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Eastern promise lures HSBC boss abroad

HSBC boss Hong Kong bound

HSBC boss Hong Kong bound

Shunting the operating base of HSBC chief executive Michael Geoghegan from London to Hong Kong tells us two things. Firstly, it represents another signal of the increasing shift in economic power from the west to the east. Where a traditional G7 power base of US and European interests once held sway, now it is rapidly being overtaken by a wider group of nations in the G20, reflecting the expansion in emerging markets such as China and India. Banking markets are less mature in Asia than they are here and thus the opportunities to grow and increase profits are greatest.

But there is a second and more reassuring point. It demonstrates that western banks are returning to their stuffy savings and loans knitting, a pattern that once produced solid streams of profits that allowed large chunks of cash to be handed back to shareholders on a bi-annual basis through dividends.

In their desperate dash for growth far too many banks have developed a devil may care attitude in regards to growth, expanding into all sorts of highly leveraged, high risk products and markets. That shift has led us to the events of the past few years and the near collapse of the western banking system, so a return of grey suits and reassuringly dullness is a welcome breakthrough.

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Doomed to boom and bust

Global gathering in Pittsburgh

Global gathering in Pittsburgh

We were promised the end to boom and bust markets and today we’re told that the US wants to hand over a greater share of responsibility for the global economy to many of the emerging Asian powerhouses of the future. Decisions and policy, we’re led to believe, will in future be influenced to a greater extent by the G20 group of nations , including China and India, rather than just the US and a small select wealthy few European nations that constitute the G8.

Does this imply a huge step has been taken towards the new economic world order that was promised by many commentators a year ago in the wake of the damaging collapse of Lehman Brothers and the multi-billion dollar rescue of Merrill Lynch and insurance firm AIG? Some think so. According to Fareed Zakaria, editor of Newsweek International and author of The Post American World, ‘This is the major power shift of the last few centuries,’ he says, speaking to the BBC World Service. ‘For the first time in at least 300 years, you have non-Western actors of a size and scale that will really be dominating the world.’

Yet the obvious new significant player in this stage show is, of course, China. Its emergence as a genuinely new global powerhouse has been in evidence for several years thanks to its vast and cheap labour force. The IMF predicted in February that China’s GDP growth could exceed 6% this year, not quite the double-digit expansion previously witnessed but impressive all the same against the belt-tightening economic backcloth. But a victory for the communist model? Such claims would have Marx and Mao spluttering their party members’ coffee since China remains hopelessly committed to emulating the western capitalist, or Wall Street, model that got us into this mess. The world’s four biggest banks are now all Chinese yet they are also all quoted on the Beijing stock market and operate to the beat of an increasingly western drum.

Inevitable boom and bust

Inevitable boom and bust

The problems that lay at the heart of the global financial and economic collapse are systematic and it will take far more than the introduction of a few stiffened regulations to avoid inevitable repeats. Markets are fundamentally cyclical which means individuals and organisations alike are incentivised to milk the good times while they can. But markets are not the only cyclical factors – businesses, regulators, government and investor mood is too. And just as soon as a sustained up turn is in evidence you can bet your bottom dollar that the cries to loosen the red-tape burden will be loud and wide as business attempts to maximise it position, please investors and line its pockets. This breeds a short-termism and a greed that is as understandable as it is unavoidable, where bubbles balloon on waves of market euphoria only to explode into a recessionary bloodbath.

Former Fed chief Alan Greenspan recently admitted, another financial collapse will happen… it won’t be the same as this one, history never repeats itself exactly, but it will happen. So while regulators, bankers and government desperately fiddle with one lot of parts of the global financial engine in the hope of avoiding a repeat performance, so another future disaster develops in a different part of the machinery.

Market economics is far from perfect and cyclical booms and busts remains the norm, not the exception. Finding a better system remains the challenge but it would be a start for the decisions makers to dig a little deeper for genuine answers rather than merely patching the holes that sank the ship last time round. Until they do, boom and bust will remain as certain as Benjamin Franklin’s death and taxes.

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Water: the future of liquid assets

Clean water running dry

Clean water running dry

Take any commodity and it can be replaced with something cheaper or greener with a bit of imagination, investment and technical savvy. Plastic pipes are replacing expensive copper ones; wave, wind and sun provide energy in place of coal-fired power stations; corn-based ethanol and fuel cells instead of petrol. Costs may not be immediately comparable, but the invisible hand of the market should address any imbalance in time. Yet arguably the world’s most vital commodity we all take for granted every single day… water.

Water is different since there is no replacement regardless of price yet bizarrely it remains one of the cheapest, in relative terms. Around the world the price of water is usually lower than the cost of providing it.
We are familiar with the investment implications of the imbalance between supply and demand of commodities but the investment case for water-related businesses is even more compelling. On the demand side, population growth is a major problem. It took 10,000 years for the world’s population to grow to one billion, 150 years to double to two billion and in the past 60 years it has risen to three-times that. The global population could be eight billion by 2050.

That increase would be bad enough, but each of us is also using a great deal more water. In America the population has grown roughly 50% in 30 years but its water use has tripled. Other problems include the uneven distribution of water around the world. China, for example, accounts for a fifth of the world’s population but it has just 7% of its renewable water supplies, according to US-based investment manager Summit. Only 10 countries account for 60% of the world’s fresh water.

A huge investment theme to tap

A huge investment theme to tap

Lack of investment in water supply networks is also a huge problem, in both the developed and developing world. About a fifth of the world’s population does not have adequate supplies of drinking water, many more do not even have basic sanitation. Summit believes infrastructure needs in the US alone could cost up to $1,000 billion over the next 20 years.

Put together constrained supply and booming demand and you have the basis for the world’s most compelling long-term investment themes, yet amazingly, it remains a distinctly under-appreciated. Summit’s analysis of the industry and share prices returns shows US water stocks delivered a total return, including re-invested dividends, of over 380% in the 10 years between 1996 and 2006, roughly three-times that of the Dow Jones index. The UK’s own water sector also performed strongly over the same period (although a 2002 UK stock market reshuffle makes direct comparisons difficult). More recently water industry share prices have collapsed in line with the vast majority of UK share prices in spite of their long-term earnings visibility and reliable dividends.

But rather than cherishing this most valuable commodity it is, according to Summit, being allowed to dribble through our fingers at a worrying rate thanks to surface pollution and using ground water supplies faster than they can replenish themselves. Summit reckons overall water levels in China are falling by roughly three metres a year. Basic supply and demand economics have had far reaching effects on most commodities over the past few years, and while there may never be a direct market for water trading, the water industry could easily turn into among the best long-term investment themes yet.

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