Where are we all heading economically?
By Prof. Robert Anthony, Anthony & Cie
Quantitative easing has clearly created employment, albeit sometimes at low salaries. Whereas in the late 1980s hyperinflation was considered to be a way of creating demand, since the crisis of 2007 we have seen a different strategy. Initially there was speculation in safe commodities such as gold, but the price has now dropped from its previous high levels. Several advisors regarded it as undervalued and predicted it would continue to rise. As markets settled, despite the problems not being over, gold stabilised at a lower level. As we come out of slow growth, what effect will this have? Many think European equity markets are still undervalued. We have seen recent speculative selling, but markets have been volatile for a while.
Over the last eight years, many companies have restructured to concentrate on their core business. There have been demergers where conflicts were identified within groups and mergers where it was considered useful to the core business. However, this is a generalisation, as some mergers were not entirely sensible. Government protectionism has sometimes impeded international monopolies or foreign investments.
Looking to the future, the question arises as to political influence on the markets. How will they be affected by the UK general election? The financial centre in the UK is being threatened by the socialists discussing the scrapping of non-domiciled status. This status has attracted top financial brains to the UK. They create hundreds of jobs. Could this ill-advised move signal the end of London as the European financial hub of Europe? The consequences may result in the leading skilled professionals moving to Ireland, Malta, Luxembourg or New York. How short sighted are short-term political gains? Please note that I intentionally omitted Switzerland due to the current instability in its political financial administration.
The election result in the UK will direct future UK policies. What security does this now give to an investor intending to invest in the UK? The world has always opened new doors as old ones close. India is emerging as an exciting investment proposition with its relatively new government placing major international orders. China is currently also looking at quantitative easing. What is clear from all of this is that wealth is generated from the creation of jobs away from the meddling of governments. Long-established economic theories still apply. Fundamentals have not changed despite the technological revolution, although it is worth noting that systematic issues confuse the overall scene. The issue is can the effect of employment sufficiently succeed to overcome the explosion of additional liquidity injected into the capital marketplaces and its consequences.
Germany and the USA are leading the world out of its crisis, but India is joining as a driving force. Whilst having achieved a reduction in unemployment, the UK clearly still needs to address its overall debt issues as well as its membership of the EU. If a social government destroys international confidence this could have a disastrous effect. French Prime Minister Manuel Valls noted that taxation of the population had been too high, while government had not been adequately cutting public spending. The Greek government wants to increase spending unrealistically in order to fulfil its election promises. Now they have an issue as to how to respect the unrealistic election pledges and at the same time satisfy the EU. These many uncertainties are causing quite a dilemma. Stock picking is extremely important as are real assets such as property and forestry. It is essential to buy wisely by carefully choosing well managed investments with growth potential.
The tax push of governments has left certain sectors with problems. Green energy has been hit hard by government cuts and lack of bank lending. New sources of investments are growing by way of crowd funding and investment funds. The restructuring of the banking industry has created new businesses and opportunities. The world is not short of money but of visionaries. Needless to say there are entrepreneurs, but the financial sector is suffocated by analysts with no real business experience playing with financial instruments and backtesting theories. These have a heavy impact on the market and market prices.
It is about time politicians and banks come to terms with the real world. Perhaps it should be an obligation for financial analysts and bankers to have at least two years in commerce or industry before assuming such roles to ensure they understand how the other half lives. So to, politicians should have two years apprenticeship work experience in industry or commerce in a decisionmaking role before they can become a member of parliament. As a result, they would hopefully understand more clearly the effect of inappropriate legislation.
As the world achieves economic growth, the slow performing European economies will be pulled along. It is not to the credit of domestic governments, but a global push towards demand. As this materialises, the stranglehold of taxation can be eased thereby unblocking the arteries so in need of lifeblood to survive. Let’s just hope that future politicians do not make the same mistakes of the past by stopping the circulation.
In conclusion, it is a brave person that dares to predict tomorrow. The fluctuation of currencies makes this even harder, as is evident from the growth slowdown in the USA due to the strengthening of the dollar. A solution could be hedging by direct investment into international commodities that are in constant demand, in this way mitigating the risk attributable to foreign exchange. Although this may not be very exciting, it at least ensures living on to fight another day and also reflect on the past.
Prof. Robert Anthony
Anthony & Cie, Sophia Antipolis, France
published: May 2015