November 2005
The title of our January 2001 newsletter was, “The Popularity of the Weather Channel Did Not Change the Weather.” The point then was that the media’s short-term view can create either unfounded exuberance or depression, depending upon which generates the most entertainment value. We cautioned investors back in 2001 about the financial media’s euphoria over Internet and technology stocks. We now believe that the media has replaced euphoria with fear and that investors should take advantage of the valuations that exist in the equity marketplace as a result of rampant media-driven pessimism.
As we see it, there is a conundrum imbedded in the global growth paradigm. For many of the earth’s inhabitants, the world has probably never been a safer place; yet many of those same people have been led to believe that the world is falling apart. Relatively speaking, there have never been fewer wars, more individuals with access to fresh water, and so many who will experience a longer life span than that of their ancestors. In America, both murder and crime rates continue to drop. At the same time, the advent of global media communication grants us unparalleled access to everything that is both good and bad…in the world! Since fear currently sells well, it appears that the media literally sorts the globe for a catastrophe of the day. Thus, on an otherwise quiet news day, a statistically minor but tragic bus accident in Port Vila, Vanuatu can be viewed by billions of people before they finish breakfast!
Let’s look deeper into our thesis that the world is actually better in some ways now than 10-15 years ago. Despite distressing hostilities in Iraq and elsewhere, the trend is overwhelmingly toward fewer conflicts than in the past. Research conducted at the University of Maryland1 shows that much of this is attributable to the fall of Russia in 1991 and the end of the Cold
War. At that time, one in three countries was experiencing some form of serious armed conflict. That number has dropped by more than one-half, to 15% at the end of 2004. Looked at another way, trends in global democracy versus autocracy are also positive (unless you happen to be a despot). In the late 1980s, the world was divided almost equally between democracies and autocracies. At the end of 2004, however, there were more than three times as many democracies…and the trend continues. Along with development comes ever more ubiquitous media coverage, which allows problems in every corner of the world to be seen by the fearful eyes of those watching television.
So, why does all of this concern us as we invest our clients’ funds? The answer is that we must stay focused on long-term trends. In that vein, we recognize the fact that like America, both Russia and China are far from perfect. However, they are leaning toward better treatment of their people and no longer formally call the West an enemy. Billions of global inhabitants such as those in India are improving their lives and becoming consumers of medicine, education, more hygienic water and entertainment. In our view, these positive trends are sustainable and not dwarfed by hurricanes, earthquakes or, for that matter, terrorism.
Today’s paradox is the fact that the increased movement of goods and people across the globe has probably elevated the risks of pandemic bird flu. Never before, though, has the world been so well prepared with communications, global organization and technology to deal with a potential problem quickly. We certainly hope that current global efforts are successful in
handling this particular risk.
We remain bullish. Most of our Quality Core companies have reported third quarter earnings that either met or exceeded Wall Street’s estimates. Global growth has been impressive and corporate profits are high. Moreover, compliance with new laws like the Sarbanes-Oxley Act, coupled with the reduction in tax on dividends, has encouraged corporations to manage their businesses to maximize cash (i.e., higher dividend payouts and fewer senseless acquisitions). This is all good news for shareholders.
Energy prices are a concern, but we expect high natural gas and oil prices to lead to rationalization of energy use, development of alternate fuels and essential productivity enhancements like outsourcing to control all costs. As for interest rates, we observe that “America’s deficits are someone else’s surpluses,” and the giant funds flow toward China and the oil producing nations will likely be followed by global infrastructure spending by these governments. These money movements and related inflationary pressures may cause interest rates to continue to rise, but not to levels that will choke long-term growth.
In conclusion, stay tuned to your televisions as we move from hurricane to bird flu season. We do not mean to downplay human tragedy or risks, but simply want to keep them in perspective as we witness the unfolding of what we believe to be the most sustained and broad-based growth in history. Perhaps most important, we believe that global growth is in its early stages and allowing for normal cyclical ups and downs, has decades to run.
1By Dr. Monty G. Marshall at the Center f or International Development and Conflict Management