These days everybody’s talking about international trade.
Specifically, trade between the United States and China … the world’s two biggest economies.
The Trump administration has been negotiating for over a year with the Chinese government. Things got a lot worse last week, when President Donald Trump imposed new tariffs on China, and China responded in kind.
Trump wants to eliminate U.S. trade deficits with China. Many on his negotiating team also want to eliminate unfair Chinese trade practices, such as government subsidies to exporters and theft of U.S. intellectual property.
The way these two countries are carrying on — and the way markets are reacting to their current impasse — you’d think U.S.-China trade was the only game in town.
Trade between countries accounts for about 58% of global gross domestic product (GDP), or $45.1 trillion. U.S.-China trade is worth about $660 billion a year.
That’s just 1.46% of global trade by value. The other 98.54% of global trade occurs with and between other countries.
In coming years, that’s where the action is going to be … and now is the time to position yourself to profit from it.
New Kids on the Trade Block
Forget about U.S.-China trade squabbles. The future is elsewhere.
Twenty years ago, 62% of all bilateral trade was between rich countries, like the U.S. and Canada, or inside the European Union. Now it’s down to 47%, as emerging markets become traders in their own right.
On top of that, the value of trade between emerging economies — such as between South Africa and India, or China and Vietnam — is up tenfold during the last two decades.
Overall, 53% of bilateral trade involves at least one emerging-market economy. And 45% of countries conduct most of their trade with emerging markets.
Here are some of the big drivers of change in global trade patterns:
- Agriculture: Thirty years ago, China bought just 6% of Latin America’s agricultural exports, such as coffee. It now buys nearly 30%.
- Minerals: Twenty years ago, 68% of South African mineral exports went to developed countries. Today, 55% go to other emerging markets, led by India and China.
- Oil: Thirty years ago, 89% of crude oil exports went to developed countries. It’s now down to 55%, as India and China gobble up oceans of the stuff.
- Electronics: Electronics comprise a huge chunk of U.S.-China trade. But over the last 30 years, Chinese electronics exports to other Asian countries have risen by nearly 20,000%.
Goods Go Where the Money Is
Increasing trade involving emerging markets reflects two things.
First, as these countries grow and become more prosperous, consumers want to buy things that aren’t produced domestically.
Vietnam is a typical example. The country’s industrialization process has been based on producing components for the Chinese manufacturing sector.
Vietnamese GDP per capita has grown 6% to 8% every year for the last decade. As their incomes grow, Vietnamese consumers start buying Chinese electronics and other products made with Vietnamese components.
Second, as population growth stagnates in developed countries, and slows to low single digits in older emerging markets such as Latin America, younger emerging markets consume more and more commodities such as coffee, agricultural products, precious metals, gems and oil.
In other words, global demographic shifts drive an increasing amount of trade to emerging markets.
The bottom line is that 20 years from now, the vast bulk of global trade will involve countries that today are at the start of their consumption growth.
Buy Cheap, Sell Dear
The most successful investors practice a simple strategy.
They wait for an unjustified drop in the price of an asset and buy it on the cheap. They hold it until it has realized its potential and sell it for profit.
Right now, emerging markets are suffering along with everyone else from the U.S.-China trade war.
But on top of that, emerging-markets asset prices have suffered over the last few years from the gargantuan global rush to buy into the rising U.S. stock market, courtesy of superlow U.S. interest rates.
That means emerging markets are at historic relative lows compared to other assets.
Right now, the gap between U.S. stock prices and a broad basket of emerging-market stocks is at its widest since early 2002 … when investors were fleeing emerging markets in the wake of 9/11.
So emerging market assets are cheap right now. But what evidence do we have that they will grow to their potential so we can profit?
The International Monetary Fund — and a substantial number of institutional investment advisers — believe that emerging markets will outperform the U.S. and other developed markets by double digits over the next decade.
As I pointed out in my article last week, Africa’s population growth alone means its GDP growth will outpace the rest of the world for the foreseeable future.
On the other hand, U.S. stocks are at historically high valuations. They don’t have much room to run higher, even if the U.S. economy does manage to grow at 3% per year, which is unlikely.
My advice would be to follow the strategy of the most successful investors … diversify into emerging-market assets now, while they are as cheap as they can get, and hang onto them.
Your portfolio will thank you!
Editor, The Bauman Letter