Here we go again. Yet another “end of the world” call
approaching. This time the Mayans predicted that 2012 is the end of time. I
don’t blame you for being cynical having watched the biggest non-event of the
century in 2000. Many new age groups, meetups, shamans, yogis, priests and
clubs have sprung up around the world in an attempt to help the scared, part
with some for their money. Whatever you may think of the Wall Street types, you
know one thing, they are not going to be taken again, at least not so soon
after having wasted billions in
preparing for 2000.
So while I do not believe the earth axis is about to reverse,
causing massive floods and earthquakes ( a popular belief floating around the
internet about 2012) I do see continuing problems in money matters everywhere
in the world.
European problem is actually not as serious as you may think
at first. Europe’s problems are no different than what we have faced and
continue to face in other democracies like Canada and even US. Some regions
are better off than other in our world too. For decades, eastern provinces like
Newfoundland , PEI
and New Brunswick relied on Ontario
and Quebec and they in turn relied on Alberta when quick rise
in energy prices completely dislocated the affluent regions. Similarly US central
government has been bailing out poor states since confederation.
There is however something unique about Europe
and that is not that they have a common currency now but that they are
independent sovereign nations. In Canada too there were cries of “let
the eastern b’s freeze in the dark” but be it for compassion or greedy behavior
of the politicians to get votes, no body froze. Not too different from Germans
wanting the Greeks to sail away on a leaky boat while the rich European
countries use the barren white sands of Athens as playground for the rich. I
say compassion will win the day again and after all the noise, Italians will
still eat their Gelato and Spanish Paella will still be cooking in the big wok
in Barcelona .
Will there be many unemployed? Yes. Will the rich also have to take a haircut?
You bet.
One important relationship to remember in all of this noise
is that just because the poor get shafted by higher taxes, the rich will be spared.
Or if the money managers take a bath on Greek bonds, the citizens are
unaffected. Higher unemployment among the poor and the middle class means lower
demand for all products which in turn hurts the rich shareholders and all
suffer, more or less. Collapsing bond markets means that holders of such
instruments, mainly institutional portfolios suffer which in turn means pension
funds whose funds are with these managers have no money to pay out to the poor
recipients.
It is this relationship that gives me the confidence that
finding a solution is an incentive to all segments of the society and the
world. This is why it is certainly of interest to the French and the Germans to
see Europe through this crisis even if it
means taking a haircut. Their disdain of the British position is quite
understandable.
The major problem facing us is not the enormous debt faced
by many nations but the solutions to these. If there is a lot of individual
solutions without regard to your neighbour, the system could unravel leading to
chaos and a financial catastrophe of the type we saw in 2008. This may
culminate a more serious recession or even depression particularly if demand
dries up to such an extent that China ’s
exports lie idle in their factories or on ships. I do not see such an event at
this time as most in control realize this quite well.
If you believe in my best case of an eventual muddled answer
to the global debt problem, the standard of living will go down in all
segments; rich and poor, east and west or north and south. On a national basis
it usually results in dropping currencies like Canada faced in the nineties.
To build an investment strategy based on this, one has to
consider previous eras when economic turmoil including high debt levels
destroyed economies like Canada ,
New Zealand , Indonesia , Thailand . We do have many examples
of such events in the past which is another reason I feel confident, we will
muddle through.
Innovation and technology have always come to the rescue
when economies get bloated. During the last fiasco of the early nineties, it
was the internet which not only created easy availability of pornography but
incredible cost savings in conducting business all around the world. What used
to take an army of accountants and clerks to accomplish is now being done by a
laptop. No wonder, American productivity keeps rising, even now. And no wonder
Canadian productivity stays in the dog house for decades; we still are
predominantly diggers and lumberjack, business segments where technology is
perhaps much more difficult to implement.
The good news is that technology stocks trade at decade low
valuations. You can have pick of the litter in 2012. But if you just want to buy
one technology stock for the next year, take IBM. Throughout the last decade,
IBM has proved yet again its leadership by being well ahead of the pack. It was
the first to realize that manufacturing PC’s is a losing battle when upstarts
like Dell could come and eat their lunch and genius marketers like Steve Jobs
could be far quicker in responding to the colour choice of consumers. Management
of IBM just couldn’t see how they would ever come up with iPods and pink iMacs.
The game of old technology had changed, it was not about gizmos but it was
still about innovation, design and now about service. IBM made itself into an
unmatched technology service company in the world with a huge distance from the
next best. The others are now scrambling to unload their manufacturing and peripheries.
Most will fail where IBM has succeeded.
While IBM is best known for its hardware, it has
increasingly offered software and services covering nearly every aspect of
business. This has helped IBM increase its margins over time and create a
competitive advantage against other hardware companies such as Hewlett-Packard (NYSE: HPQ ) , Dell (Nasdaq: DELL ) , and Oracle (Nasdaq: ORCL ) . IBM also has intense exposure to
international markets, with nearly 70% of its revenue coming from outside this continent.
And IBM has been steadily raising its dividend, now at 1.7%, which is still a
payout of less than 25%. Barring any major sustained global downturn, you can
expect your dividend to rise.
Things won’t stay the same in years to come. The question
you have to ask is if it will be AMD or Cisco that will roll with the punches
or IBM. More importantly who will be ahead of time and make the decision now
about what is to come in the future. My bet is IBM has proved beyond doubt that
it will be the one. It has provided a blueprint for success for all technology
companies. In brief that strategy says you can no longer depend upon just
technology innovation although that is paramount in an increasingly competitive
world. What you must do is also innovate your business strategy. And that
strategy not just for IBM but for the entire western economy including Europe is to offer design, research and consultation
services. These are the fields where simply moving a plant to Thailand or
Ireland will not make you win. This creates a new ball game where success is not
measured by usual sales growth year over year but by profitability and even
dividend income. You can see that happening with the likes of Intel and
Microsoft but none has done it better than IBM.Here
No comments:
Post a Comment