China Shops, India Drops

07/09/2009 11:51 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Herded this week into an active earthquake zone, the G8 summiteers did their best to do nothing earthshaking. They gingerly papered over the cracks between the freespending English speakers and tightfisted Germans by pledging to do everything possible to fight the global slump, the (wisely unspecified) state of public finances permitting.

Nevertheless the ground swayed as commodities crumpled and US stocks followed suit, with predictable aftershocks in Frankfurt, Tokyo, and Hong Kong. And no sooner had everyone praised the vigor of the bulls in Shanghai and Mumbai than the Indian one saw red. It turned out that rural development was not merely an empty campaign promise on the road to deregulation but rather a government action plan, a sufficiently expensive one to swell the budget deficit to 6.8% of the GDP. This proved more than investors could stomach, costing the Sensex 8% so far this week.

With the US federal deficit forecast to hit 13.1% of the GDP, it's a good thing foreign investors suddenly can't seem to get enough of Treasury debt. Seldom have so many chased such puny yields. Nothing like crude dropping $12 a barrel in five days to make a nominal 3% a year look good.

Not everyone lost their taste for risk this week. Shanghai, for one, has barely budged from Monday's 13-month high. Taiwan and Indonesia have also felt little pain, the latter re-electing a popular president who's helped to fix up the economy.

China's growth is being spurred by an officially blessed borrowing and lending spree of vast proportions and unknowable consequences. The ethnic riots in Xianjiang this week gave the government a taste of what might happen if growth falters, hardly an incentive to slow things down.

Well down the list of worries for Beijing are western complaints that it's unfairly hoarding some commodities in violation of the global trade rules. China's too busy investing in overseas drillers and miners. On the heels of Sinopec's (NYSE: SNP; Hong Kong: 386) $7.2 billion buyout of Addax (TSE: AXC; LSE: AXC) comes China Investment Corp's purchase of a $1.5 billion stake in Canada's coal and zinc miner Teck Resources (TSE: TCK-B; NYSE: TCL). China National Petroleum is on the prowl in Argentina, looking at Repsol's (NYSE: REP) local assets. And China doesn't like to hear No, as four employees of former takeover target Rio Tinto (NYSE: RTP) may have discovered.

Asia's appetite for raw materials is no passing fancy, says influential Canadian economist David Rosenberg, who views it as the logical byproduct of the shifting economic balance of power. Even on a week commodity bulls would sooner forget, his comments ring truer than the naked claims of those who've deduced the "fair" price for crude down to the last dollar per barrel.

China's commodities grab risks provoking a costly trade war that would only exacerbate the recent hardships, warns the ever sobering Gordon Pape. His advice to wait for upcoming market corrections before buying has also proven timely.

China's plans to dramatically expand its strategic petroleum reserve highlight the importance of infrastructure plays like Dalian Port (Hong Kong: 2880, OTC: DLPTF), which is relatively reliant on energy imports and less exposed to the whims of Western consumers trying belatedly to save up, according to Yiannis Mostrous. But as longtime China bull Jim Trippon recently cautioned, highflying Chinese stocks may yet catch Wall Street's blues. Trippon writes that now's not the time to buy.

Canada's Emera (TSX: EMA; OTC: EMRAF) seems a better short-term fit in a market preoccupied with taking profits. Emera has lately ventured from its Maritimes and Maine base into riskier places like Nevada. But fundamentals and the dividend are solid, writes Tom Slee.

Reliable income plays will prove increasingly attractive to boomers seeking predictable cash flow to bolster insufficient savings, Rosenberg notes. And Canada has no shortage of such steady Eddies.

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