Outlook - Can It Get Better?

Welcome to 2007! We wish everyone a happy and successful new year!

Performance of Key Market
Source
In clueing in to the coming months, a good starting point is to understand what is happening in the key markets.
First, let us review the US housing sector - house prices having been falling in 2006 and declines are larger than reflected in data. An indication of poorer sentiment amongst sellers. Non-residential sector, equipment and software investment also seem to have fizzled out with investment expected to be marginally in positive territory. Job growth slowed in 2006, with less than 100,000 jobs added for the past 2 months in the private sector. Consumers’ ability to borrow against their homes is diminishing and with prices heading south, this will limit their ability to consume as there will be no further equity to borrow. On the retail end, softer holiday sales, slumping car sales, rapidly rising rates of mortgage delinquencies and defaults all point to a business cycle that is decidedly turning.

With major sources of demand manifesting weakness, job growth is more likely to in the negative. Declining employment, falling income, falling consumption, and then further job loss will exacerbate a downturn.


Productivity
Productivity growth for Q4 06 will be less than 1.0 percent, and this gives an average annual growth rate of just 1.3 percent over these 5 quarters versus more than 3 percent from 2001-2005.


What May Be Unfolding?
1. Will US Fed begin lowering rates no later than its first meeting in January 2007?
2. Will unemployment climb to over 6 percent by the end of 2007?
Some appears to think so.


Lessons Learned From the Past?
1. When the business cycle is nearing peak, which is a probable case for the moment, it will be an uphill task to embark on any greenfield undertaking where business traction has yet to be underpinned. To invest your hard earned savings for such proposition is high risk as the odds of a downturn is high and in a contracting environment, tightened liquidity will force people to focus on more immediate needs. Review your portfolio and take steps to trim your sails to concentrate your efforts on propositions that will remain profitable and generate cash flow. Surplus cash flow generated during a downturn is worth by far more than in a boom market. For one, you can afford to buy in things at a far lower valuation. You get more bang for the buck.

2. Avoid forming new ventures with partners you cannot be sure have the stamina to see through the tough times. It is likely that when it comes to a cash crunch such a partner will take flight leaving you with the burden on see the proposition through or simply to pull down the shutters. Either way, it will do you no good for your wealth ( health ) preservation.


What are the implications ?
1. export-oriented economies will be hard hit,
2. outsouring will intensify as corporates seek to cut costs,
3. domestic consumption will be boosted ( primed ) to stimulate the economy, and
4. interest rates are likely to fall.


What to avoid?
1. high-end lifestyle products and services,
2. export-oriented business model ( manufacturing - emerging countries ),
3. real estate where prices have surged suddenly and do not appear to be sustainable ( sucker prices ), and
4. longer term commitment where future your cash outflow is based on forecast made during boom time.


What to engage?
1. keep cost low, remain competitive, optimise cash generation,
2. upgrade on technology,
3. maintain market presence,
4. increase cash weighting, reduce debts,
5. immunise with orders on hand that will allow you to maintain decent cash flow when tough times dawn on us.

As in any crystal ball glazing, we could be totally off the mark particularly in terms of timing. So it is prudent to map out a portfolio of actionable tasks that have low correlationship to one another, and yet able to leverage on one's core competency. For us, we will definitely look at reconstructing equity/real estate portfolio that will provide a long term sustainable return e.g. more defensive type, while at the same time cast a keen eye on the next winner.

We have the work cut out for us. All the best for the new year!


Keywords: trend, recession, investment, profits, growth

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