By Yiannis G. Mostrous

ATHENS, Greece I expect that SRI readers are enjoying the summer. After all, history has shown that extensive investment moves during the summer–especially in August–have never been particularly successful.

It also allows an opportunity to make necessary portfolio changes both tactically (i.e., leading to the end of the year) and strategically (i.e., positioning for the next five years).

Before offering some general thoughts, let me remind long-term readers and inform newer ones of the main ideas that led to the creation of the Silk Road Investor. As I wrote in the first issue (see SRI, 15 February 2006, The Rules Of Engagement):

The premise of this advisory is economic change. The idea here is that the world is moving to a more multipolar system, and this shift is having a great effect on the global economy, as new economic superpowers rise and prepare to challenge US supremacy. Although the US will remain a very important player in the global economic stage, it will gradually lose its title as economic hegemon.

A combination of new developments–the rise of China and India, the re-emergence of Russia and the revival of the Japanese economy–are the main catalysts for this new global economic order. Investing in these changes will offer superior results to the patient, well-positioned investor.

A look at the emerging market economies around the world shows not only that these “21st Century nations” have experienced strong growth in the past 10 years, but that, since the Asian crisis of 1997, their performance has been stellar and their economies are on a much stronger footing. Ten years ago, these economies had current account deficits–now the majority of them have current account surpluses.

Furthermore, their share of the global economy has grown from 31 percent in the early 1990s to 38 percent today. Given that their economic transformation is still in the early stages–after all, China’s urbanization ratio is about where Japan was pre-’40s–expect these numbers to continue to improve over time.

My firm belief that a big change is taking place is obvious here, and investors who choose to ignore it will eventually regret it. This conviction–also outlined in my book The Silk Road to Riches–strategically drives my investment thinking.

One of the many parameters of this shift is the geopolitical developments around the world and their significance in the investment decision process. You know the importance of these developments through the Geopolitics & Investing Quarterly reports.

In order for investors to be able to take advantage of geopolitical changes in the context of a globalized economy, they must look at these developments as objectively as possible and from as many angles as possible to reap real benefits. It goes without saying that a demagogic, hysterical reaction to assorted geopolitical developments won’t benefit their thinking and, consequently, their investment process.

Concerning the current geopolitical landscape, the Middle East situation (no matter what anyone’s beliefs are leaning toward) is a destabilizing factor for the global economy that can become potentially very problematic if able diplomats don’t get to work fast.

And the Middle East is only a part of the puzzle. As the Stockholm International Peace Research Institute (SIPRI)–a globally respected, independent international institute for research into problems of peace and conflict–noted in its Yearbook 2006:

In its 40 years of existence, SIPRI has witnessed a shift from the clear-cut bipolar confrontation of the cold war to a much more complicated strategic environment. No simple formula such as North-South or West-West confrontation, a new US “empire”, or the identification of human categories like terrorism or Islam as “the” enemy can be either intellectually or morally satisfying.

Notions of danger and security have also become more complex over the past 40 years, shifting away – in particular – from any sense that armaments are the core of the problem. A wider spectrum of trans-state, intra-state and personal violence has taken the place of state-to-state conflict, and the salience of “human security” threats such as epidemic disease and natural disasters has grown. Non-state actors of all kinds have gained in power, as security menaces but potentially also as contributors to solutions.
Different levels of security response, from sub-national through national and regional to global, need to be integrated and correctly applied.

In general, there has been a shift in preference towards ways of tackling threat and risk that are active, cooperative and interventionist even when not actually “pre-emptive”. All regional security organizations now exhort their members to build up their military capacities for benign uses such as peace missions. The assumption increasingly seems to be that it is not arms and armed forces that are bad in themselves, but their use by bad people for bad purposes – if these terms can be defined – that must be prevented.

It should therefore be understood that things are getting more complicated than assorted “neo-political” commentators will have us believe.

In SRI, I’ve identified a lot of potential geopolitical developments and tried to assess potential consequences while offering investment advice. You should take a look at the two reports that are already offered.

The upcoming change in the leadership of the Liberal Democratic Party (LDP) after the departure of Prime Minister Junichiro Koizumi in Japan–one of my favorite long-term investing themes and also the main player in one of the above mentioned reports–is of great importance. The most recent indications are showing that Chief Cabinet Secretary Shinzo Abe is far and away the front-runner among both the Japanese people and the LDP. (According to a public opinion poll in the 8 August Yomiuri newspaper, 45 percent of respondents said that Abe would be the best choice as Koizumi’s successor.)

As Japan is not only the second-biggest economy on earth, but also a tight US ally, I’m providing some information on the man who will probably be leading this nation forward.

Abe comes from a political family. His grandfather was Nobusuke Kishi, Japan’s 56th prime minister, known for signing the new Japan-US Security Treaty. His father, Shintaro Abe, was foreign minister for nearly four years under Prime Minister Yasuhiro Nakasone and a candidate in the LDP general election. Shinzo Abe worked for Kobe Steel after graduating from the University of Southern California.

His father’s appointment as foreign minister was an opportunity for Abe to work as a private secretary. In 1993, he succeeded his father in Parliament, winning the lower house seat in his home district, and afterwards he became LDP deputy secretary and later LDP chief secretary. In October 2005, he became the chief cabinet secretary.

Abe is a big believer in the US-Japan strategic alliance; I expect the relationship between the two countries will remain an important one.

Finally, the recent economic numbers in the US vindicate the view I’ve long held regarding my hedge positions, as outlined in last week’s issue (see SRI, 9 August 2006, Look Out Below). Stay the course with those.

Also, as recent economic numbers are indicating, my long-held view that Europe will perform very well this year (economy- and market-wise) is turning out to be true. I’ll address this continent further in next week’s commentary.