The overriding investment theme of 1999 was global economic growth. As the year ended, financial markets
outside the US were set to outperform the American market
for the first time since 1993. Asia led the way as an economic
recovery took hold and the pace of restructuring activity accelerated,
and Europe picked up late in the year.
Looking ahead, we think that the
changes that are underway in Japan and the liquidity that is building in Europe will
be the keys to the markets’ performance in
2000. The rate of growth in corporate
profits is likely to accelerate in Asia and
Europe during the year as it slows in the
United States.
As part of that view, there are four
themes that we think investors should
keep in mind as 2000 progresses.
First, investors all over the world, and
particularly those in the US, will have to
“think globally.” We expect the performance
of the US stock market to trail
that of the non-US markets again in
2000. At the same time, Asia’s recovery is
likely to gather steam, and Europe will probably
benefit from further economic growth and restructuring
efforts.
Second, the investment story in Asia appears to be changing for
the better. An important part of that trend is the rapid financial and
technological transformation that is taking place in Japan. On the
financial front, we think that the most bullish development is the
decline in bank credit. That signals that Japan’s business sector
is restructuring itself, and that liquidity is rising. On the tech front,
Japan and Asia will be striving to catch up with the rest of the developed world in the years ahead in terms of investment in new
technologies. For example, PC diffusion in Japan is only about
half the US level, and unit sales growth will have to remain close
to the current 30%-a-year rate for several years for diffusion to
pull even. Internet use, which is driving PC sales, is about two
years behind US levels. In addition, certain technology trends may
be starting to move in Japan’s favor. The trend
toward digitalization of consumer electronics products represents an opportunity for Japanese
producers in light of their traditional competitive
strength in that area and in related technologies.
Moreover, the strength of the Japanese in consumer
electronics and related technologies
offers companies an entry into the high-growth
internet/telecom markets, especially in the
realm of internet “appliances” and mobile internet-
access systems. Elsewhere in Asia, we think
that investors might want to pay attention to
Korea, where the economy is growing, export and
investment activity are up strongly, and private
consumption is recovering.
Third, Europe stands to benefit from an economic
recovery, from shareholder-driven consolidation activity, and from an increase in liquidity.
Wealth is beginning to increase in Germany, for example,
and we think that German investors, especially those who are
thinking about financing their retirement, will be looking for
higher returns in the period ahead. Fourth, the inflation worries
that have dogged the global economic recovery could dissipate.
That would give a boost to bonds. Deflationary tensions may be
shifting from tradable goods and commodities, which took
the brunt of the hit from the Asian crisis, to the services sector
in the US and other developed economies.
