Return of the Spice Route

Fascinating discussion via Nomura strategist Sean Darby on a new investment theme:

Investors are overlooking the domestic growth opportunities of Muslim-dominated
countries situated along the ancient Spice Route. We estimate that between 2020F
and 2025F, approximately one in every five births will be in countries whose ports
were visited by merchants trading along the route way back in the 13th century.

We believe investors are ignoring Muslim-dominated countries in favour of the
China consumer theme, despite the fact that China’s demographics and income
per capita are inferior to those of the Spice Route economies. These countries are
also benefiting from significant infrastructure investment spending.

The Spice Route report complements our Silk Road theme, launched in June 2008.
The Spice Route theme highlights secular consumption overlooked by investors;
the Silk Road theme is about the future economic benefits of a series of road and
rail projects traversing central Asia. Both have low information ratios.

The return of the Spice Route

Follow the Spice Route, follow the consumer: Booming demographics are the distinguishing factor between the Muslim countries and most of the world. The Muslim population dominates the coastal countries passing the Spice Route, all the way from Borneo to West Africa. India by itself is home to around 150mn Muslims. Indonesia has the largest single number of Muslims, with Malaysia and the Gulf countries failing to break into the top fifteen. Using independent forecasts, we calculate that births in Muslim countries as a percentage of global births will continue to increase until approximately 2015.

Companies likely to benefit from the theme We highlight companies listed within the respective markets that derive a high proportion of earnings from growth in domestic operations. These are typically banks, telecom and consumer staples. Further, we have
added some prestige Asian companies that export high value-added
consumer goods such as autos, as well as other well known brands in
sectors such as tobacco.

We are launching our Spice Route basket with the goal of riding secular consumption trends running from Indonesia to the Gulf. We believe the theme has a low information ratio, low correlation to global equity markets, and is a lateral way of playing demographic changes within the Islamic world. We highlight 17 companies from Japan through Indonesia to the Gulf as potential beneficiaries of the consumer boom.

Nomura urges investors to turn to Asia, Japan
Reuters, Jun 30, 2008

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