Investing: How to Make Money on the Industrialization of Brazil, Russia, India and China

In October 2003, Goldman Sacks published a research paper titled, “Dreaming with BRICs: the Path to 2050.” The paper states that Brazil, Russia, India and China, commonly referred to as BRIC, may rank among the world’s most dominant economies by mid century. By 2041, China’s Gross Domestic Product (GDP) could possibly be greater that the United States and larger than everyone else except Japan by 2016. The BRIC economies together might be larger than the G6 (US, Japan, UK, Germany, France and Italy) by 2039. Obviously, there are execution risks, but the trends are in place for this to occur.

This has enormous implications. As these countries develop, just think of how their people will benefit and the opportunities that will be created. Demand for items that developed countries middle-class have come to expect will be tremendous. Consumer items such IPODs and DVD players will be of interest, but that will pale in comparison to the demand for housing with indoor plumbing, electricity, basic appliances and cars. In Goldman Sachs follow-up report released in 2004, it states that between 2005 and 2015 over 800 million people in these countries will have crossed the annual income threshold of $3000. By 2025, approximately 200 million people in these economies will have annual incomes above $15,000.

So, how can we as investors benefit from the industrialization of BRIC? I would like to propose two approaches: direct and indirect investing into the emerging economies. Direct investing requires an in-depth knowledge of companies in complex and diverse countries. This is far too time-consuming for the average investor. A much simpler approach would be purchasing single-country exchange traded funds (ETFs). I realize this is a mouthful. Let’s start by defining exchange traded fund (ETF). It is a fund that tracks an index, but can be traded like a stock. Thus, it provides the diversification of a mutual fund, but is not hampered by trade cut-off times and early redemption fees. A single-country ETF is linked to a country’s index that reflects the value and composition of its specific stock market. ETFs of the BRIC countries include: Brazil (EWZ), Russia (TRF), India (IFN), and China (FXI). Their year to date performance (YTD), as of 6/30/2006, is 17.2%, 27.4%, 16.3% and 24.6% respectively. This produces an equally-weighted return of 21.8%. Trouncing the US Major indices returns of 4.0%, 1.8%, and -1.5% (DOW, S&P 500 and NASDAQ respectively).

The second approach, indirect investing, consists of investing in companies that supply materials and equipment that the BRICs will need to industrialize. Imagine the number of highways, bridges, railways, factories and skyscrapers that will need to be built. This is impossible without commodities such as iron and carbon that are combined to form steel. Modern society requires copper for electricity and information technology. Can you imagine how much cement and concrete will be consumed? The demand created for these and other commodities will be phenomenal.

To leverage this approach I have created a basket of 12 stocks. It contains proven industry leaders that produce or supply to companies that extract base metals from the earth. Base metals include Copper, Aluminum, Nickel (stainless steel and nickel metal hydride batteries), Zinc (anti-corrosive coating in galvanized steel) and Lead (lead-acid car batteries). Companies that mine base metals include: diversified producers – BHP Billiton (BHP), Falconbridge (FAL), Rio Tinto (RTP); aluminum producer Alcan (AL); copper producers – Freeport-McMoran (FCX), Southern Copper (PCU), Phelps Dodge (PD); nickel producer Inco (N); iron ore producer – Companhia Vale Do Rio Doce (RIO). The suppliers of equipment, parts and services to these companies will profit as well. Thus, I have included two heavy equipment manufacturers in the portfolio: Caterpillar (CAT) and Bucyrus International (BUCY). The final company is not a base metal producer or supplier, but countless tons of cement and concrete will be necessary for the build-out. Therefore, I have included cement and concrete producer – Cemex (CX) in the basket. This indirect approach, using an equally weighted portfolio of the above listed stocks, has outperformed the direct approach 27.2% vs. 21.8% year to date.

In closing, I would like to share a couple of implementation details with you. The above portfolios are intended to be traded as a basket meaning that all should be bought and sold at the same time. Cherry-picking a couple of stocks may not produce better results – the diversification reduces company or country specific risk. It is also important to choose the right brokerage to employ this strategy. I have found that FolioFn lends itself well to this strategy. It enables complete automation of the process by supporting single-order basket trading as well as automatic dollar cost averaging. I highly recommend combining this strategy with dollar cost averaging. For more information on the benefits of dollar cost averaging, refer to my article on “Double Digit Gains with Dollar Averaging.” Commissions on a large basket can be cost prohibitive. Foliofn address that with its various commission plans including one that allows up to 600 window trades per month for $30. Consequently, fees on accounts of $40K would be less than 1% per year using this plan. This puts fees of basket trading in-line with fees of ETF and much better than mutual funds.

There is a tremendous opportunity to make money investing in the BRIC thesis. What are you waiting for?

Reference:

“Dreaming with BRICs: the Path to 2050.”

The Golden Gate Bridge

The Golden Gate Bridge in San Francisco is a marvelous feat of Engineering. Located on the Golden Gate Strait in San Francisco Bay, the idea of a bridge linking the two sides of the bay was first discussed in 1872. It wasn’t until the 1930`s that an Engineer named Joseph B. Strauss submitted the final plans for the bridge to the District Board of Directors and construction began.

The Art Deco styling that the bridge is famous for was the idea of the husband and wife partnership, Irving and Gertrude Morrow, with their subtle ideas and eye for good taste; they created the easy on the eye bridge span. With opposition from the US Navy, Morrow and his wife chose a unique colour for the bridge known as ‘International Orange’ and this has become famous all over the world. As Chief Engineer Strauss was very safety conscious he, with the help of Edward Bullard, a local manufacturer of safety equipment, introduced new, ground breaking safety procedures which are still followed on a high percentage of construction sites to this very day. The death rate for men working on the bridge for the time of construction was second to none showing how important safety precautions where and still are.

Key Dates

1872 . Earliest discussion of building a bridge to span the Golden Gate Strait.

May 25, 1923. The state legislature passes the Golden Gate Bridge and Highway District Act of California into law.

December 4, 1928. Golden Gate Bridge and Highway District is incorporated as the entity to design, construct, and finance the Golden Gate Bridge.

August 27, 1930. Joseph Strauss submits his final plans for the bridge to the District Board of Directors.

November 4, 1930. Voters within the 6 counties of the District approve the $35 million bond issue to finance construction of the bridge.

January 5, 1933. Construction of the GGB begins.

May 27, 1937. opens to pedestrian traffic

May 28, 1937. opens to vehicular traffic at twelve noon. The bridge opened ahead of schedule and under budget.

July 1, 1971. Remaining original bonds issued for construction of the bridge are retired. $35 million and almost $39 million in interest were financed entirely from bridge tolls.

February 22, 1985. The one-billionth car crosses the bridge.

August 15, 1985. Construction completed on the replacement of the original roadway with modern orthotropic steel plate deck.

May 27, 1987. celebrates its 50th Anniversary.

September 2, 1998. United States Postal Service unveils Golden Gate Bridge commemorative stamp.

March 1999. The Golden Gate Bridge awarded number two position in Top 10 Construction Achievements of the 20th Century by CONEXPO-CON/AGG SECOND ONLY TO Chunnel Tunnel (Channel Tunnel).

Bridge Rectifiers – Ideal for Converting Alternating Current Input Into a Direct Current Output

Bridge is an arrangement of four diodes in a bridge circuit configuration that provides the same polarity for either polarity of input. The most common use for this application for conversion of an alternating current input into a direct current output known as a bridge rectifier. A rectifier provides full-wave rectification from a two-wire AC input, resulting in lower cost and weight as compared to a rectifier with a 3-wire input from a transformer with a center-tapped secondary winding. A rectifier in itself is simply an electrical device that converts alternating current (AC) to direct current (DC) in a process called rectification. AC can flow in reverse direction while DC only flows in one direction. Rectify can come in many forms, which include but are not limited to vacuum tube diodes, mercury-arc valves, copper and selenium oxide rectifiers, semiconductor diodes, silicon-controlled rectifiers, in addition to other silicon-based semiconductor switches.

The main uses of bridge rectifier are in DC power supplies and high-voltage direct current power transmission systems. Initially, vacuum tube thermionic diodes and copper oxide or selenium-based metal rectifier stacks were used before the introduction of silicon semiconductor rectifiers. Once silicon semiconductor rectifier were introduced, other types of rectifier immediately became obsolete, with the exception of enthusiasts for vacuum tube radio equipment. There have been many types of different rectification technologies, beginning with the electromechanical rectifier in 1905 and progressing to the synchronous rectifier, vibrating rectifier, motor-generator set, electrolytic rectifier, plasma type, and solid state, respectively. The various specifications to consider when analyzing current day bridge rectifiers are the peak reverse voltage, maximum reverse voltage, forward continuous current, max surge current, forward voltage drop, maximum reverse leakage current, power dissipation, and maximum operating temperature. It also comes in varying dimensions of length, width, height as well as mounting style and packaging.

The most common sizes for maximum average rectified current are 1 A, 1.5 A, 4 A, 25 A, and 35 A but can also be found as high as 1000 A. Forward voltage for bridge rectifier is most commonly 1.1 V or 1 V, although it can range from 450 mV to 1.1 kV. The top manufacturers of bridge rectifiers are Bourn, Central Semiconductor, Com chip Technology, Diodes Inc, Fairchild Semiconductor, GeneSiC Semiconductor, Infineon, IXYS, Micro Commercial Components, NJR, ON Semiconductor, Rectron, Shindengen, ST-Microelectronics, Taiwan Semiconductor, Texas Instruments, and Vishay.

You can browse on web for leading distributor of all types of Bridge Rectifier components from a comprehensive list of manufacturers. On this sites where you can get tier 1 pricing from manufacturers which pass selected savings to you.