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The economic center of gravity will not always reside in the United States. In fact, it's already in the process of shifting from the US to Asia and the Middle East. Forward-looking investors cannot afford to ignore this trend.
One of my favorite ways to invest in the rapidly growing emerging markets is through the back door, so to speak. Invest in companies, wherever they are, that have what these economies need or want, but don't have. Airliner production is a classic example.
I bet most Americans would be surprised to learn, for example, that the Middle East is a very important market for new jets. The Gulf's leading airlines - Emirates (out of Dubai), Etihad (out of Abu Dhabi) and Qatar Airways have become big reasons why Boeing and Airbus make any money. "The Middle East is still the hub of aviation growth," says Airbus CEO, Tom Enders.
According to informed guesses, the Middle East will buy 1,400-1,700 planes over the next twenty years, at a cost of $240-300 billion. These planes will support passenger growth of nearly 5% annually over that timeframe. Many other developing nations around the globe are also becoming active buyers of passenger jets. Airbus just signed a $1.8 billion deal with Vietnam Airlines for four A380 super-jumbos and two A350s. Ethiopian Airlines recently put in an order for 12 A350s, at a cost of $3 billion. These are just two examples.
The Asia-Pacific region, despite the impressive growth out of the Middle East, is still the largest buyer of aircraft. Over the next 20 years, for instance, the Asia-Pacific region will require close to 9,000 planes, at a cost of over $1 trillion.
I've focused mostly on civil aviation. But there is also defense spending. In the Middle East, defense spending will probably rise to more than $100 billion by 2014, from only $36 billion now, according to a new study by consultancy Frost & Sullivan. That's why Lockheed Martin recently announced it would double its capacity to produce the C-130 Super Hercules - because of increased demand from the Middle East.
Also, I can't end without saying a word about the world's urge to lower carbon emissions. The industry has pledged to cut its carbon emissions in half by 2050 - an effort that will require new planes with lighter material, different design and innovative engines.
Despite all the good news on the aviation front, there is a fly in the soup that Boeing and Airbus will have to fish out before long: They are having a hard time making the planes on time. This is a rather fascinating subject on its own, given the history of aviation. In 1944, for example, Boeing used to crank out 16 B-17 bombers every 24 hours. Today, it's having a hard time producing one of its ballyhooed Dreamliners after more than two years of trying. Airbus has had its share of delays as well.
Eventually, they'll sort it out. Eventually, they will build the new planes. There are lots of ways to play on these ideas as an investor, as these new planes ripple through the supply chain.
My favorites are the titanium producers. Titanium is a lightweight metal. In fact, it has the highest strength-to-weight ratio of any metal, making it ideal for aircraft. The newer planes are titanium intensive, more so than in the past.
Our play here is Titanium Metals (NYSE:TIE), the second-largest producer of titanium in the world. It has a solid financial position with lots of cash and no debt. It's stayed profitable, even through the slump. And Wall Street doesn't expect much from it, as analysts rate the stock as a poor performer. The potential upside when it comes makes it worth hanging onto. In TIE's heyday back in 2006, it was a $40 stock. Today, it's about $13. All cycles turn, remember. And this one will, too. The company only recently signed a new agreement with Boeing that will keep it as a key supplier through 2015.
Titanium Metals has the potential to be a big winner once the aviation cycle gets in full swing again.
Royal Bank of Scotland Group Plc, the 84 percent government-owned U.K. lender, will manage sales of at least six bonds in the Middle East this year as it aims to boost regional revenue by 30 percent in 2010.
“There are more than half a dozen live documentations currently under way,”Simon Penney, RBS’s chief executive officer for the Middle East and Africa, said in an interview in Dubai today. The sales are from companies across the Middle East, including investment-grade and non-investment-grade issuers, as well as one from a Dubai government-related entity, he said.
RBS’s Middle East investment banking revenue grew 30 percent last year as the bank managed bond sales for National Bank of Abu Dhabi PJSC, Dolphin Energy Ltd. and Qatar Telecom QSC and increased employees fourfold, Penney said. RBS was also the biggest underwriter of loans to Dubai World, the state-owned company seeking to reschedule debt, arranging $2.3 billion or 17 percent of the company’s loans since January 2007, JPMorgan Chase & Co. said in a report Nov. 27.
Aldar Properties PJSC, Abu Dhabi’s biggest real-estate developer, became the first company in the oil-rich emirate to receive a “junk” rating by Moody’s Investors Service after property values fell.
The developer of thousands of homes and offices in the United Arab Emirates’ capital was cut two levels to Ba1, the first step below investment grade, and given a negative outlook, Moody’s said in a statement today.
Aldar’s “fundamental profile has deteriorated over the past 12 months,” Moody’s analyst Philipp Lotter said in a phone interview today. “Although Aldar still receives fairly material uplift from government support, the combination of relatively lower support and a weaker real estate market has resulted in that rating coming down.”
The Abu Dhabi government backed its associated companies Thursday, saying it fully supports them and has enough reserves to meet its commitments to them, after Moody's Investors Service Inc. downgraded a raft of key government-owned and related companies by one or more notches.
"We obviously disagree with the reasoning involved in a number of Moody's decisions, especially those concerning TDIC, Mubadala, and IPIC," Hamad Al Hurr Al Suwaidi, under secretary of Abu Dhabi's department of finance, said in an emailed statement.
The three companies are "irreplaceable" as part of the government's economic diversification plan and the government "fully and unconditionally" backs them, Mr. Suwaidi said. "It is impossible to differentiate between the government and any of these three entities in terms of credit risk," he said.
Moody's earlier Thursday downgraded the ratings of Mubadala and IPIC, or the International Petroleum Investment Co., to Aa3 from Aa2. It cut TDIC, or the Tourism Development and Investment Co., to A1 from Aa2. Abu Dhabi carries an Aa2 sovereign rating with stable outlook from Moody's.
"We have strong fiscal position and reserves that give us all the capacity we need to meet our commitments to these companies from our own resources," Mr. Suwaidi said.
The government also said it "continues to support" Taqa, which Moody's cut four notches to A3 from Aa2. "Taqa is majority-owned by the government, provides almost all of Abu Dhabi's water and electricity supply, and plays an important role in the emirate's energy policy," Al Suwaidi said.
Moody's Thursday concluded a review of seven Abu Dhabi-based companies that it started in December last year, prompted by the restructuring of operations at government-owned conglomerate Dubai World to re-evaluate assumptions of government support.
Abu Dhabi's government companies and government-related firms have borrowed heavily from international debt markets over the past year to fund their expansion, and the government's aggressive development program. Companies fully owned by the government raised at least $9 billion in bonds and loans on international markets in the past year.
The government itself raised $3 billion last April as part of a $10 billion sovereign bond program. In a research note, Saud Masud, head of research at UBS in Dubai, said: "We reiterate our view that despite being a strong net creditor, Abu Dhabi's economic engine will likely significantly slow down, especially as Dubai Inc. deleverages going forward."END
The three banks backing Prudential’s $35.5bn bid for AIG’s Asian arm said on Thursday that the soveriegn wealth funds of Qatar and Singapore had joined 30 banks in the syndicate to underwrite the UK insurer’s $20bn rights issue.
The Pru, which announced its agreement to buy AIA on Monday, needs to raise the cash from its shareholders to fund the lion’s share of the deal. The group will also issue to AIG $5.5bn of stock, $3bn of convertible notes and $2bn of preferred shares.
AIG’s Asian arm was due to be floated in Hong Kong until the 11th hour when the stricken US insurer’s board was finally persuaded that the Pru could fund a deal. However, that decision left a large number of investors still keen to put money into the combined group.