At Schloss Elmau, Germany, one of the most picturesque corners of Europe a discreet but high level group of global executives expressed concern about the state of play in the West, but offered their relentless enthusiasm for the expansion in the East from the Middle East to Far East Asia.
Schloss Elmau is a castle, transformed into a luxury resort in a Bavarian village near the border of Austria. Austria’s former Chancellor Wolfgang Schussel urged 125 mainly European business executives “not to panic.” “Look at the real figures. We should be rational about a post-crisis environment,” Schussel said. German industry can leverage its famed engineering prowess to expand market share in green technologies and high-end manufacturing.
While not an outright panic, executives did express ongoing concerns for the medium term. In a poll conducted at the Stern Stewart Institute annual gathering, they predicted growth of only 1.9 percent in Europe and the U.S. for the next five years. The world they all agreed would be propped up by the East, with China sustaining baseline growth of 7.5 percent in the same time frame.
The former chief executive of German retailing giant Metro, Hans-Joachim Korber said we all need to recognise the shift of both economic and political power to the East. He made his first move into China two decades ago spending two full weeks on a tour from the top to the bottom of the vast land.
The demographics support Korber's position, one that is echoed by scores of others. Mumtaz Khan, chief executive of a Singapore-based investment group talked of “fundamental change” driven by population growth and the desire by governments, companies and citizens to boost the wealth of their nations and per-capita incomes. They shared figures indicating that China, India and Indonesia will be home to more than 3.3 billion people by 2050 from roughly 2.6 billion today.
The Middle East region is in the mix of countries with fast growing populations and intense spending plans by governments to build out infrastructure. Saudi Arabia and Abu Dhabi have earmarked $700 billion over the next five years for such activity. This by the way matches efforts by China, which has a current population of 1.2 billion - four times the size of the entire Middle East.
Marios Maratheftis the Dubai-based economist for Standard Chartered Bank told the gathering that governments in the Gulf States are quickly re-directing their spending away from real-estate projects after the 2008-09 crises. “Human capital tends to be neglected,” said Maratheftis pointing to the property sector in the UAE, which made up 70 percent of all activity in the pre-crash environment. Leaders in the region have recognised the need to speed up job creation and per-capita income for a wider swath of their populations. Recent unrest in Bahrain by the Shiite majority only served to underscore his points.
Beyond their concerns about sluggish domestic growth, they listed the threat of conflict in Iran as the number one risk to global security and the global economy, with surging energy prices due to high demand in the East straining supplies over the medium term.
During a plenary session on the link between economic and military power, the highly respected former ambassador for Germany in the U.S. and UK, Wolfgang Ischinger, did not hold out a great deal of hope for the latest round of Middle East peace talks. He and said we should look for innovations beyond the current framework. He said this strategy should be built around a regional security pact initiated by Washington and supported by others.
Such a pact would remove the long-standing risk premium put on the region by investors and give these executives yet one more reason to be bullish on the East.
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A towering national debt, a revolving door of prime ministers and an export-driven economy limping slowly from its worst economic slump since World War II – Japan’s got it bad.
So why is the yen trading at 15-year record highs?
A number of factors have combined to pump the yen up to 83.36 per dollar on Tuesday, the highest since May 1995.
First, to set the scene: In June 2007, the yen was trading at 122.64 against the U.S. dollar – its highest level in five years. Then the U.S. subprime loan market imploded. Japanese who invested in other currencies with higher yields – known as “carry trades” – brought that cash back home as other currencies, particularly the dollar, was hit by the crisis.
The yen’s natural strength lies in the country’s trade surplus. Cars, electronic goods and other Japanese products sold abroad brings a healthy stream of yen back home. Add to that the influx of cash investors brought back to Japan as the global economy crashed, and the yen continued to strengthen.
Another factor: Countries and investors diversifying away from the dollar in the wake of the crisis were looking for a safe investment, and the yen was a popular choice. Most notably, Beijing has been snatching up a record number of Japanese government bonds instead of U.S. ones.
“That to me explains largely what is happening to the yen in the face of what is reasonably dark economic news and a difficult political situation,” said Benjamin Pedley, head of investment strategy in North Asia for HSBC Private Bank.
And that adds to the difficulties for Japan’s recovery – a strong yen cuts the profits of its products abroad.
The markets are waiting to see if the saber rattling among Japanese politicians on the skyrocketing yen will turn into a government intervention to lower the value of the currency. The government hasn’t taken such steps since 2004.
But Pedley doubts any intervention by the government will have any long-term effect on the strength of the yen. Trading partners in Europe and North America, on balance, would prefer a stronger yen. “The problem is, any intervention would be unilateral – they won’t have any cooperation,” Pedley said.
With the re-election of Naoto Kan as head of his party - and as Japanese prime minister - the markets are betting that the yen will remain high. The Tokyo markets closed before the vote, but hit a fresh 15-year high on the belief that Kan would survive the internal challenge from Ichiro Ozawa, who favored a strong intervention in the markets.
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