Monday, November 22, 2010
Sunday, November 21, 2010
The road ahead of global economy and how to invest
Macro outlook:
Nothing new this time. As always, today's world economy challenged with many risks.
(a) Surging inflation in China
(b) Government debt across many countries (not just Ireland but many other European countries,Japan and US) and
(c) Asset bubble in emerging markets
Can the world economy grow without major players (US, China, Japan and European countries)?
Emerging and developed economies presented with different issue to handle, hence it would be difficult to see continuous growth in global economy for the next few years. The last few decades US growth have been fueled NOT by economic fundamentals BUT by increased leverage that cannot sustain. The deleverage started taking place and will go on for many years. There won't be any significant growth until US is done with deleverage.
Stock market in both developed and emerging markets are not cheap by any valuation measure. In my view, it is time to be skeptic and just hold on to quality companies that can continue to survive even with many nasty surprises.
What determines quality companies?
Firms with
(a) higher market cap,
(b) lower D/E ratio,
(c) better corporate governance,
(d) geographically well diversified (selling products/services across different continent)- particularly companies located in developed countries and selling things in Emerging countries and
(e)the score on Porters five forces.
What are Porters five forces?
1) Supplier Power
2) Buyer Power
3) Thread of Substitutes
4) Barrier to Entry
5) Rivalry
How form can win over rivalry?
a) High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. For example, mining companies and utility companies.
b) Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. For example, Google
c) Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. For example, Wal-mart
d) A larger numbers of firms - For example, Indian cell phone carriers
What/who killed General Motors?
1945 to 1990 GM used to be almost #1 company in US. What made this company bankrupt and how to avoid investing in another GM like company? Did GM scored high on Porters five forces and quality factors we mentioned earlier?
Nothing new this time. As always, today's world economy challenged with many risks.
(a) Surging inflation in China
(b) Government debt across many countries (not just Ireland but many other European countries,Japan and US) and
(c) Asset bubble in emerging markets
Can the world economy grow without major players (US, China, Japan and European countries)?
Emerging and developed economies presented with different issue to handle, hence it would be difficult to see continuous growth in global economy for the next few years. The last few decades US growth have been fueled NOT by economic fundamentals BUT by increased leverage that cannot sustain. The deleverage started taking place and will go on for many years. There won't be any significant growth until US is done with deleverage.
Stock market in both developed and emerging markets are not cheap by any valuation measure. In my view, it is time to be skeptic and just hold on to quality companies that can continue to survive even with many nasty surprises.
What determines quality companies?
Firms with
(a) higher market cap,
(b) lower D/E ratio,
(c) better corporate governance,
(d) geographically well diversified (selling products/services across different continent)- particularly companies located in developed countries and selling things in Emerging countries and
(e)the score on Porters five forces.
What are Porters five forces?
1) Supplier Power
2) Buyer Power
3) Thread of Substitutes
4) Barrier to Entry
5) Rivalry
How form can win over rivalry?
a) High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. For example, mining companies and utility companies.
b) Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. For example, Google
c) Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. For example, Wal-mart
d) A larger numbers of firms - For example, Indian cell phone carriers
What/who killed General Motors?
1945 to 1990 GM used to be almost #1 company in US. What made this company bankrupt and how to avoid investing in another GM like company? Did GM scored high on Porters five forces and quality factors we mentioned earlier?
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