Thursday, 7 March 2013

Macro Level Trends – The Geo-Economic Transition – The Long-Awaited Shift to 'Western Fundamentalism'

Recent weblogs sought to initially provide general global macro-economic backdrop, into which each of the ‘Global 11’ auto-makers could be respectively contextualised. The obvious premis re-counted by investment-auto-motives is that presently the world economy sits within a transition period, whereby the Triad regions partly regain their notionally lost dominance.

[NB S.Korea now obviously seen as a critical constituent of that 'Triad'].

Worldwide Geo-Economic Transition -

The noted slow-down of previously stellar performing (credit fuelled) EM regions, re-affirmed again by China recently, has become counter-balanced by a renewed, yet cautious, faith in western economies.

This obviously reflected by stock-market dynamics , each bourse notionally acting as ‘leading indicator' given historical precedence for markets to either foretell or prompt industrial and consumer activity. The fact that such 'faith' is accompanied by the investment community’s increased vocalisation for deep structural change, at corporate and national levels, simply demonstrates a 'real world' recognition of the immediate challenge if the once 'advanced economies' are to rebound as before – before the BRIC and CIVETS story.

The phenomenon is perhaps most prevalent and publicly visible within the automotive sector.

The US played a demonstrative role with the wholesale deconstruction and reconstruction of GM, necessitating a similar 're-engineering' both downstream and upstream of the value chain, so that a new era of better value creation might begin.

Whilst very 'old news’ now, that effectively pre-packaged bankruptcy, its cross the board re-structuring and corporate re-emergence, effectively set the tone for a necessarily slimmed, partially re-imagined global auto-sector. Given the geo-economic power of the US, that singular action created a domino effect. The Japanese mass manufacturers had to follow, and did so in response to the challenges imposed by the natural disasters domestically and in Thailand. Europe likewise, though without a Chapter 11 process and thankfully no major natural disasters, the process is slower. And today S.Korea, faces unsettling behaviour from N.Korea, which itself may well sap economic confidence and so enforce a round of commercial re-structuring.

European ‘Catch-Up’ -

With the US and Japan relieved of operational drag issues, it has been evident that the mainstream European players have had to respond likewise. Given the greater intensity of regional competition this has been a slower process, Brussels offering little more than rhetoric, itself recognising that each European auto-maker, self-governed, parentally owned, or with an inferred national remit, must balance short-term over-capacity and so unit margin destruction, against the longer-term intent and capability to serve an ever-expanding EU empire; in doing so fulfilling local and national economic obligations.

Hence the circular European dilemma, one which is compounded by the abject disintegration and fractiousness of EU politics, which itself has created a 'core' vs 'periphery' split – itself re-emphasised recently by Italy's not so comical political situation. So seemingly little possibility of any pan-European political and industrial stabilisation 'pact' - effectively offered by German economic and manufacturing might - such an ideology effectively undermined by powerful American industrial influence, eg FIAT-Chrysler and PSA-GM; aswell as the host of PE companies scouring S.Europe for 'firesale' industrial assets (as foretold by investment-auto-motives in 2008).

Whilst politically the Euro project marches onward ideologically with geographic expansion, the pragmatism of economics and finance means that the region is actually less commercially cohesive than at any time since 1989. Beyond the major auto-player alliances with America, the weaker industrial players of that notionally unified 'single market' are being swallowed by external American and BRIC private equity interests. Good for the companies in question, with access to new financing, co-operation within conglomerate / holding company structures, with often access to new markets that can revive much needed export sales

Such an economically generated commercial reality, together with obvious intra-EU political ill-will, obviously undermines the idea of true pan-European industrial and commercial cohesion...for all the efforts of Volkswagen Group (with SEAT, Skoda, Lamborghini, Bugatti and Ducati).

This complex reality seemingly well understood by Brussels’ given the Commission’s two-headed approach toward the auto-industry: calling for plant rationalisation yet also allowing state support; thus a pseudo- laissez-faire approach to national industry and cross-border competition; preferring a policy of remote interaction which in this instance seemingly allows for free-market reign; itself dependent upon the time-frame of central bank QE actions and liquidity availability. The first to do so – ie the the USA – able to capture and influence the optimal industrial assets.

Industrial Dichotomy -

Critically, European auto-players well appreciate that the present near and mid-term western economic deflation – instigated by “debt deleveraging”- will be eventually be counteracted by ‘re-inflation’ – and so perceived growth –as a direct and indirect result of trickle-down QE (itself key to the process of industrial restructuring). So, ironically with 'jam tomorrow' effectively creating a disincentive to permanently cut swathes of local capacity, instead companies having to dramatically cut general fixed and variable overhead costs and so manage working capital keenly, in order to survive and re-engage investors.

[NB basic theory posits that the greater the imposed fiscal austerity and the greater the available monetary plenty, the stronger and long-lasting the eventual economic rebound].

So those mainstream regional players: VW, PSA, FIAT, Renault, GM and Ford seek to balance their respective 'here and now' position with that of their inevitably positive forecast future; and that is invariably interlinked with policy-led expansion of American and European money supply .

Reduced QE -

Whilst 'Abenomics' seeks to provide Japan with its own version of the American renaissance play-book, the fact that Federal Reserve and the Bank of England have diminished QE efforts in a phased manner over previous years. This the tail-end of very necessary policy tool intervention which simultaneously inflate monetary policy (money supply) whilst deflating what had become over-extended (ie debt-ridden) fiscal policy. Both designed to act in concert so as to create what could be termed an economic 'transition stage'.

Those QE programmes, in their various guises, have obviously been executed in decreasing tranches, yet at dose measured deemed powerful enough to counteract what even until now have been often inverse industrial and consumer activity reports – formerly the demand side shrinking as the supply side rose. That has now reversed for the UK and fortunately an even better balanced for the US with job growth; as the Fed's 'beige book' analysis shows.

So optimism is in the air.

Here in the UK the BoE's Monetary Policy Committee countering departing Governor Mervyn King's expectation of another QE injection, leaving the base rate at 0.5%, thus inferring cautious positivism; itself stemming from impressively rebounding retail sales, including big ticket items such as cars and buoyancy in the housing market.

Speculation vs Fundamentalism -

At long last the optimism and 'traction' of Wall Street appears to be infusing Main Street, and whilst a noted liquidity shortage has affected SME's (requiring their own cash cushions to see them through), improved credit, debt and equity conditions have undoubtedly bolstered the fortunes of listed companies of all sizes across most western markets.

However, recent events in Southern Europe have once again raised investor concerns.

Greece recently missed its budget obligations whilst paradoxically seeing youth unemployment fall, good for momentary popularity, but creating investor concerns regards the slackening of austerity measures. And of course Italian voters unable to decisively democratically elect a convincing leader, the loss of an unelected yet still effective technocrat and subsequent loss of secure policy direction whilst promising an 'austerity unwinding' (as possibly seen in Greece) only adds confusion. Such events, whilst seemingly reducing national pain temporarily only serve to lengthen it, as their respective economies fail to demonstrate initiatives in meeting the evident global productivity gap (vs N.EU nations and EM countries).

So whilst the ECB promise to “do whatever it takes” to overcome the sovereign debt crisis, seen in falling government bond yields, the fact is that such events shake investor confidence. Previous confidence evident in the return of volume stock purchasing has withered and stock shorting seemingly re-appeared (FIAT SpA hit hard). And the plethora of zombie-like private SME companies become ever more zombie-esque. The failure of the public to fully appreciate the internal workings of the national economic machine have given a return opportunity the market speculators that had previously departed. Without orderly reform that speculation trend will only continue and the industrial base grow ever more weaker, so prone to what Germany would call a 'vulture fund' attack.

As stated, fortunately the opposite appears true for N.America and N.Europe.

Increasingly it will be a fundamentals-based investment perspective, and not feverish market speculation or rumour-mongering that will underpin the far more stable present and future dynamics of national bourses. A far more clear-sighted and very necessary practice, given the fact that future western economic expansion and the concomitant wealth-effect will have been based upon specific new-era drivers.

- regional and international QE circulation

- risk-weighted credit availability

- the returned importance of (regulatory influenced) investment banking

- changes in intermediary banking (with “consumer brand banking” and new start-ups)

- obvious re-structuring of commerce where required

- a cost-compliant workforce

- introduction of new regulatory demanded employee pension schemes

- wear and tear capital goods and IT replacement

- improved Triad and EM trading in specialist arenas

- sizeable EM originated FDI into western commercial sectors.

A New 'Platinum' Era ? -

As mentioned previously, 2012/2013 may in the distant future become viewed as having been the true economic turning point for what have been pummelled western economies.

A time when the previous 'rebound fever' of QE inflated stock markets ceases, and the far more rationalised investment behaviour of a broader and deeper investor base, itself increasingly representing the interests of the masses, finally emerges. Participants and markets largely re-attuned to once again become more disciplined and discretionary.

Importantly, far more attuned to sector and company fundamentals.

With this as the 'returned rationality', the next weblog will re-run investment-auto-motive's proprietary investment methodology...”Coupled Ratio Analysis”...running the numbers over the 'Global 11' auto-makers.