It’s Much Worse Than I Thought

The Motley FoolLast week, Motley Fool Singapore was invited to present a short talk at a seminar organised by Mind Kinesis. I would like to thank Cayden Chang and his team for the opportunity to chat with his delegates about our Foolish vision of investing.

Indeed it was encouraging to see so many participants keen to learn about looking for value in an increasingly difficult global economic environment, which is worse than I originally thought.

Economic conditions are unquestionably tough right now. But why do I say it is worse than I thought?

Another triple-A bites the dust

Could it be the UK losing another one of its prized triple-A ratings? This time the ratings agency Fitch has downgraded the UK debt to AA+ owing to a weakened economic outlook. That is indeed disappointing but not entirely unexpected. After all, why should we be surprised at a bankrupt country losing its triple-A rating? So, while that is bad, it is not worse than I thought.

Could it be news that China’s economy is not growing as quickly as expected? Again that is disappointing but not worse than I thought. When you are the second-biggest economy in the world, you don’t expect to grow at the rate of knots any more. In any case, I suspect most economies around the world would give their eye teeth for a growth rate of 7.7%.

So could it be reports in the Financial Times this week that China’s local government debt is spiralling out of control. It seems that provinces, cities, counties and villages across China are estimated to owe between $1.6 trillion and $3.2 trillion. That’s equivalent to between a-fifth and two-fifths of the size of China’s economy. Again that is unfortunate but hardly shocking when you consider that the US alone has a national debt of more than $16 trillion – and rising. Now that’s awful.

They haven’t got a clue

So that just leaves the recent International Monetary Fund (IMF) comments about global growth. The IMF has told the US, Europe, Japan and China that they need to do more to focus on growth and less on trimming budget balances this year. It said there is a critical need for policies that spur job creation.

The IMF also lowered the outlook for the world economy this year. It reckons that spending cuts would slow US growth and keep the Eurozone in recession. But now for the really worrying part – it wasn’t so long ago that the IMF was praising austerity. Now it is saying that it is too stringent. I wonder how much of the about-face has to do with reports that an economics student has discovered that two eminent Harvard professors, who were proponents of austerity measures, had got their sums wrong.

That is why I think it is much worse than I thought. The people who are supposed to right the financial wrongs in the world just haven’t got a clue.

Recession? What Recession?

Thing is, we investors should not be influenced by what economists say. By all means listen, but don’t base your investment decisions on their views of the world. After all, didn’t economists predict 10 of the last three recessions?

We need to remember that companies collectively make up an economy. But they also function in spite of the economy. I remember once visiting an economically-difficult part of the UK expecting to find boarded up shops and shopkeepers leaning forlornly on their broomsticks whilst watching the world go by.

Admittedly, there were some vacant properties and a smattering of derelict shops. But there were also many outlets that were doing a roaring trade. I am sure the shopkeepers of those bustling businesses would say: “Recession? What recession?”

The lesson for me is that opportunities exist in the market all the time. And the key to successful investing is to identify those businesses that have found the recipe to succeed.

We are truly fortunate here in Singapore because we have the best of both worlds. We have many companies that operate in a vibrant and thriving domestic market. But at the same time those companies have leveraged their experience at home to venture into markets abroad.

So let those eminent economists continue to pontificate, procrastinate and prognosticate about the world economy. We private investors have more important things on our agenda – investing better now so that our future is rosier that our present.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.