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On the Silk Road
02/17/2006 12:00 am EST
"Just as the original Silk Road created fabulous fortunes for ancient explorers, modern investment travelers will capture new riches from Russia, China, India, and Japan," says Yiannis Mostrous in his just-launched The Silk Road Investor.
"Asia offers investors the same opportunity that the US did in 1980, before embarking on a two-decade monster bull market. It has near-perfect demographics, high savings rates, and a huge pent-up domestic demand. As a billion Asian baby boomers get their first credit card, the implications for growth are stunning. And you do not need to open a foreign brokerage account. Many of the most exciting companies profiting from this booming trend trade on US exchanges.
"Because of its vast size and red-hot growth, China gets the most attention of all the developing Asian economies. But my favorite long-term investment destination is India. The subcontinent is home to some of the most promising companies on earth and benefits from a much more reliable domestic demand than most emerging economies. Its huge and growing middle class is bigger than the entire US population. And its universities churn out 2.3 million college grads a year—92% more than the US.
"And as wages inch up, millions of Indians have disposable incomes for the first time. With money to deposit, they are using banks—and banks in turn are making loans to entrepreneurs. For example, instead of saving for decades to buy their homes with cash, Indian banks are finally offering mortgages to consumers. The most intriguing play in this market is HDFC Bank (HDB NYSE).
"This booming lender makes an excellent core holding for any long-term investor. It’s at the heart of India’s newfound consumer financing area, and its ruthlessly efficient managers boast the lowest cost of operations in its class. It is one of the fastest growing banks in the world, with customer assets up 44% and retail loans up 74% in the past year. Meanwhile, deposits have grown 36%, while fee income has surged 63%. You can buy this one and relax for a long, long time.
"A can’t-lose path to investment success is to buy something about to be squeezed sharply higher by the twin forces of rising demand and limited supply. Nothing fits that bill better today than energy. And the best place in the world to profit from this classic supply-demand squeeze is Russia, whose Siberian vastness holds massive reserves of oil and the world’s largest reserves of natural gas.
"My top Russian oil play is Lukoil (LUKOY Other OTC), which has more oil in the ground than any company in the world, with 16 billion barrels of proven reserves against ExxonMobil’s 11 billion. Yet this giant is determined to become even bigger. Higher oil and gas prices have allowed it to pour cash into exploring and developing new fields. As a result, it is one of the few major oil companies anywhere that’s finding enough oil to keep pace with production. In 2002, it made history by acquiring Getty Petroleum and its 2,000 gas stations—becoming the first Russian company to buy an American firm.
"It may only happen once or twice in an investor’s lifetime. But when a major industrial nation suffers through a 15-year bear market, fantastic gains are made by anyone smart, brave, or just plain lucky enough to be invested as it reverses course. That’s exactly the opportunity Japan is giving you now. When the Japanese bubble burst in 1990, the hardest-hit sector of all was domestic banking. After 15 years of false starts Japan’s banks are finally off life support.
"My favorite way to play Japan’s rebirth is with that country’s version of Merrill Lynch, Nomura Holdings (NMR NYSE). Despite its size, Nomura remains one of the world’s largest unheralded financial institutions. Burned during the Nikkei’s slow 15-year death, Japanese investors have shown little interest in stocks in recent years. But Japan remains a promising market for stock sales. It is savings-rich and older Japanese have tremendous wealth for investing.
"Even better, much of it is sitting in savings accounts earning zero interest. As soon as the end of deflation is apparent you can bet that a huge chunk of this money will find its way into stocks. That’s a huge plus for Nomura. It is already seeing rising interest for dividend-paying stocks and with volume now steadily climbing on the Nikkei, commission incomes are recovering nicely, too."
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