Jim Mellon, chairman of Charlemagne Capital and Regent Pacific tells MoneyWeek where he’d put his money now.
Last week, I went to a party in one of the Temples of Angkor Wat in Cambodia. I wouldn’t normally expect MoneyWeek readers to be interested in my (usually more lacklustre) social life, but one thing struck me about my experience there that has relevance for today’s priced-for-perfection emerging markets. Allow me to explain by example.
When we were leaving Angkor Wat, I bought an espresso and some water at the airport. The total bill was $6, more than the same drinks would have cost me on the Champs-Elysées. This in a country where average incomes are about $300 a year. Locals could not afford these airport prices – the prices had been set to suit foreigners’ wallets.
The same can be said of shares in the more fashionable of the emerging markets. Regardless of their political, structural and legal risks, they tend to be priced highly in terms of p/e ratios and so on – quite often emerging markets sell at levels that match, or even exceed, established markets.
This may be because emerging markets tend to be smaller, more speculative, and because they reflect supposedly higher underlying economic and earnings growth than in established markets. But faster economic growth does not necessarily translate into faster earnings growth – ‘leakage’ occurs at almost every point thanks to asset shuffles, transfer pricing and minority shareholder oppression. In fact, as I have often said, the largest emerging market of them all – China – remains a place of profitless prosperity for foreign investors. China’s stockmarket’s performance has been woeful.
Of course, there are opportunities in emerging markets – but when readers are invited to invest in Bulgarian ski lodges, Serbian wine companies, and Ghanaian telecoms firms, they should be very careful. Emerging markets have been my business for years, and to me they don’t look enticing.
What does look enticing is the metals story: as it relates to China, it has a long way to go. A second wave of cities in China is being rebuilt – or rather hugely expanded – following on from Shanghai and Beijing. The rebuilding of such cities as Nanjing, Chengdu, Wuhan and Tianjin will use up even more resources than have already been consumed in the first wave. China has a chronic shortage of copper (among other metals), and now consumes more copper than the US and Japan put together. China’s consumption of copper has trebled over a decade and will rise significantly in the years ahead – almost no matter what happens to the world economy. Recent shenanigans in copper markets are a symptom that the established order of that market – relatively low long-term volatility – is over. Copper is a good bet, and a much safer way to play the China theme than by dipping into local shares. We have bought an existing mine with huge potential and I am very excited about it.
Similarly, perhaps silver bells will be ringing for Christmas. MoneyWeek editor Merryn Somerset Webb and I have shared a similar view on silver for some time and it looks to be paying off. I firmly believe silver – now just over US$8 per ounce – will go to US$25 in the next three years or so. Hopefully, profits from this will let me keep on expanding my property portfolio in Germany, which is still unfashionable compared to any other property market in Europe. German property is a banker for the retirement fund and I urge readers to make a trip to Berlin to see for themselves.
As for currencies, I’m sticking with the yen. I prefer to own currencies that reflect an economy that sells things, rather than primarily buying them.
Jim Mellon is the author, with Al Chalabi, of Wake Up! Survive And Prosper in The Coming Economic Turmoil (Capstone Publishing)