‘The market is behaving as if it’s all over for mining,’ laments Diggers & Drillers editor Dr Alex Cowie in his latest issue out this week. He goes on, ‘but nothing could be further from the truth.’
The good doctor probably feels like a lonely voice right now. It’s been a rough ride over the last two years in the mining sector. But you don’t find bargains when the outlook is rosy. So how do you find them? ‘Find the trend whose premise is false,’ says legendary speculator George Soros, ‘and bet against it’.
The premise, in this case, is that the natural resource bull market is all over. But…
Is that a Bet You Want to Take?
Take China’s economy, for example. We’re told that the Chinese economy needs to adjust from an investment-led, manufacturing and export economy to a consumer-based model. Everyone’s positioning for this pivot, whether they think China can or can’t pull it off. In the meantime, commodity producers get the jitters as they price in lower growth.
But what if China is about to become a major inflationary force in the world? Remember, for the last thirty years China has been a deflationary force as its cheap labour brought down manufacturing costs and it exported cheap products all over the world.
Well, analyst Shaun Rein says, get ready for the buying power of the most important group in the world right now: the Chinese consumer. This will put pressure on prices around the world – including commodities. Rein is especially bullish on agricultural commodities as the Chinese middle class grows.
‘The Chinese consumer will be the greatest growth story in the world in the next three years…As China continues to urbanize, there still is plenty of room for economic growth. I expect GDP to hover around 8 percent over the next five years.’
Rein should know what he’s talking about. He lives in Shanghai. He’s the founder and managing director of the China Market Research Group. And he’s also a columnist for Forbes and BusinessWeek. His basic position is that the Chinese consumer is in a stronger position than people realise.
And, he argues, Chinese consumer demand is a much bigger percentage of Chinese GDP than most economists calculate.
He might be right. Luxury brand Coach [NYSE: COH] revealed sales like this last month: ‘International sales rose 6 percent to $382 million in the quarter, driven by a 40 percent rise in sales in China.’ China is also Apple’s second largest market after the US.
There’s no question Chinese incomes are rising in real terms and there is strong demand for workers because of the shrinking labour pool. This is the opposite of the United States.
Now, it’s easy to be cynical about Rein, as his consultancy obviously profits from advising companies to target Chinese consumers. But it’s interesting to note that Rein came out in 2010 after Jim Chanos called China ‘Dubai times a 1000’ and said he was wrong. That was a gutsy call, considering the credibility Chanos brings to the table. And to a large degree, it’s Rein that has been proved right so far.
A Bubble in China?
It’s 2013 and this bubble has not burst. Maybe there is no bubble. From Reuters a couple of weeks ago: ‘For all the talk about a real estate bubble in China, apartments are much more affordable in smaller cities throughout China’s interior.’
Jim Chanos probably wouldn’t agree with that. Indeed, only this month he gave a presentation that reiterated what he has been saying for the last five years – China’s real estate (especially commercial sector) is a bubble and will end badly. It’s a credit-driven binge that has resulted in massive over investment in buildings and infrastructure. He says it was bad back then, it’s REALLY bad now. The companies connected with it are in trouble.
Rein disagrees and suggests the two biggest problems in China are actually corruption and pollution, not real estate. That’s an interesting angle.
Who’s right? We don’t know. But we do agree a trend to back over the next decade is rising incomes in Asia. As Alex says in his latest report,
‘There are four billion people in China, India, Indonesia and other ASEAN (Association of South East Asian Nations) members who are rapidly getting richer, and increasing their quality of life from a low base – and that will require commodities. Lots of them.’
We agree. But we don’t expect it to be a smooth ride.
Editor, Money Weekend
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