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The Long Haul

Economists, journalists, businesspeople and commentators invariably remind us that investment is for the long haul. The locus of success may change, but sooner or later the cycle becomes another upward spiral. The economic cycle decrees that what goes up comes down and vice versa, but the eventual direction is always an upward spiral. Nothing has really changed.

During the present financial crisis it is time to take a long and cool look at the trends in the global economy. As always the detail of a forecast may be "what would have happened if what actually does happen did not happen". But certain trends are sufficiently clear to lead safely to some "broad brush" conclusions. In relatively recent years we have the chance to learn from the after-effects of the one man assault on the British pound in 1992 and the Asian banking crisis of 1997. Perhaps we may reasonably hope to draw some safe conclusions amidst the current turmoil.

There are some near certainties.

Tomorrow's world

• Those that have cash will continue to require it to work for them. There will be continued and growing investment in securities, bank deposits, assets and equities. Where the markets are concerned the balance of wealth may shift, equity prices may vary - wildly at times - but in total the markets will grow.
• China and India may pursue trading dominance at a different pace, but they and other emerging markets will continue to flourish.
• The pace of growth in emerging markets will be largely maintained over the economic cycle.
• With the continued fall of the dollar the sluggish Eurozone will take on new life and the Euro will continue to rise in relative value becoming a major reserve currency.
• The oil-rich countries of the Middle East will increasingly develop as financial hubs to challenge the traditional dominance of the USA and Europe.

In Napoleon's words "everything changes, but everything remains the same".

Stability

In the short term a degree of gloom will continue to be cast over the US economy as the balance shifts eastward, but the USA will remain a leading player for the foreseeable future because of the sheer size of its economy.

An investment sector that can be relied upon to continue to grow even in the stormiest weather is financial assets. Financial assets are bank deposits, government debt securities, corporate securities and equity securities. In spite of the questionable behaviour of much of the global financial sector during 2007 the growth momentum is too great to slow down other than temporarily. During the unhappy second half of last year when credit was constrained and financial instruments unravelled these continued to grow at 17 per cent - twice the annual average over the last two decades.

China uses bank deposits increasingly as the preferred haven for new prosperity. The growth of bank deposits will almost certainly accelerate. As the banking system holds more cash assets the "credit crunch" should slowly ease as these are put to work.

Financial markets

For years global financial assets have been growing faster than GDP. This trend seems fated to continue, but not necessarily at a faster rate. Twenty years ago only around 30 countries had financial assets that significantly exceeded their national GDP. Today the number has grown to over 70 countries with the BRICK countries (Brazil, Russia, India, China and South Korea) growing fastest. By 2006 the growth in financial assets had reached three and one half times world GDP. Growth may not continue at this rate, but it will probably persist as developing countries move down dissimilar paths toward greater privatization.

Cross border investment

International investment was once the province of the so-called developed countries of Europe and the USA. It has become increasingly widespread over the years and the record level of around $75 trillion that was reached in 2006 will have been exceeded in 2007 in spite of the problems that emerged half way through the year. International investment will continue to be widespread in spite of a growing tendency of the USA to look inwards.

Emerging markets

In 2006 the financial assets of emerging markets grew at roughly twice the rate of those of the developed markets and reached $23.6 trillion. The $5.3 trillion growth that enabled that total to account for one quarter of total global growth in financial assets that year was heavily influenced by China and there are few if any signs that the growth of China will slow before other developing markets start to make an ever more significant contribution to further expansion.

International providers of capital

Economic theory suggests that emerging markets should be net recipients of capital flows. By 2006 this was only true of East European countries. In total emerging markets, fuelled by surging commodity prices and rising exports became net providers of capital to the world. This may slow, but is unlikely to reverse. The indicators are that demand for commodities to support an expansion of world trade may even enable growth beyond the $300 billion that developing economies invested more than they received in 2006.

The growing euro

In April 2007 the number of euro notes in circulation exceeded those of the dollar. The euro is at last taking its position as a truly international currency. The euro now accounts for around 25 per cent of global reserves - against 66 per cent that is held in dollars, but with increasing "de-coupling" from the weak dollar the share held in euros is likely to continue to grow.

The future

Concentration in this article has, of necessity, been on only international capital markets. But as Harold Macmillan pointed out all of the more abstruse activities are eventually dependent on something more concrete than "all taking in each other's washing". The trends in capital markets provide us with a strong basis for predictions concerning world trade. It is likely that as a relatively brief recession hits the USA and parts of Western Europe the balance of trade, like the balance of investment may well change, but there is every reason to believe that recession will be brief and shallow.

It is highly questionable whether the actions taken in haste by the Fed will bring about the desirable but almost mythical soft landing that we in the West desire, but the harm that has been done by greed and ineffective supervision may be of short duration. There is every reason to believe that the global economy is strong although in some areas it is possible that some will show the pessimism of some of my friends in South Wales that still say, "We had a recession starting in the 1920's. We are looking forward to it ending soon".