Clem Sunter

The Eish U!

2010-05-19 12:30

The way the European Union is going, it should change its name from the EU to the Eish U! As I pointed out in an article a couple of months ago, many governments in the world are afflicted by the “Boom, Bloat, Bust” disease.

There is now a rash of candidates in Europe led by Greece. Talk of contagion is rife and the Euro has sunk so far against the US dollar that it is beginning to resemble the Zimbabwean dollar. In a few years time, they will probably knock three noughts off and call it the real Euro. It is a pity that the African continent does not have a common currency, because - if it did - it would be called the Afro and I would be putting my Euros into Afros.

Seriously, though, this new fund worth one trillion dollars, that has been set up to save Greece and others who face potential default on their loans, is like giving someone an aspirin for a serious illness. It will act as a temporary palliative but it won’t cure the problem. In fact, the problem may be chronic so that no cure exists.

Other than Germany, which is still an outstanding world class economy and - in fields like cars and machine tools - can knock the socks off the competition, Europe has become a high cost, low innovation region. Of course, pockets of excellence exist but they are not enough in number or scale to offset the rise of the East, particularly China. Essentially, European economies are being hollowed out as companies shift their manufacturing plants and service activities to places where labour is cheaper and more productive. The East has even narrowed the gap in the quality of education it gives its children.

Social unrest

Hence this great fund established on the Abba principle “Bailing you, Bailing me” - we’ll bail anybody out who gets into trouble - has so far only had one consequence. To foreign investors it has put a Greek element into German bonds and, by doing so, has raised the risk of purchasing the latter.

As I surmised in the previous article, I would not be surprised if the Euro zone broke up with the northern countries parting company with their Club Med neighbours in the south. Most of the commentary has focused on the financial condition of Greece, Portugal and Spain, but I would rate Italy as the biggest potential headache. They have by far the largest national debt (nearly one and a half trillion dollars) of the Club Med group; and the amount exceeds Italy’s annual GDP. Moreover, Italians, like Greeks, are not known for their fondness of the tax authorities; and right now, raising more tax revenue and cutting State expenditure are the two critical remedies for bloated debts and deficits.

This raises another issue - social unrest. Those shrieking heads on TV (they never talk) ignore the impact that further austerity measures will have on an already battered public. They blithely side-step the possibility of a revolution against capitalism as it is currently practiced. All I am saying is that social unrest can make nonsense of all the plans carefully crafted by the financial boffins. And then what?

Chantell Ilbury and I have developed a new scenario which we call “Ultraviolet” or “UV” for short. It is a mixture of our “Hard Times” U-shaped recession scenario and our “New Balls Please” V-shaped recovery scenario. Essentially, we move into a two-speed world where some economies recover and others don’t. We put America, Brazil, Africa, India and China in the first category and Europe, the UK and Russia in the second category. Japan could go either way. The first lot get a nice, even suntan while the second lot get seriously burnt.

Investments

We now attach the same probability of 40% to this third scenario as to “Hard Times”. In a way, we have been in it for the last 10 years. Japan has been in a “U” since 1990; and if you had invested in the UK stock market at the beginning of 2000, you would have lost almost a quarter of your money today (excluding dividends). Meanwhile, you would have tripled your money in the JSE. Even with a higher inflation rate and a depreciating currency, South Africa would have been a better place to invest over the last decade. So much for all those investment advisers who persuaded you to put your money offshore – they were plumb wrong to play the negative scenario, except as  a means of making you more geographically diversified in the wealth you possess.

In summary, if you are risk averse, a large chunk of your portfolio should be invested in developing economies. The only safe havens are America and Germany providing it can ring-fence itself. However, let me finish on a humorous note. The Economist in May 2000 had Africa on the front cover with the banner headline “The Hopeless Continent”. In every year since then Africa has outperformed the global economy by two per cent per annum (admittedly coming off a low base). How would The Economist describe Europe now? They have to be partisan about the UK.

One thing for sure if you are the largest player in the field. I would rather be South Africa on the tip of the third fastest growing economic region in the world (after China and India) than be Germany bailing out my elderly neighbours!

Send your comments to Clem

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