Megatrends to keep in mind as you ponder your portfolio

Time of article published Feb 28, 2004

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There are some megatrends sweeping the world and investors should factor them into their investment decisions.

The most evident and pervasive trend is the continuous and orches-trated debasement of the United States dollar. The effect of this is almost all-embracing, affecting the real value of US equities and other asset classes and investments worldwide. This trend has ravaged South African exports over the past two years, knocking company results and resulting in job losses.

The debasement of the dollar is probably the most important trend affecting investment strategy.

Adding to the complexity of the debasement of the US dollar is the fact that, relative to the dollar, the rand has been one of the strongest currencies - if not the strongest currency - in the world since the start of 2002.

It is pleasing to note that "government speak" or rhetoric at last seems to be drifting away from a pro-strong rand stance to a less sanguine stance.

Last week Kuben Naidoo, a senior official at the National Treasury, added his voice to the already strident calls from South African business for a less-powerful rand.

Among other things, Naidoo said the rand is overvalued and will weaken to more competitive levels this year. Let's hope this does not turn out to be wishful thinking.

Naidoo is not alone. The finance ministries of both Australia and New Zealand have been saying the same thing. They have also said that they would not, however, intervene in the currency markets.

Naidoo said the rand was "uncompetitive at these levels" and was harming the economy. "It will revert to more competitive levels," he said. "There is no doubt about that."

He was adamant that the treasury would not try to intervene in the currency markets to weaken the rand. There were no policies in place to try to weaken the rand and he doubted if any would be introduced. When the rand was at R13 to the dollar there was no intervention. Similarly, there would not be any intervention at these levels.

Another megatrend, and effectively a counterbalance to dollar weakness, is the sustained bull market in commodities. You should factor this into your asset allocation decisions.

The stubbornly high oil price is also of particular interest because of its fundamental importance to the world economy and the investment opportunity that it presents.

According to Bear Stearns analyst Adam Clarke, China's surging demand for oil is the "primary factor" behind the success of the Organisation of Petroleum Exporting Countries in preventing a collapse in the oil price after the swift US military victory in Iraq.

The Chinese economy has been growing by 10 percent a year for the past 10 years and growing demand for oil to lubricate this mammoth economy is driving world oil markets. The success of the Chinese economy is assured and investors need to build this into their investment models.

Having surfed these mega waves from the US across the Pacific to Australia and into China, where does this leave the contemplative investor? Well, it is easy to find oneself washed up again on South African shores.

China is no longer a sleeping giant. It is a sprinting elephant. Its demand for commodities is massive.

This places South Africa in a fortunate position. We have some of the most respected mining companies in the world. Sasol is an international leader in its field, with cutting-edge technology, and Iscor is a highly respected steel producer. These companies have been fantastic investments at certain times.

Remember, alongside the risk lies the opportunity.

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