Readjusting Certain Macro Assumptions

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

June 2003 

Some events and trends in recent times including the War on Iraq II, stance of certain European countries on the issue, apparent policy changes in others, possibility of terrorist attacks, and the like may render certain popularly or long-held global-macro economic-business assumptions less applicable. Or at least they need to be revisited and reviewed. Your humble author is surely no politics expert, and it is not the intention here to dwell into those aspects either. Rather, we wish to share a few of our gut feelings, which may be subjective in part, with readers as to why we think there may be a need to have these global macro assumptions reviewed:

A)     The European Union and its economy / market has not, at least to many in Asia, turned out to be the equal alternative to the USA (North American) economy / market: This is not saying its influence is nil, just that it has not lived up to the level that many had years ago led us to believe. Except for the United Kingdom, most countries in the European Union have less than luster economic performance, high unemployment rates, and so on. With the US in the economic cross-road (i.e. recession or recovery), global investors will have a much tougher time finding markets and opportunities and traditional geographical / regional economic diversification tactics, such as balancing their investment portfolio among the three so-called global economic engines, namely Europe, Japan, and the USA, may not work at all or as well should the US also plunge into a recession, even if only a mild one. Perhaps instead of geo-economics, one should be picking specific city-economies-industries.

B)     In addition, Europe is still, at least in the political arena, not as united as its union seems to imply = Based on their respective stance on the Iraqi war, this division of opinion and diversity of (political) stance seem to indicate that while economically the countries may have a union of some sort, politically they do not. Furthermore, the split seems to follow along the traditional / historic lines e.g. countries such as Spain or Italy seems wary of an over-bearing France-Germany alliance. Some traditional cultural-socio-political factors still count.

C)    Central European countries may gain in economic importance = This can be seen from two angles: 1) Many in former Western Europe invest, take vacation, work, do business and the like in Central-Eastern Europe, in a way similar to Hong Kong going up north to invest, work, and play in Mainland China. Naturally, doing so in Central-Eastern Europe would be a bit more complex as different countries with different laws, governments, and languages are involved; 2) It is reported that the United States may consider stationing-relocating some of their military facilities to certain Central European countries for cost-saving and other tactical reasons. If so, this reflects a shift in geographical emphasis with the end of the Cold War era. In any event, investors contemplating Europe may wish to allocate part of their resources and capital on Central Europe, perhaps to spice up the portfolio.

D)    Deflation = Much of the world is suffering from some form of deflation, even the USA which has been enjoying a comparative robust economy is now trying hard via interest rate reduction etc to prevent deflation taking hold of its economy. Investment assets which offer a steady income stream and which might have been neglected by some investors who favor price appreciation over steady income, be this in the form of a rental income or interest income, are now becoming more significant and popular. For instance, many real estate developers in Hong Kong have been expanding their rental investment property portfolio. Also, conservative investors may wish to reconsider lowering their required nominal yields in a deflationary environment (while maintaining more or less the same spread between yield and the lower inflation or deflation rate) assuming similar risk levels.

E)     Most if not all developed / advanced economies are graying (getting old) but would have some accumulated wealth, while less developed economies generally have younger populations who are collectively poorer = Thus implying a business / trading match, with the developing economies providing services and goods, ones focusing on the elderly included (e.g. health, medical etc), to the more affluent in the developed economies. Nonetheless, the competition to provide goods and services to these affluent economies will be quite keen, as roughly there are around 4 people in less developed economies for every 1 person in the more affluent economies. The question is thus: who out of the 4 people in the developing economies will get to provide the bulk of the services and goods to the more affluent economies? They are worth watching and investing.

By and large, the above are not something that is cast in stone, but that every investor and investment manager should at least contemplate and see if some adjustments are needed for their current investment strategies.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.  

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