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Dear Friends and Clients.
In the past several weeks, many of my clients have asked me how the subprime crisis is going to affect the stock market; what the prevailing view of investors is for both US and emerging market companies; and how to use this information in formulating their communications strategies as we begin 2008. This is an opportunity, as we start a new year, to consider the advantages and challenges presented by each company; industry and geographic sector. Despite what appears to be negative economic news, continuing political uncertainty here and in certain markets abroad, and grave concerns about the US economy and the dollar, Wall Street pundits refuse to be daunted. Optimism is still strong while gold reaches new highs, oil stays above 90 dollars a barrel, and we are getting close to a new Presidential election which has implications for differing industries (depending on which political party prevails).
I share with you some highlights which summarize, as of today, what we hear about the US economy and financial markets.
Economists are divided as to whether the United States will sink into recession in 2008. Many economists, including the Federal Reserve, believe that while 2008 will witness weak growth, the United States will avoid a recession. However, Alan Greenspan, Lawrence Summers (former Treasury Secretary) and Martin Feldstein (president of the National Bureau of Economic Research) have recently placed 50/50 odds on a recession occurring.[i]
The Fed has clearly become more nervous about the economic outlook. In his January 10th speech, Ben Bernanke, the Federal Reserve Chairman, signaled further interest rate cuts by stating , "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."[ii]
The subprime credit crisis has certainly hurt the U.S. economy. Subprime-related writedowns have hit banks hard. Citigroup, perhaps the most prominent example, reported earnings on January 15th and wrote down $18 billion of subprime-mortgage investments. On the other hand, the dollar's decline has helped the U.S. export sector and overseas earnings overall are robust.[iii] For example, IBM on January 14th pre-announced stronger than expected 4th quarter sales and earnings. IBM cited strong operational performance in Asia, Europe and emerging market countries and at least temporarily boosted hopes for the tech sector.
Investors are concerned about the prospect of US economic woes affecting emerging markets. Goldman Sachs recommends that investors focus on companies that will benefit from local consumer demand. Harry Lange, manager of the Fidelity Magellan fund said that some of his favorite investment opportunities are firms that serve China and India's middle class.[iv] Emerging market countries in 2008 should continue to be attractive to investors, particularly in an environment of slow, at best, US growth. The International Monetary Fund in October forecasted real GDP growth of 8.4% for India, 10% for China and 6.5% for Russia.
The obvious takeaway to me is that emerging markets will continue to perform well as their economies are growing and the individual countries with very strong economic growth, such as China, India, Russia (although Russia has some inflation concerns), Brazil and Turkey will fare the best. China has probably been overvalued so while we continue to see enormous opportunity we ask our Chinese clients and prospects to consider how to share your growth strategies and normalized growth potential as measured against the prevailing valuations. We like India, and those companies that will benefit from the rising wealth of more consumers will do well. Those that are more dependent on a strong US economy will suffer, and those that are IT outsourcing businesses will do well as the larger companies outsource rather than hire. However, the smaller domestically focused US firms who are likely to be hurt by a recession will struggle.
Think as we start the year and before yearend earnings what message you want to convey to investors. Remember that competition is tight for investor dollars, but that there continues to be huge amounts of money to be invested. Investors look to you, the CEOs and IROs, to market your story so they can make a proper judgment and valuation. Nothing succeeds like face-to-face. Media is your quickest and best way to create immediate interest and visibility but you must be prepared to tell your story and also recognize that not everything reported will be accurate.
We at Global Consulting believe it is going to be an exciting year and a good year for our clients, especially those that are in the emerging market space as well as the US companies that sell abroad because the dollar will continue to be weak. Know your strengths and know your weaknesses and always tell the story and share your objectives. Happy New Year and we look forward to hearing from you.
Sincerely,
Anne McBride
Vice Chairman
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Todd Gerlough
Director of Research
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[i] Danger Ahead-The prospect of recession again confronts America, Financial Times, January 3, 2008
[ii] Bernanke says more interest-rate cuts may be needed, Bloomberg, January 10, 2008
[iii] See above, Danger Ahead
[iv] Fidelity reopening Magellan Fund, The Wall Street Journal, January 15, 2008
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