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What to expect of investing in the '90s.

What worldwide trends are influencing the way we manage and invest money today? What trends in the investment business are influencing us? What will the investment environment look like over the next decade, and how will we as investors and financial managers cope with it?

We all agree that the world is changing. But future change and how we adapt to it is not the issue. Instead, it's can we adapt quickly enough to take advantage of what is happening around the world and invest our money well as those changes occur.

Here and abroad:

Executives need to take a large-scale look at the trends before making investment decisions. Globally, there has been a significant increase in the coordination of economic and financial policy among the successful countries, i.e., the Group of Seven. This has caused a reassessment of political and economic strategies everywhere in the world.

With the end of the confrontation in Eastern Europe, much of the billions of dollars committed to defense spending there can be redirected to building the infrastructure, cleaning up the environment, and improving the health care, education, and general welfare in the developing countries. Economic growth will occur, and companies will have opportunities to invest.

In 1992, besides seeing a unified Europe, we will see a North American trade zone, with Canada, Mexico, and the U.S. acting as a coordinated economic unit. The zone will have 375 million people, three governments, and three languages, and we shouldn't ignore this market just because it's close to home.

All the major industrial countries in the world have an aging population. They will need to either import labor or continue to export jobs. That includes the United States. Immigration, if managed well, can offset some of the potential social security and other societal problems in the decades ahead. If it's not managed well, we'll have to export more jobs, which means there will be investment opportunities in job creation, if not in the immigration process.

The U.S. and other industrialized countries, excluding Japan, will move from a spending to a savings orientation as the population ages. That may dramatically alter the creditor/debtor status of major countries.

And credit will be much more difficult to get in the years ahead. The rules will be tighter, and that will change the face of investing and managing money. Because of this, Japan is losing its cost-of-capital advantage, which should result in an economic leveling that encourages growth in countries with lower labor costs than those of Japan.

As for the environment, in Eastern Europe and Russia, the pollution is terrible. There are no environmentally sound manufacturing facilities. That could create investment opportunities as we help to build the infrastructure, but the environmental problems are too forbidding right now for most investors to participate in the growth.

Finally, economic growth will be increasingly dispersed. More countries will be participating, and investors will see both advantages and disjoints. The Group of Seven will remain the most stable, but the developing countries will offer a higher potential investment return, at the expense of higher risk.

Four investment trends:

In corporate investing, four important trends are:

The financial services industry bas been deregulated. It's a mixed blessing for my industry. While deregulation increases competition, it narrows our profit margins. And I'm uncertain that it's good for you, the end users. It lowers transaction costs, allows you to hedge and swap, and may result in lower financing costs, but some negatives come along with that.

Capital bas become more mobile, and America's dominant role in the world capital markets is eroding. Cross-border equity holdings now exceed $600 billion. Where cross-border capital and gross trade flows were about equal in 1980, capital flows are seven times greater today. Thirty years ago, U.S. equity and fixed-income markets represented about 80 percent of the world capital markets; today, they represent between 30 and 40 percent and they're getting smaller.

Technology is changing the investment environment. Because of technology, we now all have the same information at the same time. No longer can the U.S. take advantage of its wealth of information when dealing with foreign peers, as it has in the past. No one has an information advantage, and the concept of a transnational financial market is a reality.

New investment and finance products are changing bow we invest and how we finance our businesses. Today, the value of all the outstanding interest-rate and currency swaps exceeds $1 trillion, up from zero 10 years ago. In essence, we have built a series of new products that have $1 trillion of exposure.

Investing influences:

By the end of the century, we will have a truly global investment market. We still need to deal with accounting standards, settlement procedures, and valuation protocol, but at least we've started addressing the problems.

The global flows of capital will continue. U.S. pension funds have $2 trillion now and are growing. Only 4 percent of that money, however, is invested outside the U.S.

We'll see more investment in foreign real estate, given the state of the U.S. real estate market.

There will be significant global capital investments in Southeast Asia, with a secular shift from an agrarian economy to an industrial economy. For example, South Korea's population in the last 30 years has gone from 70 percent rural to 70 percent urban. The opportunities for investment in Southeast Asia are now.

But Eastern Europe's promise is not as close at hand. Aside from its infrastructure and pollution problems, the area's political issues need to be resolved before investors can confidently focus capital there.

At home, changes in investment trends are affecting how we operate. First, new products, most likely computer based, will be designed to meet specific needs. Second, more savings by the U.S. and other industrial countries will change the product appetite and the risk profile for products offered to individual investors.

Third, we will have a much more specialized investment world. The products and the complexities of investing are too great for any one company to do everything well. Therefore, all of us will focus on a set of customer needs, rather than trying to do everything for everyone. That will mean better results, but probably more difficulty in selecting who you want to do business with.

Finally, I think we'll start eliminating the excesses of the past. We'll get back to the basics. As investment professionals, we'll work for our clients, not for ourselves. Dividing responsibility How will we cope with these changes as corporate executives and investment advisors? For our part, we will learn the interrelationship between the economies and the politics of various countries. The U.S. and the U.S. investor have been too insular. The investor needs to broaden his perspective.

The investment community needs to have people in the countries, close to the economies and politics, who can make judgments on how the broader market will be affected by changes there.

We need to specialize, pick our shots well. We need to take a disciplined approach to investing. Spend the time and energy to do it right. And we need to accept change as a fact of life, adapting to it rapidly to take advantage of investment opportunities.

For your part, you need to make sure your companies are stable and attractive for investment.

What am I looking for when I view your company as a potential investment? Global diversification, both in products and markets; low-cost production and quality, which means you have the flexibility to move your manufacturing facilities to where you can get the greatest cost advantage; environmentally sound practices; enlightened management that focuses on people, production, quality, and the global marketplace-instead of on financial engineering that may be good for neither shareholders nor customers; and good current earnings coupled with investments for the future in research and development, production, and your people resources.
COPYRIGHT 1991 Financial Executives International
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Special Global Report
Author:Trumbull, George R.
Publication:Financial Executive
Date:Jan 1, 1991
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