Anthony Eaton JM Finn Global Opportunities Fund, London

T: +44 20 7600 1660F: +44 20 7600 1661E: anthony.eaton@jmfinn.com

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Investing in global markets

The wisdom of crowds and the new numbers game

What are we are investing in

Raw materials and Primary industries

Energy

Strategic assets - e.g. ports, power stations, roads, rail, grain

Economic traction in developing economies

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The Old World Order

The New World Order

Dominated by the industrialised West Wholly built on cheap inputs

Trade barriers down Cheap inputs getting more expensive Pricing power moving from Western consumer nations to the industrialising producer economies

Source Stifel Nicolaus5

A Short History Lesson!

SOME OF THE NEW KIDS ON THE BLOCK…………….

China, India, Egypt, Iran, Iraq and Thailand for example.

HAVE BEEN HERE BEFORE………………China has been the richest economy on earth in all

periods other than the last 100 years. The others have good previous form in the wealth creation game.

INDUSTRIALISATION IS THE KEY…………The West has only been top dog since it has

industrialised and urbanised. (That process has occurred in the last 100 years - a nanosecond in the history of man).

World Output In 1820 In 1950 Projected for 2015China 33% 5% 20%India 16% 4%Europe 17% 19%US 2% 27% 20% 6

What happens when a Country Industrialises

In 1701 Jethro Tull invented a seed drill to plant farmland more efficiently that his labourers

By 1789 the efficient production of low priced food meant the typical eighteenth century English family did not have to spend substantially all of its money on food, as they still did over the channel in France

This enabled the emergence of discretionary spending and was later tagged “The Agricultural Revolution”

Economists later identified this surplus purchasing power as the primer of the “Industrial Revolution” by which people with spare cash bought consumer foods produced in factories.

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GlobalisationPhase 1 Life Before Globalisation

The West builds its rich urbanised industrialised lifestyle on the back of cheap inputs. Other countries are excluded by circumstances or trade

barriers.

Phase 2 Tariffs FallWestern growth rates are stimulated by access to cheap and formerly unemployed labour abroad. This deflation masks growing shortages inbasic inputs and infrastructure. Those shortages are aggravated as

developing countries gain economic traction and compete for those same inputs.

Phase 3 InversionThe Western industrial complex is modelled on “added value” – take

something cheap and turn it into something expensive. Now it is the cheap stuff that is getting

expensive and the Western “added value” margin is getting squeezed.

Phase 4 The OpportunityHigher prices for raw materials, energy, power, food, infrastructure.

Pricing power moving from Western finished goods industries to Primary industries.

80% of the world’s population see economic lift off.

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Inversion in Action

Asian Iron Ore Contract Price Settlements with CVRD

Period DateChange (%)

2008/09 Feb 18 08 65.0

2007/08 Dec 21 06 9.5

2006/07 May 18 06 19.0

2005/06 Feb 22 05 71.5

2004/05 Jan 14 04 18.6

2003/04 May 21 03 9.0

2002/03 May 31 02 -2.4

2001/02 May 26 01 4.3

The Asian imported iron ore price has risen in price fourfold over the past 5 years. Over the same period the average world price of one tonne of basic strip steel has doubled.

That is a margin squeeze. 9

Demographics Help

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Expectations are that by 2015 around 60% of India’s population will be under 30.

Populations in developing nations are, at 80% of the total, huge and getting huger!

Worlds largest countries by population (million)

2007 2050China 1,329 India 1,658India 1,169 China 1,409United States 306 United States 402Indonesia 232 Indonesia 297 Brazil 192

Pakistan 292Pakistan 164 Nigeria 289Bangladesh 159 Brazil 254Nigeria 148 Bangladesh 254Russian Federation 142 Dem Rep of the Congo 187Japan 128 Ethiopia 183

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat 2007

Outside the West the Cash is Piling Up

2007 Central Bank Reserves in Dollars

China $1300bn (up 40% this year)Gulf States $1000bn (up 40% this year)Russia $ 407bn (up 58% this year)India $ 220bn (up 40% this year)Brazil $ 155bn (up 133% this year)

USA $ 55bn (down 2.5% this year)UK $ 42bn (up 3.9% this year)

Sovereign wealth funds operated by China, Russia, India and others now contain £1.9tn – enough to buy Exxon Mobil, the world’s largest Corporation, 3 times over. This figure is forecast to rise to nearly $7.9tn in 4 years.

Source Merrill Lynch11

U.S. electricity usage per capita vs. real GDP per capita, 1904 to 2004.

10 kWh

100 kWh

1,000 kWh

10,000 kWh

100,000 kWh$0

$5,0

00

$10,

000

$15,

000

$20,

000

$25,

000

$30,

000

$35,

000

$40,

000

Real U.S. GDP per capita, expressed in current year 2000 dollars

Per

-cap

ita e

lect

rici

ty g

ener

atio

n

Chi

Electricity consumption per capita rose 124-

fold as real income per capita rose from $5,000 to $20,000, then

saturation ensued.

U.S. oil usage in barrels/capita vs. real GDP per capita, 1904 to 2004.

0 bbl

1 bbl

10 bbl

100 bbl

$0

$5,0

00

$10,

000

$15,

000

$20,

000

$25,

000

$30,

000

$35,

000

$40,

000

Real U.S. GDP per capita, expressed in current year 2000 dollars

Oil

Con

sum

ptio

n pe

r ca

pita

in

barr

els

Oil consumption per capita rose 35-fold as real

income per capita rose from

$5,000 to $20,000, then

saturation ensued.

U.S. beef, veal, pork, lamb, chicken & turkey, lbs. per capita, versus real GDP

per capita, 1909 to 2004.

70 lbs/p.p.

90 lbs/p.p.

110 lbs/p.p.

130 lbs/p.p.

150 lbs/p.p.

170 lbs/p.p.

190 lbs/p.p.

$0

$5,0

00

$10,

000

$15,

000

$20,

000

$25,

000

$30,

000

$35,

000

$40,

000

Real U.S. GDP per capita, in year 2000 dollars

U.S

. mea

t con

sum

ptio

n, lb

s. p

er c

apita

China,

Meat consumption per capita rose about 90% as real income per capita rose from

$5,000 to $20,000, then saturation

ensued. Since meat is grain intensive, we

estimate grain-for-meat rose about

300%.

Source: Barry Bannister of Stifel Nicolaus, U.S. DOE/EIA, BP Statistical Review of World Energy 2005, USDA, U.S. Census. Stifel Nicolaus format and opinions.

The Consequences of Wealth Generation

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Indigestion within a Trend

0 5 10 15 20 25 30 35 40 45

Philippines

Vietnam

Pakistan

Malaysia

China

Hong Kong

India

Indonesia

Thailand

Food consumer price inflation as a proportion of total consumer price inflation Spring 2008

Source IMF World Economic Outlook

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

U.S. raw materials unit consumption growth minus U.S. real GDP percapita growth, 10-yr. smoothing

Emerging Economy (U.S. early 20th century; exporter

of manufactured goods).Producer-to-Consumer

Transition Economy (Post-W.W.II, rise of U.S. $;

consumption of durable goods & shelter).

Service / Intellectual Capital Economy

(Post-1980; saturation levels for

commodity consumption).

Source: Barry Bannister of Stifel Nicolaus, “Historical Statistics of the United States, Colonial Times to 1970,” a U.S. Census Bureau publication, “Historical Statistics of the United States, Millennial Edition” Cambridge publication, U.S. Geological Survey, Stifel Nicolaus formats.

States raw material demand is highest when an economy is industrialising.

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A Long Term Secular Theme 300m people 3bn people

Global Infrastructure Build Over the last decade the CAGR in demand for power in G7 has been 1.5%. In non G7 it has been 4.6% The West uses approximately 20,000 kwhours pp pa

(capacity is fully utilised) The world uses approximately 2,700 kwhours pp pa India uses approximately 600 kwhours pp pa

(the government target is to increase capacity to 1,000 kwh pp pa by 2012)(Source Power Corporation of India)

A quote from the Chief Executive of Aggreko, a global supplier of back up power, 18th December 2007

“In between now and 2015 world demand for energy will far outstrip the world’s ability to put new power generation in place. I am utterly comfortable that the gap between power supply and demand is going to increase inexorably”.

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The Theme in a Picture

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