Nordea. Hong Kong, Singapore, Bangkok – October 2005. The Outlook for 2006: Any good investment ideas left?

By Adjunct Professor at CBS, Visiting Senior Research Fellow at ISEAS, J. Ørstrøm Møller.

www.oerstroemmoeller.com

PreludePotential versus reality.- The potential is an unprecedented shift in power structure.- The reality is whether it will be allowed to happen and if so the circumstances.

The bad news. All the ingredients known from the world wide depression in 1929 are smiling at us – like the Cheshire cat in Alice in wonderland. Too much liquidity chasing assets instead of productive investment. The bubble(s) will burst.

Japanese stockmarket. Then Japanese property market. Third Nasdaq/IT bubble. Fourth property bubble (US, UK).

Prelude

Three rules of thumps announcing a melt down. - Liquidity chases fast profits trading assets.- Anyone can make money in the market.- Exponential rise in asset prices.

All three are here – right now.

The good news: Anyone got a hearing aide!- May be China and India. If the US allows them to step in.- US policy vis-à-vis China. Preventive and pre-emptive economic strike?

1. Current TrendsBusiness cycle. Global growth peaked in summer 2004. Falling since.Electronic cycle does not look promising.Economic policies in major countries (primarily US) is not any longer expansive.Profit outlook for US discouraging.Oil price impoverish the global economy.

Key word: Business cycle not promising.

Main culprit US economy with strong and persistent imbalances. Deficit on balance of payment about (↑) 5% and rising in the phase of the businesscycle when it should be falling. What does it tell us about competitiveness and growth disparity.

1. Current Trends

Deficit on public finances about 4% and rising.For the fun: Website US National Debt Clock. Debt calculated continously. Fx September 30, 2005 at 07.06.37 AM GMT: $ 7,244,360,930,45. Not so fun: It rises with 1,6 billion USdollar….every day. 8.78% % of US GNP per year; 239% of DKs GNP! http://brillig.com/debt_clock/

Imbalances in Japan. Almost the opposite of US. Japanese recovery? Monetary policy?Europe? Nothing much happens there.China and India revert later

2) The global economy is a roller coaster having derailed in a curve continuing out in the free airspace!

What makes the global economy ticks: US consume. China (and India) produces. Low costs in Asia keep global inflation down. FED is splashing out liquidity. The whole dump show is financed by Japan and China /Greater China accumulating USdollars as a substitute for consumption but how long can you live eating greenbacks? Come and buy a chunk of the wild west!

Keywords: Under-consumption in Asia, over-consumption in US. Over-production in Asia, under-production in USA.

71% of US GNP consumption ctr trend = 67%. EU = 58%, Japan = 55%, China = 42%. US personal savings are negative. EU = 14%, Japan = 8%, China = 35%. (per cent of GNP).

Adjustment must and will take place. Transfer of purchasing power/economic strength from US to Asia. It can be done in one of the following ways:

- Economic policies primarily in US. Fiscal policy. Monetary policy.

- Currency rate changes.

- Protectionism

- Let the market do it not knowing what will happen.

Where are we right now? Tighten your safety belts.

Which factors will stop it- Until now the job market and private incomes are still holding but how

long?- Asian unwillingness to produce without being paid – a change of

preferences production/consumption in China. Jobs in China New cohorts, restructuring, immigration etc.

- US real interest rate gets to a level corresponding to the trend growth of US (approx 3-3,5 %). Now short term 3,75% after 11 consecutive increases. Long term steady at 6%

Can the world function with savings surplus in developing (poor) nations and dis-savings in developed (rich) nations?

3) The shift from US to China and India

a)

China is the factory of the world, pricesetter for industrial goods and offer technology. PPP second largest economy, largest recipient of Foreign Direct Investment (FDI).

India Measured in official exchange rates Chinas share of global GNP is about 3%, India about 1,4%. BUT PPP gives about 13% respectively about 7%. China and India 80% of US GNP. Add in Japan, Korea an Southeast Asia equals 125%.

India is the servicecenter for the world, price setter for service goods and offers solutions. Fourth largest economy (PPP).

3) The shift from US to China and Indiab) Total communication. Nomads.

China 402 mio subscribers on mobile phones end 2005. Fixed line 360 mio. About 103 mio on internet. Broadband user 2005: US 39 mio, China 34 mio. Prognosis for 2007. China 57 mio – US 54 mio. SMS China 6 billion in ONE DAY! New language emerges.India 60 million subscribers on mobile phones. 2 million more every month.Prognoses 2010. China globally number one PCs 178 mio. India 80 mio.Cernet2, IPv6. 3G technology.

4) What makes the Asian economy tickThe Asian economy has changed completely. Not an annex to the US economy or the global economy. Self sustained and integrated.

Two flywheels. Production – outsourcing- supply chain. Consumption – middle class – urbanization - branding- young YOUNG consumer.

Outsourcing – computercontrolled container transport – Free Trade areas (FTAs) – 90% of all intra-Asia trade less than 5% tariffs – air freight 1% of volume but 35% of value VOUW!

First half 2005. 24% increase in bilateral trade China-Asean to a total of 60 billion Usdollars.

4) What makes the Asian economy tick

China is the spider in the center of the net.

Intra-Regional Trade - The Pivotal Role of ChinaExports to Exports to

2003 China as % China as %of total exports of export growth 1996 2003

Hong Kong 30.2 50.4 1.8 0.6Taiwan 15.4 80.6 10.6 6.4Japan 12.2 67.6 28.7 11.4Korea 18.1 36.2 8.8 7.2

Singapore 16.5 18.0 12.1 4.1Thailand 12.4 22.1 3.3 2.3Malaysia 8.2 11.2 9.5 8.8

China 8.5 22.4

Share of theUS Market (%)

4) What makes the Asian economy tick

But the coin has two sides:

Decreasing growth in China’s import (from amonthly average growth of 35% in 2004 to 15% in2005.) puts a squeeze on the economic growth in therest of South East Asia – from 5,5% in 2004 to 4,4%in 2005

5) The strength of the Asian economies

A) Positive Scenarium. - China and India keeps growing. Economic center moves across the Pacific. - The international system adjusts to this new situation. The world sees a peaceful and orderly transformation from an American dominated economy to a global economy with China and India in the drivers seat. - New technology paves the way for a new investment cycle. - The demographic and environmental problems is under control. Terrorism, international crime, infectious diseases are not allowed to derail the global economy.social and infrastructure investment repercussion.

5) The strength of …B) Negative scenarium.

-The ice cream gateau slides too fast. China and India cannot make up for the vacuum created by the weakening US economy. - The global economy comes under pressure. US is not strong enough any longer to exercise control and no one else in sight. Rising egoism and rising threat of protectionism heralds the day. - NOIC appears just over the horizon. Gradually we move away from a global model towards a more national model. A more destructive world emerges breaking with may of the hitherto unchallenged ideas.

The decisive factor will be private consumption in Asia primarily China.

6) Conclusion and Forecast.

Shift from US to Asia.American declineLower global growthRising global interest ratesFalling USdollar. Euro? Asian currencies? Interest rate gab makes a forecasts difficult but………..A word about US-China and the Yuan-USdollar. Stock market.- US ↓p/e trend = 15 but now 19.- Asia →←- Europe↑Restructuring + Mergers & Acquisitions.

6) Cont: Conclusion and Forecast.

Keywords. Trends

- Asian economic integration

- US decline

J. Ørstrøm Møller

www.oerstroemmoeller.com