After listening to a very entertaining and informative talk by financial expert John Maudlin, who wrote EndGame — a book on the global debt spiral — I was struck by how US and eurocentric his observations were.
Yes we know the developed world is imploding but far too much attention is given to these scenarios and not enough to what is happening to the rest of the world. Unlike the developed economies, the emerging giants like China, India and Brazil do not have the same kind of problems as Europe and America and over time the engine of economic growth will shift towards the developing world.
We need to have more balance in the reporting of global finances and economies so we are able to position ourselves for this change in paradigm. As South Africans we need to understand our position in this changing environment. While we may be the weakest partner in Brics countries (Brazil, Russia, India, China and South Africa), we are most certainly not plagued with the problems of the developed world, although for a while we will be dragged down by them.
Focus on income
Mauldin made two points that are very relevant to investors all over the world. The first is that when choosing investments, we need to look at income. This is something I strongly agree with. A focus on capital gains is only relevant in a very strong bull market like we saw in the 2000’s. In a more moderate growth period we need to go back to the fundamentals of investing and look at the actual income the asset will deliver. When it comes to equities that would be dividends — buying a company that is offering investors a good dividend income of 4% to 5%. If you buy a property, buy it because it will deliver a rental income of 10%, not because it will double in value over the next five years.
There will be another bull market
Another point he made is that economies and markets move in cycles. We are in a down cycle at the moment and will be for a while to come, however this too will change and the next bull market will return. The key here is that you want to be ready for the next bull-run. You want to have accumulated assets so that you have a significant amount of money that could triple over ten years as the JSE did between 1998 and 2008. There is no point only starting to save in the bull market, you will not have accumulated enough to take advantage of it. If you have twenty years to retirement you will have another opportunity to substantially increase your wealth, but you have to start saving now so that you can grab the opportunity when it comes.
Mauldin’s hot picks at the moment include:
Biotech: He argues that this will be the next bubble in 20 years’ time and you want to get in early. There have been huge advances in medical research and there are treatments coming that will cure cancer and rejuvenate the cadio-vascular system. He predicted that someone in the room would live to 150. Of course he didn’t explain how one could afford to live to that age.
Resources: Even in a weak economy we will still be buying stuff like iPad’s and that needs metals. This is also tied to the growth story in emerging markets.
African agriculture: arable land will be in demand as populations grow.
IT: there continues to be massive advances in technology which improve productivity.