Transcription of Finance News Network Interview with Business Futurist and BRIC expert, David Thomas.Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today at the Port Phillip Publishing Inaugural Investment Symposium is business futurist and BRIC expert, David Thomas.
David welcome, and thank you so much for your time. First up, what does BRIC stand for and what excites you about them?
David Thomas: Well the BRICs are the big four economies of this century - Brazil, Russia, India and China. This was an acronym invented by Jim O’Neill of Goldman Sachs 10 years ago when he first came up with this BRIC idea, which has later been called the ‘call of the decade’. I got excited in it about six years ago.
I was always an Asia guy. You know I spent all my early career in Hong Kong, so I spent a lot of time in China and India, and was always interested in the rise of those economies. But in the last six years or so, I’ve started to find myself in Latin America and Eastern Europe because of this BRIC idea, and I wanted to know a lot about it.
Lelde Smits: Now David, you’ve just given a presentation titled, “New Bull Markets of the 21
st Century”. Where do you believe the biggest opportunities lie?
David Thomas: Well the two big themes across all the BRICs are these; The first is the resources and commodities coming out of Brazil and Russia, now are feeding China and India. So China and India with rapidly industrialising countries now have to be a major buyer of resources, food, agriculture and that’s all going to come out of Russia and Brazil. But of course, the biggest of all, the big theme of all, is this new emerging consumer. You know the two to three billion people now coming on to the global market looking to buy stuff.
Lelde Smits: Let’s look closer at the BRICs; What qualifies a country to be part of this unique group?
David Thomas: I think that what you need to be a booming economy is land, people and capital. If you look at the big land masses of the world, you see Russia very much at the top of that list. Russia is a vast country with 11 different time zones, but you also see Brazil, you see China and India, all in that top ten. Then you look at big population sizes and of course, China and India stand out in that area. And then you look at where all the capital is in the world and where the capital is going to be in the future. And there’s no question that it’s going to come out of these four countries.
When you put all that together, you see the four very much in the middle of those three key issues. And Indonesia, for example, is a country that has capital and people but it doesn’t have a lot of land. So they won’t be a BRIC, but they could well be part of the next group that comes right behind them.
Lelde Smits: OK David, so you’ve explained what makes BRICs similar. But could you detail what makes them different and your interests in each?
David Thomas: Well Brazil is a resources and agricultural economy, a bit like Australia actually except with a lot more people. Russia is still very much an oil and gas story and you know China particularly, is starting to invest in Russian companies to build pipelines to bring gas through from the Russian Continent, through to China rather than to Western Europe, as it has in the past.
India is a big domestic economy, a young population, dominating the business process outsourcing sector in terms of technology and outsourcing. And China, up until now, has been the sort of world’s manufacturer but now moving rapidly up the value chain into new areas as well. So they’ve all got different traits and characteristics. But there’s one thing that goes across all of them – are these vast numbers of people coming out of poverty and starting to join the emerging middleclass of the world. And it’s in that area where opportunities, investment opportunities, can be found across the board.
Lelde Smits: Emerging economies do appear to have opportunities, but what dangers or risks should investors watch out for?
David Thomas: Well there’re all kinds of challenges, I mean these are emerging countries. Some of them are only 10 or 20 years old in terms of, you know, being part of the global scene. So you’ve got problems like corruption, you’ve got political risk, you’ve got sovereign risk. And of course, many people complain about the lack of governance, the lack of transparency and information. So there’s plenty of risk associated with investing in these countries. But I don’t think that that should put people off, and I think while we get obsessed with risk, we’re losing opportunity.
The Russian market is up 25 per cent this year so far. Very few people are participating in that because they are obsessed by the risk associated with Putin’s re-election as President. So you know, I think that as investors, it’s important to get behind the stories and start looking at what’s actually happening on the ground. And I don’t see enough of that in this part of the world.
Lelde Smits: And in what ways can investors assess corporate governance or risk mitigation prior to doing business in the BRIC countries, and best position themselves for successful investments?
David Thomas: Well investors have to do their homework on the ground. I mean, you know, I work with a group in Eastern Europe who visit a thousand Russian companies every year. Now clearly, people can’t do that from a distance. You have to, I think, work with local managers who have local people on the ground, who understand the local environment and have a track record of success in that local environment. It’s no different to how you would expect foreign investors to invest in a country like Australia.
So I think the starting point is to get local representation at a business or investment level. And have local relationships that you can rely on, where you can build that trust and gain that confidence.
Lelde Smits: Reports of stalling growth in China are gaining momentum; the Chinese Government even recently cut its outlook for the nation’s growth in 2012. But in your presentation you said you’re bullish, why?
David Thomas: When I look at a number like 7.5 per cent [growth per annum] across China, you know China’s a vast economy, even now. You know there are parts of China that are growing at 30 per cent and there are other parts that are growing at two or three per cent. When you aggregate that all up to one number, you get 7.5 per cent and that’s the number that everyone’s fixated on.
But there are parts of China, particularly in the west – in the western provinces and those inner cities of Chong Qing, Chengdu that are experiencing much higher growth rates than that. And there are sectors within those regions that are growing even faster than that.So I don’t think that we can, you know, just sit back and look at that big number and read too much into it, to be honest.
Lelde Smits: Closer to home David, how can Australians benefit from the global shift which is witnessing the rise of the BRICs?
David Thomas: Well we particularly can benefit from China. You know, our closest neighbouring trade partner. We have a 40 year history of diplomatic relations in China. So you know, we are well positioned I think, of the four BRICs, to do business and gain investment opportunities through China.
You know over the last 10 years we’ve seen enormous investment into our mining resources sector. $65 billion of Chinese investment has come out of China into Australia and just invested in one very small part actually, of our economy. Because although mining resources get all the attention, it is still a very small part of our economy - less than 10 per cent, whereas it’s the other 90 per cent that I think is where the opportunity is.
Lelde Smits: So looking at investment into Australia. What sectors would you suggest Australian investors look at to attract overseas investment?
David Thomas: Well again, it’s in the service sector. So financial services, tourism, healthcare, technology, IT – great time to be in technology I’d say. If Australian companies have innovative new technologies, which are looking for capital injections in order to export those technologies to China, they’ll get a lot of interest from China, as part of what they call their ‘going out strategy’.
So I would suggest Australian investors look for opportunities to play this game of Chinese investment into Australia. Australian companies capitalising to take advantage of China’s opening up, particularly the opening up of the western provinces, and look for ways in which to participate in that, as an investment opportunity.
Lelde Smits: To Australia’s equity market, have you identified any companies that you believe are particularly well positioned to benefit from the rise of the BRICs?
David Thomas: I do, I mean take a company like Blackmores Limited
(ASX:BKL). I actually know the head of Asia for Blackmores quite well, Peter Osborne, who actually used to be with Austrade. Blackmores have seen significant growth in their Asia business, just in the last couple of years. If you have a look at Blackmores, I think that’s a great template of an Australian company that has a good quality healthcare product, which is now tapping into a fast growing emerging market like greater China.
Lelde Smits: And how about the mining or energy companies?
David Thomas: My feeling at a gut level is that we’ve probably reached the end of, you know, what’s been a really good run on the mining sector. That doesn’t mean we won’t continue to invest in it, we will, but I don’t think we’ll get the same kind of growth there as we have in the past.So I think the future to investing in Australia, is to look to companies that have something that’s of interest to Asia. And look to invest in them and watch that growth take place, as they start to face this huge two billion consumers looking to buy and enjoy the sort of products that we enjoy here in Australia.
Lelde Smits: Finally David, you finished your presentation with a surfing analogy for investment. Could you explain it for those not present?
David Thomas: Well I have this saying about surf where the big waves are. Now I’m not a surfer myself actually, I’d like to be but I’m not. But all my surfing friends tell me that if you want to have fun surfing, you need to be on a big wave and I think it’s the same with investing. I think that you need to look for the big waves and the big opportunities that are out there, because it’s very difficult to time the market. You need to be on a wave that’s got some distance to run. So in my view, there’re four big waves in the global economy today. They’re Brazil, Russia, India and China, and I urge everybody to surf them.
Lelde Smits: David Thomas, thank you for sharing your investment opportunities.
David Thomas: My pleasure.
Ends
