadian dollars rise in value versus the U.S. dollar – something that happens naturally when the price of Canada and Australia’s natural resource exports rise.

All four ETFs have the added advantage of giving you excellent dollar diversification, as they rise when the dollar falls.

P.S. If you are interested in learning more about becoming a member of Bonner & Partners Family Office, you can find out about it in this letter from Bill’s eldest son, Will.
 

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