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.