Feral and Ferrous

That’s just what the world needs right now - a feral state with a tin pot dictator who has an inferiority complex (and probably a personal security one as well) - chucking missiles around and setting off nuclear bombs. Kim Jong-il, who looks like a character out of “South Park”, and behaves like one as well, may be doing this for domestic reasons as well as trying to draw attention to himself on the world stage, but either way it is not helpful. The lyrics from “Evita” come to mind for this political throwback when General Peron utters the words of every nervous tyrant...

“Dice are rolling, knives are out,
Would be presidents are all about”

Economically this demented idiot and his regime has little impact directly, but geopolitically such actions shake the nerves of an already delicate global economy where the words of “trust and confidence” are so important - but sadly so lacking.
Under this US President we would hope the reactions will be more measured and intelligent than the last cowboy, but this time it is really for the Chinese to step up to their international responsibilities and to impose some discipline on this regional delinquent.
This issue apart, the focus on the People’s Republic of China must increase over the next few years. As I have mentioned before, our medium term growth view must have a more oriental hue over the next few years. That is where the potential for more significant and sustained growth will come from - probably not so much from a thriving demand from the West that we saw in the last decade, but rather from the ability for Eastern nations to start to release their own domestic consumer demand that we know is pent up in certain areas. We only have to look at the explosion of retail expenditure in more liberated nations to see the potential for this. What effect, then, will a burgeoning Chinese middle class have?

This may be one of the first signs of a new economic generation moving away from the
dominance of globalisation, perhaps to an increase of regionalisation?

***

Last week’s move by Rio Tinto to cut the price of iron ore I think was an important move. Firstly it reflected a dose of realism that global demand has been disintegrating, but also to bring down basic asset prices to encourage regeneration at a later date. This was an inevitable event that had to occur as a precursor to any recovery at some stage. This, I suspect, will be followed by more to come over the next few months across other metals. I am sure that China will be banging the table not just for similar cuts but significantly greater ones as well.

The mining companies and commodities themselves are fascinating assets. Unlike many other asset classes, they can constrict supply and even bury the stuff for a while. After all it will still be there in a few years and it won’t have “gone off”. Compare that with commercial property where, once built, your asset may well become one of declining interest rather than rising value.

Whilst the global economy is in a funk, demand for commodities is going nowhere; but as prices fall and supply reduced, so the opportunity for future value is being laid down. This natural chain effect stretches from the mines of Brazil and Australia, through the shipping companies, who are currently laying up their unwanted hulks, through to the cobweb covered factories of Southern China. After seeing the collapse of metal prices since 2007, a time for such investment then may not be too far off.

***

And finally...

Oh the indignity. Rushing for a meeting in Bolton last week, my train was
overtaken by a ‘Tesco’ train - they are becoming ubiquitous, moving vast quantities of products and produce around the country. Beaten by a shopping trolley on rails...

If what the Chinese need is some serious consumer attention - what they really, really need is a few Victoria Beckhams. Apparently her “Hermes Birkin” handbag collection is now estimated to be worth an astonishing £1.5 million. That’s not a collection, that’s a fetish.

Have a good week,

Justin Urquhart Stewart
Director
Seven Investment Management Limited

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This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.