InvestTalk: National and regional perspectives - 2006/07

In my previous posting on investments, I provided the Economic view that I took on the global economic trends that I paid heed to while making my investment decisions (for fresh investments added between mid 2006 and end 2007). In this posting, I wanted to share with you the National and Regional perspectives that I perceived as important in May 2006 while bringing in investments starting mid 2006 and carrying on till mid 2007. The idea behind these notes is to share with you my top-down approach to investment and solicit your feedback on my perspective and analysis. (Clarification: These days, I am a passive investor, watching from the sidelines as the results of my bets play out in the market since work, socializing, blogging have kept me a bit pinned down). My recent bets have been placed in equity markets on the following regional perspective (I might change them when I re-enter the market hopefully at the end of Q1, 2008). The factors that I thoughts mattered for investment decisions in the countries and regions considered were:

US

o Pros: Most innovative (technology, product development) economy; largest economy by several magnitudes; huge corporate profitability of late and inventory built in the past were exhausting which would lead to potential investment in capital/IT by cash rich companies; amongst the most developed financial markets

o Cons: High deficit; high debt; currency fall risk; housing price will probably go down; consumer confidence may get hit

Western Europe (non UK)

o Pros: 2^nd largest economy; good governance of companies; sophisticated financial markets; Government will step in to prevent run-away losses; excellent infrastructure; European stock markets already moving up and economy getting better

o Cons: Ageing population; stagnant policies; Euro costly (currency risk big); immigration averse; general sense of unhappiness could impact growth; extensive social protection; high tax wedge on labour income reducing the incentive to work; high non-wage labour costs; rigid employment protection and persistently weak domestic demand depresses the demand for labour

Japan

o Pros: 3^rd largest economy; excellent world beating companies in some sectors; banks re-structured recently to be more efficient; Government efforts to directly boost economy in recent past; currency will probably not go down but likely up; brilliant technical capability; hard working quality conscious people; generally has huge trade surplus that can absorb shocks

o Cons: Ageing population; slowing growth; China/US/Taiwan/Korea taking away its existing hold on the region; oil dependent economy; resource starved; immigration averse therefore low therefore wage impact will be high; bad relations with neighbouring countries

India

o Pros: fast growing economy; IT and services driven economy; young population driving hard, optimism; growing realization and acknowledgement that infrastructure needs to be focus area; entrepreneurial, scientific man-power; highly educated manpower supply; significant expansion in the production of durable consumer goods including cars, scooters, consumer electronics, computer systems and white goods; services (including airlines, banks, construction and small-scale private traders as well as the public sector), accounted for 49.4% of GDP in 2001/02; Indian companies gaining confidence and striding globally; minimal legacy of major industries as a burden on the economy

o Cons: Oil dependent economy; political wrangling with the Left will slow reforms; lop-sided growth and endemic poverty will keep country off-kilter; pathetic infrastructure; India’s trade deficit rising despite growth and economic prosperity; and (although exports performed strongly, rising by 31.3% to US$78bn, imports soared by 42% to US$97bn); Two-thirds of India’s labour force works in agriculture which, with forestry and fishing, accounts for around 25% of GDP and most are on subsistent basis; agriculture hugely monsoon dependent and not served well by irrigation systems; service sector wages rising very fast; hubris of corporate chieftains; a legacy of populist lurches

Latin America

o Mexico still a commodities driven country, could not capitalize on US relations, excellent literate population, is it endemically weak despite having some colossal companies ?

o Brazil is a commodities story again; but seems the seeds of economic growth are growing deeper; market friendly though socialist government.

o Venezuela and Bolivia are a write off for now given the political clime.

o Peru/Chile : tourism, commodities driven – difficult to find vehicles to invest in.

South Africa

o South Africa, best known for its precious metals, fruit, and wine, has in fact moved from an economy historically dominated by mining and agriculture to one where manufacturing and financial services contributes the larger share of GDP.

o Mining, nevertheless, remains an important foreign-exchange earner: gold accounts for over one-third of exports. The main mined products include manganese, chrome, platinum, gold, coal and diamonds.

o Agriculture, together with mining, continues to be an important provider of both direct and indirect employment.

o Manufacturing accounts for around one-fifth of total GDP, but has faced significant challenges since the opening up of the economy to global competition.

o Metals and engineering, especially steel-related products, drive the sector.

o Services is the most important contributor to GDP, ranging from an advanced financial sector to a developing tourism sector, which has significant employment potential, and an active retail sector.

o Unemployment is a worrying structural feature of the economy. With the official unemployment rate at 29.4%, creating sufficient jobs for the estimated 4.7m currently without jobs remains the most critical economic challenge in South Africa. The high unemployment rate has contributed to South Africa’s ranking as one of the most unequal countries in the world judged by distribution of income.

o Managerial talent continues to be severely weakened after the exodus following the Free South; the attempt to encourage local black talent to develop moving sideways.

o Fabulous core infrastructure in place.

Canada

o Pros: leading G8 economy; excellent infrastructure; commodity rich; services sector accounting for over two-thirds of the country's output and providing employment for nearly three-quarters of the working population; good peaceful relations with almost all countries in the world (be it the the US or Cuba, they are all friends); welcoming to all immigrants; taxes (personal and company) should go down or worse case remain at the current levels; surpluses on current account in recent years; small companies with specialized engineering skills; water can be next “blue gold”

o Cons: US dependent; highly taxed; greying population; weakening manufacturing prowess; socialist union loving tendencies; Quebec separatism moves can result in pressures on costs; minority Government can be unstable and not good for economy; lack of ambition to do big things in the corporate world a big handicap

So how come China is left out of the analysis. Well, China deserves a separate chapter and I didn't intend writing a book ;). Needless to say, I am invested in China and China dependent countries such as Australia and Taiwan. Also doing a real analysis on China without being on the ground is very difficult given lack of transparency on economic data.

In the next note in this series, I will post the sectors that I thought would win/lose from mid 2006 to mid 2008.

Responding to you on why I picked on Water as an issue

In a previous posting where I was having fun looking ahead on key trends, I had highlighted my concerns about water. Some of you who spoke to me after that or e-mailed me wanted to check out my reasoning for highlighting why I think that the crisis with water will play out. I will encapsulate my key reasons for the impending challenges on water as being that of mismatch of demand and supply for these resources, the now acknowledged climate changes warming the globe and the human reaction to scarcity. Warming of the planet Almost everyone has now come around to the fact that the planet is warming; we have seen and will continue to see extreme weather conditions impacting different parts of the earth. The warming will likely lead to dryness in several parts of the world but increasingly, the weather will be more unpredictable and planning crops and life around water usage will become more difficult. Mismatch in supply and demand for clean water Emerging countries such as China and India with huge populations are growing extremely fast. The N-11 (next 11) of developing countries - Vietnam, Pakistan, ..... will join in. As they rapidly join and move through being more industrialized, they will need more water to not only drink, but to produce electricity, manufacture goods and satisfy the growing needs of consumers. Not only will they need fresh water, they will have to deal with a population that will be concerned with the level of purity of the water. Accelerated growth and huger populations will accentuate the demand for water from the developing countries. Waste is pumped into clean water sources on a regular basis in developing countries despite growing awareness of the problem and some tough laws. With greater growth, this phenomenon will intensify; as a result, the bulk of the people on this planet who live in developing countries will be demanding an increasingly reducing resource. Desalination techniques still have not evolved or become price effective and can be afforded by only the exceedingly rich countries, if at all, and the rich countries don't need water as acutely as the poor do. On the supply side, a few countries have access to a disproportionately high source of fresh water (Brazil's Amazon river base and Canada's fresh water lakes) and they account for a very small percentage of the population. Thus this is a classic case of "resource mismatch", as economists will put it. Human behaviour could make the problem even more acute The scarcity of water, combined with uncertainty due to climactic changes and the mismatch between supply and demand could lead to hoarding of this precious resource in reservoirs, underground storage and other innovative ways. If the hoarding is accompanied by negative human traits (envy, pride and pilfering), rivers could be diverted, dam walls between countries raised. Pride too may play a hand as few leaders would like their national press to read "We have not managed our natural resources and now import the most basic resource - Water. Bury the President/Prime Minister for allowing it to happen." All the above scenarios could lead to unimaginable chaotic consequences and as usual if the people and leaders act quickly, the crisis could be averted or the negative impacts of the problem well managed. Detailed scientific and statistical understanding of the problem at micro (city, province) and then regional (multi-country) levels, pooling of this information with impact of growth factored in. Along with scientific and research work to understand the magnitude of the problem, the obvious parallel step should be implementation of stricter laws to conserve and safeguard clean water, enhanced focus (similar to Global Warming) on spreading awareness on preserving and using water more effectively, early investment by nations in water purifying and desalination technologies (as important in infrastructure plans of nations as telecom and roads) and accelerating gaining long term agreements on water sharing across borders. But what is also needed is early thinking and proactive implementation on easy transportation of water for long distance hauling of water, advanced storage techniques, set up of exchanges for trading water (similar to oil commodity trading) and bringing water management into academic curriculum at top universities.

3 baseball games – 3 completely different experiences and thoughts beyond baseball

I don’t write on sports so this may be a little out of the normal; however, I could not help but share my recent completely different experiences from 3 “ball” games that I visited in July and August of this year.

The 1^st one was a big hyped up game where the legendary Barry Bonds of the San Francisco Giants was to equal the all time record for home runs while playing against the Atlanta Braves in his home stadium in Frisco. The 2^nd game was a game in Vancouver between Tier 2 rivals and the final game that I watched was Toronto Blue Jays Taking on the team from Baltimore. I am sharing what I realized from these 3 experiences:

* The most hyped game was the most boring. In terms of the game quality, the Tier 2 game in Vancouver was the most exciting with more strikes and home runs than the games I watched with major league players in Toronto or San Francisco. In fact the game in San Francisco was so boring that I was mostly admiring the beautiful view of the San Francisco “bay” beyond the boundaries of the stadium; even my baseball loving colleagues decided that we should abandon the game mid-way and head back to the hotel.

* The arena makes a real difference. The San Francisco game was played in a huge stadium and while people roared for Barry, the excitement of the huge open stadium was lost on me. On the other hand the closed atmosphere of the Rogers Centre was far more electrifying. But the small field at Vancouver created an atmosphere of intimacy that had me sitting all through the action.

* The side show is equally important for enjoyment, perhaps more than the game itself. When I checked the level of involvement of the crowds, I observed that the crowds cared a lot about the side-show. The “Chicken Man” with his pranks form the sidelines at Vancouver had the kids and even the elders in splits and completely riveted on his antics. The mascot, the dancing and the prancing at the Blue Jays game drew more cheers than any catch or strike made by the players. The ceremonies at the San Francisco Game were the only times that our group stopped “jabbering” amongst ourselves or I stopped looking at the Bay.

* Spectator sports at the stadium is a family event in North America. Be it in the UK, Latin America, Singapore or in India, the folks who attended games were die hard fans, mostly going individually or with groups of friends (and some as corporate guests). I didn’t observe too many mixed age groups or families going together to the stadium to watch cricket, football or similar events. However in the US and Canada, families (or atleast father-child or mom and child) go together on a regular basis. In the words of a friend of mine, “In some instances, it is something that generations can share and follow together, it gives a great opportunity for enjoyment and togetherness with friends or family, a common following or bond, not so far derived from following a similar religion.”

* Sports discussion as ice breakers and substitute for tougher alternatives. Weather and hockey are “ice breakers” for conversation at any official meeting in Canada. Talk about baseball, golf, football (the American version) are an easy way to get conversations into a swing anywhere on the continent as is discussion on the previous day’s football and cricket games in other parts of the world. People can release their energies, debate and obsess as much as they like about the game and the players without doing significant long lasting damage (in most cases) to most relationships and their social circles unlike conversations on religion, economy and politics. However, these “harmless” sports discussions in the media, in college campuses and society do replace more meaningful conversations and debates that take societies forward and provide an easy way out for tougher discussions.

While on topic of professional sports, I must confess that I still don’t get it - obsession of fans with professional sports clubs. I am still puzzled by the spectator’s obsessions with professional teams which allow players to be “traded”. I understand passion for sports teams that represent a country, a region and are composed of players from these areas who rarely will go across to a rival but what I can’t understand is as to why fans from a city go hysterical about a Red Sox (baseball), or a Manchester United (football, the real one), or a team like Toronto Maple Leaf (hockey) when these teams regularly “trade” players, don’t recruit locally in their cities and pamper millionaire stars who change their uniform for the next increment in their contracts.

The energy spent by fans and the money poured by the cities obsessing about a team that is ever changing and comprises of “foreign” talent perhaps is the result of primal feelings similar to that of the Roman cities “owing” their legionnaires (who mostly came from outside the cities) or is it simply that people are victims of a marketing gimmick by owners of these sports clubs and TV broadcasters who sell brands such as “Toronto Maple Leaf” to whip up the frenzy.

I have asked this question of many people and responses have been only partly convincing. The best answer came form a friend of mine justified saying “You pick a team that you relate to because of hometown, family tradition and up bringing, or because of the style and success of the play”. Others have focussed more about the team having a defined approach to the game and I don’t buy that because if a team has a well understood approach to the game, then it is likely not going to be successful in professional sports. Can you help me understand this obsession with transient professional team better?

On Faith, Belief, Religion and Worship – Key Influences

I intend doing a couple of postings on my personal observations and views on a topic that is very close to my heart – faith & religion. As the 1^st posting in this min-series, I examine the key influences which have shaped my views on the topic. 

I consider myself blessed to have had lived in and travelled through different parts of the world and in the process interacting with different systems and many wonderful people; all these interactions have helped equip me with a wide array of filters to look at something that is very important to each one of us – What do we believe in ? 

To understand the root of my views on the topics, I examined the influences that have shaped them and grouped them as follows:

* Growing up, the society around me was big into religious rituals: I spent 10 + years of my formative years in Bombay/Mumbai, where more than 10 million people of different religions and faiths were crammed together. And to survive in the tough city, everyone prayed – the citizens lined up all night and right into the morning of every Tuesday at Siddhi Vinayak to pay obeisance to the Hindu God, Ganesha, on Thursday they were making offerings at Mahalaxmi temple, on Friday and Sunday, they were prostrating at Haji Ali, (the beautiful mosque perched precariously on a few rocks in the sea) or seeking blessings at St Michael Church in Mahim. In between, during the week, they paused at the Parsi Fire Temples, chanted hymns on the long suburban rail journeys or called out to God every time they stepped out into the maddening chaos of the city to make a living.

Beyond the city and all over India, the country came to a grounding halt every few weeks for festivals from all religions – Hindus, Muslims, Christians, Sikhs, Buddhists and if you were on the West Coast, then for the Parsi community too. 

* We prayed hard at home and every day in school: I grew up at home surrounded by lots of images of Hindu Gods; no one asked us to join in but I saw my Mum do morning prayers regularly, my Dad stand in front of images of God quietly atleast twice a day – in the morning and with his “scotch” whiskey before his daily 7 PM sip of “nectar” ;). When I got to school, the Principal led the prayers thanking the Lord for “our daily bread”, and then we sang to the tune of the piano two different hymns in praise of the Lord and Jesus.

* Awareness of many paths to God was easy in India and at home: Modern India upon freedom from the British was a declared secular country and officially respected every religion and faith making allowances legally for each faith and giving absolute freedom of choice on the path one chose to get to God. And I was absolutely proud of it from the day I gained awareness. 

As I grew up and read the history of India welcoming the persecuted Jews and Zoroastrians (Parsis as we called them fondly in India) from the Middle East, I felt real good and I don’t think there was anything else in India that I was prouder of than the country’s past claims to welcoming people of different faiths. 

To make it even easier to accept multiple beliefs, Dad constantly expounded the virtues of different religions; to make his love for different religions even more explicit, he wore a golden chain with a Gold Cross and beads that are sacred to Lord Shiva (Hindu God for those not familiar). He even hinted to me and subtly encouraged me to find a girl friend or wife ;) who was Muslim – of course that was partly because he thought that they were more beautiful looking. 

And of course the holidays for each festival drove home the message of the many paths to get to God.

* Analytical education makes for a questioning mind: Every thing has to be proved or understood or atleast questioned. We debated in junior school, we sought empirical evidence all throughout our academic years, we gathered in our buddy Kris’ room in the engineering years to argue over a lot of the big events of the day and my parents always discussed a lot of topics with us. On top of it, both my specialized education courses (Bachelors in Engineering and Masters in Business) further made me question things and not accept anything as given.

* Studying, working, living and travelling across India and then across the continents: A huge influence on anything I believe in has been the constant movement all my life. I have been exposed to a lot of views from different people and different ways of life, having lived and worked in 3 different major regions of the world and having travelled to more than 300 towns & cities. The movement has been constant and started early and the influences constantly changing – I completed my studies across 6 different cities of India, travelled to every corner of India from age 5 onwards and since 1998 have passionately and constantly explored South East Asia, the US, Canada, Latin America and parts of Western Europe. 

* I always have needed the EXTRA help: All my life, I have been acutely aware that the benefits & results of my actions at study and work are much larger than the efforts that I have put in. This gap is accounted solely by the blessings of the Mighty One. I became aware of that Divine Help very early on, and have developed a dependency syndrome since then. I need that big extra help every year, every day and every second of my life. To add to it, I suffered from poor health in the very early years of my life and every time, largely through the power of prayer, I pulled through.