From West to East: Where to Invest In the New Era

Where should I invest my money?

I’m frequently asked this question, and almost invariably, the speaker asks it in a tone of fear and concern.

And there is much to be frightened and concerned about. As of this writing, the European Union is on the verge of collapse and the United States is still mired in high levels of debt and unemployment.

One has step back to look at the bigger picture and ask: “why is all of this happening?” The answer can be found by examining what has happened on a global level over the past 30 years. There are two sides to this story – the West and the East. On the Western front:

  • Globalization has outsourced jobs from the industrialized nations to the developing nations. Moreover, technology has, on a net basis, destroyed more jobs than it has created.
  • Consequently, average wages have steadily been decreasing during this same time period.
  • At the same time, interest rates have also been getting lower, making it easier to borrow. People still wanted to live the same lifestyle as their parents and grandparents and they were able to finance that lifestyle by getting into hock.
  • The ultimate effect was to increase levels of indebtedness at the consumer level. Eventually, these consumer debts could no longer be serviced by consumers due to their low wages. When these debts went bad, the financial institutions that made these loans became insolvent and required government bailouts to keep them from failing. Now, because they borrowed so much money to bail out their banks, entire governments are effectively insolvent and may not be able to pay their creditors (i.e., holders of government bonds such as banks and pension funds, as well as the pension of obligations of their civil service and citizens).

Meanwhile, on the Eastern front, Asia has greatly benefited from the twin forces of globalization and technology. Here are some compelling facts:

  • The Canadian International Development Agency states that over the past 30 years, 500 million Chinese have been lifted out of poverty.
  • It is estimated that 300 million Indians now belong to the middle class; one-third of them have emerged from poverty in the last ten years. At the current rate of growth, a majority of Indians will be middle-class by 2025.
  • A majority of the world’s middle class will reside in Asia – of the world’s five largest middle-class markets, four will be in Asia by 2035: India, China, Japan and Indonesia.

Today, we are witnessing a historical global power shift that happens only once every few hundred years. The last one happened 500 years ago at the onset of the European Renaissance, which saw the economic decline of China and India, then the most advanced civilizations on earth, and the rise of the European nation states which came to dominate the globe both economically and militarily.

So, within the context of this setting, we shall proceed to give our views on where to invest in order to preserve your capital and make a steady return on same. We shall examine two companies which we feel are undervalued and are in a position to do very well given the global economic forces at play today:

Intel Corporation (NASDAQ: INTC)

Intel is synonymous with microprocessors, the heart of all computers. In fact, it has 80% of global microprocessor revenue and is effectively a monopoly. There are two trends which will contribute to Intel’s financial success and consequently, its stock price:

  • A rising middle class in Asia (as well as South America and Africa) will purchase more computers and 80% of those computers will contain Intel microprocessors.
  • Intel also dominates the market for server microprocessors (approximately 90%). There appears to be a trend towards cloud computing services by both consumers and business that will be permanent. Moreover, as alluded to earlier, as technology advances and replaces people with software programs, more processing power will be required to run these applications. Therefore, there will be a rising demand for computer servers to meet demand for processing power. Ninety percent of those servers will contain Intel chips.

Intel is currently priced at a price-earnings ratio of 10.65, making this a very attractively priced stock. Moreover, it has a very high dividend yield of  3.41 % and has consistently paid a dividend since 1992. Finally, a review of its balance sheet shows that Intel is a financially stable company: it effectively has no debt.

 

The Coca Cola Company (NYSE: KO)

From a cultural perspective, the term “globalization” is synonymous with “Americanization”. The newly-minted middle class in Asia and other developing regions aspire to live the quintessential American lifestyle. They want to drive Cadillacs, eat McDonalds hamburgers, take their children to Disneyworld. And they want to drink Coca-Cola. Consider the following facts:

  • China’s soft drinks market is forecast to grow from $49 billibn last year to $86 billion by 2015, according to Euromonitor, the data agency.
  • China now accounts for seven percent of Coke’s global consumption. The company now has 41 bottling plants in China, five of which were opened during 2009-2010 and another in 2011. In the first half of 2011, Coca-Cola’s sales in China topped 1 billion unit cases, which doubled the company’s sales rate there five years ago, according to an article in industryweek.com. The new investments in China will help Coke achieve its goal of doubling system revenues and servings by 2020.

Coke is currently priced at a price-earnings ratio of 12.23, making this a well-priced stock. Moreover, it has a good dividend yield of  2.83 % and consistently pays a dividend. A review of its balance sheet shows that Coke does have a higher level of debt, but this is being used to finance its expansion plans in developing markets such as China. Given the statistics cited above, this financing appears to have been put to good use.

Disclaimer: You understand that no content within this article constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent that any of the content of this article may be deemed to be investment advice or recommendations in connection with a particular security, such information is impersonal and not tailored to the investment needs of any specific person. The author is not an investment advisor and is not offering investment advice. You understand that an investment in any security is subject to a number of risks, and that discussions of any security published in this article will not contain a list or description of relevant risk factors.

© Copyright Victor Fong, 2011.

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