World Economy Whistles in the Dark
Despite a wobbly euro, heftier oil prices and political uncertainty, the trends in the world economy are positive over the next three to five years.
In Europe, companies are reforming their operations and changing industrial patterns of half a century. In Asia, economies are growing again and China is booming. The force of information technology that has changed U.S. business is spreading to the rest of the world.
This is not an easy time to remain confident, to be sure. Intel’s announcement last week of slowing sales in Europe threw the stock market into a temporary tailspin. Worries over oil prices continue, and the U.S. and Japan have intervened to help Europe prop up the value of its new currency, the euro, which fell by 28% against the dollar in its first year and a half.
Many in Europe reject the need to change. “The ideology that says you deregulate and jobs drop from the sky is nonsense,” says Ursula Engelen-Kefer, vice chairman of Germany’s federation of labor unions. “We don’t want to copy the U.S. or the Asian tiger economies.”
Meanwhile, those Asian tigers are worried that expensive oil could abort their recovery from recession.
Yet beneath that cloud cover, investment is beginning to flow to companies in Europe and Asia. U.S. pension funds are allocating more to international investments, and individuals are increasing their holdings of global mutual funds.
Such investors are looking ahead. “Europe today reminds me of the U.S. in the early ‘90s, just when we were on the cusp of our renaissance,” says economist Stephen Roach of Morgan Stanley, who visited Europe last week. Americans were gloomy then, looking enviously at Japan; Europeans are gloomy now, looking enviously at America.
But changes are occurring. Companies are reaching out for access to global capital markets. In the last decade, Axa Insurance of France has acquired insurance companies in the U.S., Hong Kong, Japan and other countries of Europe and is now a giant with $60 billion in annual revenue. Allianz Insurance of Germany has become a global force in investment management. France’s Alcatel and Vivendi have spread out in telecommunications, water treatment and entertainment.
Companies are restructuring because they have no choice. The effect of the Internet on business is epochal. When companies today buy supplies and sell goods via the Internet, the savings are massive, as wholesale distribution and inventory costs are bypassed. “It cuts the cost of a purchase order from $75 to under $10,” an accounting expert estimates.
U.S. industry prospered by pioneering information technology in the ‘90s. But the rest of the world is now accelerating the pace.
“China and its companies are spending billions of dollars building a telecom infrastructure. Shanghai is rolling out a broadband Internet cable network that will encompass many features,” reports Howard Chao, an attorney in the Shanghai office of O’Melveny & Myers, a Los Angeles law firm.
The Japanese government last year authorized more than $3 billion to help Asian countries build Internet capabilities--with equipment from Japanese companies. Japan’s own NTT DoCoMo is now the world leader in wireless Internet telephony.
The buildup of Internet communications in Asia is a long-term process, says Philip Kelly, who heads NetCel360, a Hong Kong firm that helps companies create Internet networks in China.
Kelly, a native of San Diego, previously worked in China for Motorola and for Dell Computer. He helped set up Dell’s Asian sales network in the recent years of Asia’s recession. Today 40% of Dell’s sales in Asia come to it online.
Motorola has been building its presence in China and Asia for more than two decades, and today the Schaumburg, Ill., company gets 27% of its $31 billion in annual revenue from Asia--more than $3 billion from China alone.
The point for investors to ponder is that smart companies work through recession and uncertainty to build a presence where they know growing markets will be.
In Asia, population charts signal this century’s growth market. By the end of this decade, two-thirds of all the world’s people between the ages of 15 and 40 will live in Asia.
Elsewhere, business opportunity will stem from transformation of old systems. In Europe, financial markets are undernourished because France, Germany and Italy have not authorized private pension funds for investing, as Britain, the Netherlands and the U.S. have.
But pension funds and vibrant stock markets are coming to those countries as the need to provide for growing numbers of retirees brings pressure on governments.
Such changes will be transforming the world economy long after today’s anxieties over oil prices and the euro are forgotten.
Even within the euro area today, “some economies such as Spain and Ireland are performing extremely well,” notes Scott Weiner, managing principal of Payden & Rygel, a Los Angeles investment firm with business ties in Germany.
In a new survey, Merrill Lynch names Sweden and Singapore as countries with the best prospects for information industry because of their educated workers, capital availability and technological skills.
How can ordinary investors take advantage of such long-term trends? By investing with a long time horizon, just as the pension funds do.
“We buy stocks around the world with a three-to-five-year holding period in mind,” says Debra McGinty-Poteet, fund manager for Brandes Investment Partners, a San Diego firm that manages mutual funds with an international focus.
Brandes’ portfolio holdings include Alcatel, British Telecom and Telefonos de Mexico. Its list of long-term holdings also includes Hitachi of Japan, Cadbury Schweppes, Allied Irish Bank, PetroChina of Beijing and insurance companies Axa, Zurich Allied and Sun Life of Canada.
Most insurance companies are, above all, long-term investors. Maybe that’s why they survive and prosper in an uncertain world.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com. His previous columns are available at https://www.latimes.com/flanigan.
