As the World Turns: A Few Notes on Emerging Market Investing
In a recent edition of The Daily Reckoning, Bill Bonner observed, “The world turned against them at the beginning of the Industrial Revolution. But if the world turns long enough, it comes back to where it began.” He was writing about India. But he could have been writing about China…or Nicaragua…or any one of a number of emerging markets.
In the next 1,618 words, I’ll share few insights about both China and Nicaragua. These insights share no particular connection to one another, other than the observation that economies do not stand still. The “emerging markets” of one generation are the “developed markets” of the next generation, and vice versa.
Change is the one of the great constants in investing. Opportunity makes its nest like a tramp pigeon, never in the same place for very long. There is always something new happening. Asked about his worldview, Mark Mobius, the famous emerging markets investor, once replied: “Things change… You know, that’s it in a nutshell.” And in this swirl of change lies some big chances at profits.
For example, last year China passed the US as the world’s largest market for automobiles. First time ever that’s happened. There were 13.5 million vehicles sold in China last year – a 40% increase. There are now over 40 million vehicles in China. According to the China Economic Review, over 2,000 cars roll onto the road every day in Beijing alone.
China’s steps seem to mirror what happened in the US in the 1950s. China wants to use roads to knit the country together and open up trade between its distant provinces and cities. To that end, the Chinese are laying highways like nobody’s business. By the end of 2008, China had an estimated 60,000 km of highway. The US has 75,000 km. Over the next few years, China plans to have 85,000 km of roads.
This is having some amazing effects. For instance, China recently built a highway from Lhasa, Tibet, which runs all the way to the Nepali border. Along this road is the city of Shigatse, a formerly sleepy town where tourists may stop to gaze at ancient monasteries on their way to Mount Everest. But today, it is also a place where people get rich running freight services along the 515-mile highway.
An Economist correspondent traveling this way recently wrote:
In the past few years, hundreds of millions of dollars have been spent improving the road. This has included covering its gravel sections with asphalt, which has greatly facilitated cross-border trade. On the Lhasa-Shigatse section, which winds along a valley lined by sand dunes and spectacular peaks, Han Chinese from the interior have opened little Sichuanese restaurants catering to the lorry drivers.
The easy mixing of peoples and the freedom to pursue their own ends leads people to trade. Business expands. The quality of life rises. The roads are doing their work. The cars and trucks are coming. Where are the opportunities?
The first thing most people think of is the automakers. GM, for all its struggles, is having no trouble selling cars in China. Sales were up 67% in 2009, to a record 1.83 million units. Other carmakers are having similar success. The problem here is it doesn’t make much sense to buy, say, GM, because you like its car business in China. There is too much else going on there.
I’m more interested in investment ideas that are a step removed from actually building the cars. All those cars will eat up a lot of metals of all kinds, for example. They will also burn a lot of fuel.
Dig deeper and you’ll find China loves methanol as an alternative fuel to blend with gasoline to lower emissions. China blends more than a billion gallons of methanol in gasoline annually. And its appetite for methanol is growing more than 16% a year. Methanol, made from coal or natural gas, is China’s ethanol. Such thinking led us to our methanol play, Methanex (NASDAQ:MEOH).
I recommended this stock one year ago to the subscribers of Capital & Crisis, when US methanol prices hit a temporary low of $200 a ton. Today, the price is about $350 a ton. Not surprisingly, therefore, the MEOH stock price has more than doubled during the last year.
But the stock is still relatively cheap. At current methanol prices, Methanex could generate over $800 million in EBITDA (earnings before interest, taxes, depreciation and amortization). The total enterprise value – or the theoretical price to buy the whole company on the market – is only $2.9 billion. So it trades for only 3.6 times this potential EBITDA. That’s pretty cheap.
Another way to look at it is to think about replacement costs – or what it would cost you to build Methanex from scratch. Methanex trades for just under $400/tonne of methanol capacity. That’s less than replacement cost of about $700/tonne. There is still a lot of upside here.
Shifting to another continent, and another type of observation entirely, change is also unfolding rapidly in Nicaragua.
Nicaragua has always been a place of intrigue, mostly because of geography. Before the Panama Canal, this was the place where people thought of building a canal. As a result, American involvement in Nicaragua goes way back. Militarily, the first Marines landed here in 1912 and occupied it until 1933. And the Somoza regime, a dictatorship created and supported by the US, ran the country until the Sandinistas took over in 1979. (If you are interested in learning more, I encourage you to read Nicaragua: Living in the Shadow of the Eagle by Thomas Walker.)
As a result of the Sandinista era, most Americans probably have a poor opinion of Nicaragua. But it is a beautiful country with its volcanoes, lakes and a lush tropical climate. The people are friendly, and Nicaragua is safe to travel through. The food is great and so are the beaches. It’s also a young country with more than half of the population under 25 years old. (Nicaragua also makes one of the world’s best rums, Flor de Caña – “flower of the [sugar] cane.” I enjoyed it neat and in the national drink, el macua, made with guava juice.)
I recently visited Nicaragua and saw a bit of the country – Leon, Managua and Granada – before settling in at Rancho Santana. The latter is a development project on a spectacular 3,000-acre property on the Pacific Coast near Rivas. Stretches of it remind me of Big Sur with its dramatic coastline.
The sad thing is that Nicaragua ought to be a rich country. Nicaragua was once a prosperous place of some renown. In the 19th century, for example, Granada was the most prominent city in Central America, a rich trading city holding down a key spot in global commerce. But the country’s economic trajectory took a turn for the worse during the 20th century.
Nevertheless, the country’s rich natural resources remain. Nicaragua has lots of good land for growing things. The soil supports a wide variety of crops and livestock. Coffee in the north. Bananas, papayas, mangoes, sugar cane and more grow everywhere else. Nicaragua is also the largest country in Central America and among the least densely populated.
Nicaragua has another special resource: It is among the most water-rich countries in the world. (I’ve been making my way through Steven Solomon’s new book Water, which is a fat tome on the history of water from ancient times to the present day). In a world where water scarcity is an issue, Latin America stands out for its water wealth. It has 28% of the world’s renewable water and only 6% of its population. Solomon writes that the “super Water-Have countries such as Brazil, Russia, Canada, Panama and Nicaragua [have] far more water than their populations can ever use.”
Lake Nicaragua, one of the largest lakes in the world, is the future water supply of Central America. There are many rivers and lakes, which make useful internal waterways. And Nicaragua has access to both the Pacific and Atlantic oceans. Nicaraguan waters are also great for fishing.
Nicaragua holds great potential for wind, geothermal – from volcanoes all along the western half of the country – and hydroelectric power. In fact, Rancho Santana is trying to become self-sufficient in energy. There are ridges there where the wind blows constantly. A wind feasibility study done there lately scored as high as it could. The conditions are ideal. Finally, Nicaragua has great timber resources, as well as mineral resources such as silver and gold.
Present-day Nicaragua also illustrates one of the global trends we’ve been examining during the last few months: the “penthouse gypsy” trend. This term refers to people with money who go where they (and their money) are treated best, wherever in the world that may be. Increasingly, they are no longer in the US or Europe. It may be hard to believe, but there are plenty of penthouse gypsies down in Rancho Santana.
Why not? They are able to diversify out of the US, where tax rates are surely going much higher. They get cheap, stunning real estate. Property taxes are hardly anything. You can live very well down here on not much money. I have a good friend who moved to Nicaragua five years ago for this reason.
Most Americans worry about confiscation of property. But that risk seems remote after talking to people here. Tourism is the No. 1 cash cow of what is still a poor country. Even Ortega doesn’t want to do anything to upset that cash flow. (He owns several hotels.)
As far as enforcement of contracts, the IMF and World Bank rank Nicaragua third among all Latin American and Caribbean countries. Foreign direct investment in Nicaragua is soaring – up fourfold since 2000.
I can’t say my trip to Nicaragua yielded a hot stock tip or big investment insight. But I learned a lot about a part of the world I hadn’t explored before. Hopefully, my notes here help you see the opportunities that are out there in this great big world – if only we look at it with fresh eyes.