Harnessing the dragon

As the emerging economies, particularly China, increasingly overtake the developed economies share of global GDP, South African commodity suppliers stand to reap huge benefits from an anticipated commodity-intensive global expansion. Investors seeking to take advantage of this growth in emerging markets need to look no further than domestic, or international, commodity-based equities.

Chris Cornell, Director at BoE Stockbrokers, notes that emerging economies are projected to grow at approximately 6 times the rate of growth in developed countries during 2010 according to IMF figures, and to remain strong over the foreseeable future. China in particular, is expected to garner an ever larger share of global GDP, rapidly narrowing the gap between itself and both the USA and Japan.

“Even over the last two years when the rest of the world has been in recession and recovery mode, the Chinese economy has performed well, with record demand for almost all commodities. Much of this has been driven by the rapid pace of urbanisation in China, which is expected to continue unabated,” he says.

“Over the longer term the anticipated demand in China, and other emerging economies, for iron ore, manganese, coal, copper and other commodities has got to be good for producers of these goods. Local investors, who also have the option of investing directly in these economies via offshore allowances and asset swaps, should take a fresh look at commodity-based equities.

“The likes of Anglos, Billiton and Exarro all offer sound earnings potential over the longer term, while the more adventurous might consider self-funding junior miner Metmar or manganese and platinum producer Pallinghurst,” says Cornell.

In support of this analysis, political analyst at BoE Private Clients JP Landman, notes that even before the current economic crisis, the so-called BRIC countries – Brazil, Russia, India and China – were well on their way to overtaking the six developed countries in terms of size.

“In 2003, the Goldman Sachs forecast was for China to overtake the UK in 2005 - which was accomplished - Germany in 2009 - also accomplished - and Japan in 2015. If anything, China is likely to overtake Japan as early as 2011/12,” he says.

According to Landman, on a pure size basis South Africa, with an economic growth rate in the order or 3,5%, is not big enough to be part of the BRIC countries. Nevertheless, South Africa enjoys higher per capita incomes and is as competitive as any of the BRIC countries with the exception of China.

“Over the longer term South Africa is likely to do better than many South Africans think, except for the problem of inequality which is more serious than the BRIC countries. Nevertheless, as economic power – and with it geo-political power – shifts to the BRICs, South Africa is likely to tilt increasingly towards the BRICs, especially China.

“Already China is South Africa’s biggest trading partner. The opportunities for South Africans, especially commodity suppliers, in China are significant, and by way of return, it’s not impossible that China could end up as the biggest financier of this country’s infrastructure drive,” he concludes.