Amid the upheaval following the financial crisis, it’s easy to lose track of the bigger picture.
Before the crisis, MoneyWeek’s broad investment themes included the long-term shift of economic power from West to East, with the knock-on impacts being a secular (long-term) decline in the dollar, and growth in demand for commodities.
All of those themes remain intact. In fact, if anything, the crisis is accelerating the process.
Why you shouldn’t dismiss charting
I’ve just been reading an interesting note from Robin Griffiths at Cazenove Capital Management. Mr Griffiths is a technical strategist – in other words, he uses technical analysis or charting – and his reports are always worth a look.
A lot of people dismiss charting or technical analysis as a lot of mumbo-jumbo. You can see why. At the more extreme ends, technical analysis attracts some pretty flaky-sounding theories. To the sceptical eye many of these seem to consist of ‘experts’ drawing lines in whichever way proves the particular point they want to make – and that’s probably a reasonable interpretation.
But it doesn’t pay to be too sceptical – too many intelligent people and good investors use charting for it to be a waste of time. For example, Anthony Bolton has said in the past that if he was stuck on a desert island, the one investment tool he’d want with him is a chart. And MoneyWeek’s own James Ferguson has been known to use the words “Fibonacci retracement” on occasion.
So we’d suggest keeping an open mind on technical analysis – even if it’s only to understand why other people use it. We’ll be looking at some of the basics in more detail in future issues of MoneyWeek (if you’re not already a subscriber, claim your first 3 issues free). But in the meantime, what does Mr Griffiths say?
He points out that people have been bandying about the terms “bull” and “bear” market without any real thought to what they mean. But from a technical analysis point of view, there are very clear definitions of each. I won’t go into them in detail here, but suffice to say, when you apply the rules to global stock markets, “a very clear story jumps out,” says Griffiths. “The vast majority of people on the planet now live in areas with new bull markets, raising their standard of living and prosperity. These countries are China, India, Brazil and those other emerging markets that relate strongly to minerals, resources and commodities. Everywhere else is still in bear phase.”
Don’t pile into all emerging markets now
That doesn’t mean you should pile into all emerging markets right now. As Griffiths points out, “short-term volatility can be brutal, making nonsense of a good long-term idea.” China’s market in particular looks as though it has run ahead of events.
Of all the emerging markets, he reckons that India is among the most promising right now. It’s not export-dependent, it’s a democracy, and it has a reform-minded government with a lot of support from the electorate. That’s not to say that India is by any means perfect. It has plenty of problems of its own, as Cris Sholto Heaton has pointed out in his MoneyWeek Asia email in the past, foremost among them a nasty budget deficit (if you’re not already a subscriber to MoneyWeek Asia, you can sign up here for free).
And for now, despite a recent pullback following the Indian government’s disappointing budget, it looks as though there will be better opportunities to get in. So where should you be looking to buy?
Where you should be looking to buy
Mr Griffiths suggests that there’s “a risk, indeed a probability, that the market will see profit taking and drop back to retest the 12,000 area.” However, he adds, “I think we have missed the chance of buying at 8,000.” The 12,000 mark certainly sounds like a decent buying target. The easiest way for a British investor to play India is through the popular JP Morgan Indian Investment Trust (LSE: JII), or via an exchange-traded fund (ETF), such as Lyxor ETF India S&P CNX Nifty (LSE: LNFT), which tracks the S&P CNX Nifty, an index of 50 of India’s largest companies.
Getting back to the bigger picture, what does the shifting balance of power mean for commodities? In the shorter term, we wouldn’t be surprised to see another sharp fall in the price of oil in particular (Why the latest oil bubble could be about to burst) – there’s been a lot of stockpiling, and markets are likely to be surprised by just how persistent the recession is.
However, in the longer run, citizens of emerging markets (as they are still rather patronisingly named) aren’t going to stop demanding a better standard of living just because Americans can’t afford to buy their products any more. Life goes on, with or without the Western consumer. Growing middle classes consume more resources, and our own standard of living is unlikely to fall enough to offset expanding emerging market consumption. So energy and agriculture in particular are going to remain important themes.
We’ll be looking at the individual companies – the big brands and multinationals of tomorrow – that stand to benefit the most from the rise of emerging markets in an upcoming issue of MoneyWeek. If you’re not already a subscriber, claim your first 3 issues free.