This BUSINESS DAY writer DOES have a point...
Safety may be valued as much as
growth
by Anthony Hilton
IN THE past couple of days the
stock market has been clutching
at the slightly more cheerful
noises made by Oracle and Intel
in the hope that they signal the
worst is over in technology.
From this it is a short leap of
faith to say that the problems of
the American economy are also
coming to an end and that
prospects for the autumn and
next year look much better.
Unfortunately, such an analysis is based on a significant
misreading of what went wrong in America. The huge
boom of the late 1990s was not caused by a productivity
explosion in the US and still less by the technology and
dotcom manias. It was caused by a glut of cheap oil which
brought in its wake a low-price glut of all competing forms
of energy.
The modern world turns on energy and the US being the
world's most profligate user naturally benefited most and
showed the most dramatic growth. But when oil prices
tripled as they did at the end of the 1990s and the effects
began to feed through the system, the US economy was
first to feel the pressure.
Understanding this is important in gauging when the US
will recover. Oil, having come off its low of under $10, has
remained close to $30 for almost a year and shows little
sign of falling despite the advent of summer and slower
growth on all sides. Indeed, it is provoking a collapse of
corporate profits round the world. Thus far, technology
aside, it has been confined to businesses that are leading
indicators - advertising and the media, and airlines. But
more basic industries are also beginning to feel the
pressure, either directly or through fewer orders from their
frontline customers.
We have, therefore, to get used to a period of
sharply-reduced corporate profitability and lower
investment returns and this poses a serious challenge for
the City. Fund managers will find that generating high
investment returns will be a lot harder in the next 10 years
than in the last 10.
If most businesses are moving sideways, the indices are
likely to be flat and active fund managers might find they
come to be judged again by their ability to produce
absolute returns rather than by comparison with dull
indices.
We are entering a period where safety may come to be
valued as much as growth and if fund managers are wise
they will begin now to educate their clients and customers
that the astonishing returns of the 1990s were an historical
fluke. |
