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Global Economic Trends And Long-Term Influences

Can you imagine what it would be like in the near future if tens of millions of people in the world started to migrate from one location to another? We’d probably feel the impact, and the earth might tilt on its axis.

China

Realistically, the earth won’t tilt, but the fact that China wants to move 100 million people to the cities in the next seven years will, at some point, be felt around the world. These one hundred million people will join the 100 million farmers who have already moved to the cities. This state run urbanization plan is part of China’s overall plan to modernize its society. China plans to accomplish this by doing several things:

  • By giving (a) to the 100 million farmers that the government plans tomovein the next 7 years and (b) to the 250 million former farmers that they havealready moved to the cities the very same benefits that city dwellers already have (such as access to schools).
  • By making major improvements in infrastructure. Their overall development plan is to have cities larger than 200,000 people linked by rail and major expressways; every city greater than 500,000 would be linked by high-speed rail. Their plan includes having shantytowns replaced and hospitals and schools improved.

These events should develop as China plans

  • To have major tax reform with increased taxation by the national government or local governments (the latter presently having very limited powers of taxation).
  • To give some land rights to farmers left in rural areas (land is presently owned by the government).
  • To continue to increase the minimum wage. China’s Employment Promotion Plan mandates that minimum wages are supposed to increase by 13 percent through 2015. China does not have one minimum wage for the entire country. Instead, each Chinese province is divided into different classes of districts, and presently each district sets its own minimum wage. These proposed wage increases that will have an impact on major multinational American companies that manufacture in China.

As the Chinese people migrate to the cities, as China’s infrastructure improves, and as workers’ wages increase, margins for multinational companies will be squeezed. However, the long-term effect on multinationals will probably not be to pull out of China. Instead, some of the realistic long-term options for multinational companies are to increase prices, increase productivity, and to develop markets in other low-cost Asian markets such as in Vietnam, Thailand, Indonesia, and Malaysia. It is conceivable that one of the eventual effects of this large Chinese migration and the internal improvements in China on American firms will be on the cost of goods manufactured, especially in the retail, heavy machinery, and technology sectors. In the meantime, unlike the planned strategy in China, an increase in the minimum wage in this country undergoes great debate.

If the great Chinese migration does cause the earth to tilt somewhat, then perhaps there is a counterforce or “watchdog” to these long-term Chinese plans which will also have a major long-term influence on our economy. This watchdog “Cerberus” has existed in mythology since the time of the Greeks and the Romans, and it means “multiheaded dog”. Historically, it was the mythological Cerberus that guarded the entrance of Hades to prevent those who entered from escaping.

Large Private Investment Capital Management Firms

Investment firms such as Cerberus have been in the “breaking news” for the last several years. Cerberus Capital Management is a $20 billion dollar international, New York based private equity firm. Its investors include government and private pensions and retirement funds, charities, insurance companies, universities, and sovereign wealth funds. In 2007, Cerberus and about 100 other investors purchased an 80% share in Chrysler for $7.4 billion dollars during the 2008 financial crisis. Earlier this month, Cerberus announced that is buying Safeway Inc., the second-largest U.S. grocery store operator. Within the last decade, the company has actively acquired ownership or partial ownership in more than 40 companies in a number of sectors; some of them may sound familiar:

  • Star Markets
  • Innkeepers USA Trust (operates hotels under the brands of Marriott, Hyatt, and Hilton)
  • Caritas Christi Health Care (New England’s largest community-based healthcare system)
  • Panavision (movies, cameras, lenses) (debt restructuring, cash infusion)
  • ANC Rental (at the time the owner of National and Alamo car rental chains which it then sold to Enterprise Rent-A-Car)
  • GMAC (General Motor’s finance division)

There are other large firms that have invested a considerable amount of capital in the business world. Asset management/investment companies invest pools of funds for retail investors in securities consistent with stated investment objectives. The largest one is the New York firm of Blackrock with over $4 trillion dollars under management, and this is about 7 percent of world’s financial assets. It has grown both by its own investing and by acquisitions. For instance, Blackrock acquired all of Barclays Global Investors in 2009 which gave it control of iShares. During the recent financial crisis, Blackrock was awarded a $130 billion dollar contract to manage distressed U.S. Government assets. Blackrock investments also gave the Kuwait Investment Authority, the emirate’s sovereign wealth fund, a 40% return in 2010. As a result, with this return and its own oil revenue, the Kuwait fund became a source of capital for a number of companies such as Citigroup and Morgan Stanley during the crisis created by the collapse of the sub-prime mortgage market.

Another large group is The Blackstone Group. It is a New York based multinational private equity, investment banking, and investment and asset management firm with total assets of approximately $29 billion dollars; its initial public offering was $4 billion dollars just 7 years ago. With 8 international offices from Beijing to Dubai, The Blackstone Group has relied on pension funds, endowments, wealthy individuals, sovereign wealth funds and other sources for their leveraged buyouts, corporate partnerships, industry consolidations, and private equity investments. Some of their investments have been in familiar names, such as

  • Hilton Hotels
  • Busch Garden and Sea World Parks
  • The Weather Channel
  • La Quinta
  • Houghton Mifflin
  • Universal Studios Parks (which it sold to Comcast)

Until recently, The Blackstone Group has been the largest U.S. single-family home landlord; it spent more than $100 million a week on residential properties so that it could turn them into rental homes. With higher “For Sale” prices recently, however, delinquent homeowners have been able sell their homes at higher prices, and so the purchase of homes for the purpose of renting them has recently declined.

Climate Change

A third major long-term influence on global economic trends is the effect of climate change. The International Panel on Climate Change of the United Nations (IPCC), consisting of members of 195 countries, was compiled from reports by thousands of scientists assessing scientific, technological, and socio-economic information produced worldwide. According to the IPCC report, climate change is a risk management problem. Climate change has already had a negative impact on farming, decreasing wheat and maize production. People should expect a more unstable climate, greater temperature extremes, hotter temperatures, droughts, more wildfires, water shortages, less food production, a degradation of coastal fisheries, a decline in fruit bearing trees, increased food prices, damage to properties, and a loss of productivity. Several studies have calculated the effect of climate change on the GDP (gross domestic product). In 2012 the Climate Vulnerability report estimated that climate change is already decreasing the global GDP by 1.6% ($1.2 trillion dollars); by 2030 the report estimates that the GDP of developed nations will decrease by 3.2% and will decrease by 11.0% in the least developed countries. The Copenhagen Consensus Center of Massachusetts describes similar trends.

In the coming decades, the world economy will be significantly influenced by

  • China
  • Billion and trillion dollar multinational asset management firms
  • Global warming

The question is: What is a long term conservative investment strategy given this overview of the major influences that may well shape the economic landscape in the coming decades?

  • Investing in well-run, financially sound companies, many of which pay a dependable dividend to help to offset market volatility and many of which have a multinational footprint.
  • Investing in select sectors such as technology and health care.
  • Investing in short-term bond investments that will minimize the effects of inflation.
  • Investing to meet the client’s particular needs and with a risk tolerance that is suitable and comfortable for the client.

This is what we at Heaphy Investments LLC believe is the best long-term investment strategy for our clients.

DISCLOSURES: Investment advisory services provided through Heaphy Investments, LLC. Heaphy Investments, LLC is an investment adviser registered with the Commonwealth of Massachusetts. You should not assume that any discussion or information contained in this website serves as the receipt of, or as a substitute for, personalized investment advice from Heaphy Investments, LLC. It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise. To the extent that a reader has questions regarding the applicability of any specific issue discussed herein to their individual situation, they are encouraged to consult with the professional advisor of their choosing. A copy of our written disclosure statement regarding our advisory services and fees is available upon request. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.

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