Half-yearly evaluation of investment predictions

Investment predictions of a general nature have appeared in this newspaper in the past six months. Because of their general nature they were unsuited to the needs of any particular individual.

It is the individual investor who must structure the predictions according to his particular needs. It also depends on an evaluation of how they have been able to stand the test of time.

Six months is a long time in any investment game. The faithful reader of this newspaper, which aspires to high quality, can now evaluate what predictions I made and whether it would be useful to monitor their future development.

The China articles

Two articles on the Chinese economy appeared in early January. They stated that the Chinese economy was expanding at a marvellous rate, and that it was bound to do so for the foreseeable future.

This is no place to give further details on investment opportunities in China, which are mainly in mobiles, insurance and energy stocks. The China articles need updating, particularly as regards the effect China is having on the price of oil.

The dynamism of the Chinese economy can be felt on our doorstep. There are hundreds of Chinese students learning English in Malta. They will be moving into high positions in exporting industries.

English is the world's commercial language. My son has bought three pairs of stylish Chinese shoes for Lm12, for which he would have had to pay at least Lm90 if they had been manufactured in the European Union.

China can beat any price of the EU and the United States as regards textiles, shoes, and very soon cars. My predictions on the Chinese economy should be an eye-opener on what can be expected as regards the oil price, which because of Chinese demand can be expected to remain above $50.

This in turn has consequences for Venezuelan sovereign debt, which is safe at that oil price level in spite of that country's 23% inflation rate. China is now the key to understanding the world economy, including that of Venezuela.

Chinese economic expansion, outlined six months ago, on June 23 received the blessing of US Federal Reserve chairman Alan Greenspan. The Chinese pressure on the price of oil and metals can be expected to continue, with consequent upward movements in all sorts of energy and mining stocks.

The share price BHP Billiton has expanded by 20% since the beginning of the year. Entrepreneurs in Malta should learn what 'the China price' is according to Business Week.

It means, as that authoritative magazine says, that you must "cut your price at least 30% or lose yours customers. Nearly every manufacturer is vulnerable. The results: a massive shift in economic power is under way. Plus: Rethinking the free-trade model."

The parameters of the Chinese economy have since been strengthened and there has been no hysterical reaction in the US to its growth. China will continue to offer great opportunities to investors, especially to those who have the courage and ability to invest directly in its companies, bypassing bank intermediaries.

Six months ago there was an important economic theoretical development reported in my China article, which I must recall and report on its subsequent failure. The alert investor should judge how far the Chinese have advanced in these last six months in conquering the heights of economic, political and academic power in the US.

This success has smothered rumblings of a possible theoretical economic review of the famous Ricardian model of the trade benefits to be obtained from comparative advantage.

The intervention of Paul Samuelson of the Massachusetts Institute of Technology was in vain. Nothing succeeds like success in economics. The US is benefiting from trade with China, as the Chinese with their dollars buy US Treasury Stocks, keeping down that country's interest rates.

If this were not happening, the US would have to sell its Treasury Stocks to other nations at a higher rate of interest, triggering a nasty recession in the US.

Gold and the dollar

In my article on February 6, titled 'Gold is back - 25 years after it peaked. The dollar is down - 20 years after it fell', its basic assumptions have been used by foreign investors resident in Malta to make big money.

In gold and the dollar we are in the region of high speculation, but an investor who sleeps and wakes on his television screen can make gains, which an ordinary investor, for whom investment is not a passionate game, can never make.

There is speculation based on research, and speculation based on gut feelings. One leads to riches; the other to disaster.

In this article I pointed out that the basic weakness of the dollar was economic and that Bill Gates and Warren Buffett, the two greatest economic names in America, were no believers in its present strength and future performance.

The ones who made money on the slight, uncertain recent dollar recovery were those who were able to get in and out in time. Anybody who acted otherwise was saddled with financial loss.

As regards gold, the predictions of the World Gold Council (WGC) still carry some weight, but their weakness can be demonstrated by the actual gold performance of the past few weeks.

My February article noted that gold had risen 48.6% over the past five years, and that the WGC had carried a survey among analysts and found that 60% of them expect gold to go over $450 at the end of the year.

Oil has risen to $60, and gold this time shows no sign of repeating the old behaviour. It has not gone over the $450 line, and shows no sign of doing so.

There is a good reason for this behaviour. The world is no longer seeking refuge in gold from the high price of oil. It is seeking it in nuclear power. On June 22 US President George W. Bush announced a nuclear energy policy for America.

In Europe there is the nuclear agreement between EDF, the French energy corporation, and its Italian counterpart, ENEL. The result is a dramatic advance in the shares of BHP Billiton, which controls 38% of world uranium. Nuclear power depends on uranium.

The relationship is changing from the dollar to gold, to oil and energy shares. The Arabs will soon learn what Sheikh Yamani, the Oil Minister of Saudi Arabia, once stated, that the Stone Age did not end because of a lack of stone.

According to the STOXX 600 sectoral index, energy shares have advanced 22.97% since the beginning of the year, beating the advance of 10.08% of the D.J. STOXX Index. (These percentages are as at last Monday).

Gold has been overtaken and submerged by the rise of energy shares. The April article will help identify an opportunity in energy stocks through gold's poor behaviour.

Gold behaved differently in 1979 in reaction to the rise in the oil price, which at the time reached heights never since surpassed - that is, well over $800. This does not seem likely to happen again.

To be concluded

John Azzopardi Vella has been a promoter of the Malta Development Fund and has advised S&P. He is executive manager with DBR Investment Ltd. E-mail: johnazzopardivella@hotmail.com