This commentary seeks to provide guidance over a 3 -5 year timescale.

Europe

Taking the three big economies of the Eurozone in turn:

The German economy is moving forward quite well, with low inflation and some reasonable growth figures, but is ever more reliant upon non-Eurozone exports. Growth over the last couple of decades has been partly due to the removal of the premium exchange rate attached to the Deutschemark when selling into the Eurozone. There is no growth and little activity in the Eurozone, so Germany has to look elsewhere – most notably east.
Eastern Europe, Germany’s major recent growth opportunity, is suffering from the fear created by the Russian take-over of Crimea and the fear that Putin’s ambitions don’t stop there.

Times are likely to remain difficult for Eastern Europe for some time. Germany will suffer a knock-on effect, but still will be the strongest economy in Europe. Growth of 1.5% seems likely.

President Hollande of France appears to be too busy with the women in his private life to pay much attention to the economy. High taxes, restrictive employment practices and ineffective government are not a recipe for great results. France may stay out of a technical recession, but not by much.

Matteo Renzi has taken over as PM of Italy with some good news to greet him; the country moved out of recession at the end of 2013. That’s been the longest recession post war. Renzi has real ambition to reform Italy’s sclerotic political and economic systems, with the suggestion that all the parliamentarians should vote for their removal. That reminds me of turkeys and Christmas….if he can drive through the returns, it will take a decade or more. Growth below 0.3% seems most likely.

Spain is starting to show some signs of recovery, but it is a long hard road. Youth unemployment remains very high and there are still some political scandals and rumours surfacing. Low growth, still subject to shocks.

Overall, there will be little growth in Europe. Political instability in North Africa and Eastern Europe will continue to be a distraction and drain on resources, but at least the worst of the Euro crisis seems to be over. It’s a stable economic environment now, one of the keys to attracting inward investment, and still a large chunk of the world’s economy.

UK

The story in the UK is good news, with growth now established in almost all sectors. The real impact of cuts to public sector employment is yet to be reflected in the employment statistics, and there are still more scandals emerging in the financial services sector.

Private businesses are more optimistic than for many years, with two main constraints to growth, access to finance and access to well trained & qualified staff.

There’s a fundamental reform underway in the business finance market, with new entrants adopting a traditional model (Metro Bank, Aldermore, Virgin Money and many more) but perhaps more significantly the rise of crowd based funding, both for debt and equity. Debt based crowd funding is becoming really effective and simple to deploy.

Growth rates in the UK are likely to be 2.8% in 2014, rising to 3.5% in 2015. Interest rates are likely to rise from 0.5% to 0.75% in the first quarter of 2015, although that could take place in the last quarter of this year.

Increases in interest rate are more likely to be driven by fear of an asset price bubble, both in the stock market and in housing, than any fears of inflation. We may well see controls imposed on property lending to minimise that risk.

USA

Political stalemate continues with President Obama unable to make major legislative changes; the shale gas revolution is the main driver of change in the economy. The low price of shale gas has enabled manufacturers to reverse their policies of outsourcing production to South America and the Far East.

There are no obvious negatives on the horizon and much good news, with the US as a whole likely to be a net exporter of gas in the near future.

The US is certainly the most successful of the developed economies with growth in 2014 of close to 3% and possibly 3.5% in 2015 and beyond.

Brazil

The eyes of the world are turning to Brazil, drawn by the Wold Cup and the Olympics over the next few years, but IMF forecasts for growth in 2014 are still below 3%.
This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled.

Russia

Everything is back in the melting pot; the Crimean annexation will result in significant isolation, the value of Russian oil is falling and the ability of the government to leverage their supply of natural resources for political gain is weakening (See US shale gas above)
GDP will probably fall in 2014 and flat-line at best in 2015. The real question is how quickly relations with the west return to normal. If the sanctions and isolation continue, recession in Russia is very likely.

India

There’s significant doubt that the long established political party, Congress, will maintain its influence under the latest scion of the Ghandi dynasty. The most likely winner is Narendra Modi of the BJP party, elected on a platform of economic reform. The challenge will be to reform a country and political system where a cabinet minister has just advised his supports to “vote twice” by washing the ink off their fingers and voting in a different district.
Growth rates of 4-6% in the forecast period.

China

The new leadership has settled in and consolidated its hold on power; some of the most obvious abuses of the financial and regulatory systems have been closed off, and recently the hard reality of market forces was allowed to play its part as a company defaulted on its debt for the first time.
Couple this with the reduced number of companies approved for IPO (flotation) and there are some signs of structural economic reform.
Overall, very positive with growth in the 7-9% ranges.

“Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The possible exception to this is Thailand, where the present PM seems unlikely to survive the current unrest. That makes investment decisions tricky, so perhaps Vietnam or Malaysia will benefit.

Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.

The political risk in this area is conflict with North Korea, which would heavily affect South Korea.

Growth rates could be exceptional at up to 10 – 12%

Japan

It has been a quiet few months for Japan. There’s still the challenge from the Fukushima plant overhanging any prospects for dramatic growth, together with the somewhat sclerotic corporate structures. The worlds’ 3rd largest economy will continue to grow slowly.

MENA

The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.

Australasia

The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe March 2014

The business news this last week has included quite a big story about the valuation of AO, the online white goods retailer formerly known as Appliances Online.

For those that missed it, here’s what was in the Guardian (other papers took a similar view)

“But even the £1.2bn valuation is daft. AO last year made bottom-line profits of only £6.8m on sales of £275m. Punch those numbers through the calculator: 175-times earnings and 4.5-times sales for a distributor of low-margin electrical goods.”

There’s no arguing with that – these numbers are way out of kilter.

So is this the city gone mad? Possibly, probably. Too many people getting caught up in the hype of a success story that plays really well – the “£1 bet in the pub that turned a kitchen salesman into a multi-millionaire”

Valuations are an art form, not a science & investors are looking to the future. If a business can take on a mature market, like white goods, and apply some game changing methodologies to create a new business model and capture a decent market share in no time, perhaps it can do the same in other markets?

Is AO the new Amazon? There are some similarities. Amazon shook up a moribund market (bookselling) and has extended the business model and the technology to many markets and products. Maybe that’s what investors think could happen with AO?

Personally, I doubt it. I suspect that AO may be a target for Amazon, if they continue to show good progress and have some ground-breaking technology, but for now I think I’d rather sit on the side lines & watch than invest.

I learnt a few days ago that we were unsuccessful in a bid for a local government contract.

Oh well, I thought, never mind. We learn by our experiences.

Out of curiosity I looked up the winning bidder, to find that they were vastly more experienced in working with local government, and had worked with this authority before. No surprise that we were not the preferred bidder.

They are a not-for-profit limited company.

I told my wife, and she said “Oh well, you lost to a charity….”

No. Not for profit doesn’t mean a great deal, really. If the company makes a surplus, that surplus should be put to the good cause the company supports.

Long before the company makes a surplus, it has to pay for its staff, its directors, its expenses….

I am not for a moment implying that there is anything underhand in this, or any other case.

Just be aware that not for profit ≠ charity

This is my personal view, based upon many years researching and reviewing the work of others “standing upon the shoulders of giants”

This commentary seeks to provide guidance over a 3 -5 year timescale.

Europe

Taking the three big economies of the Eurozone in turn:

As expected, Angela Merkel was re-elected and is forming / has formed the grand coalition with her political opponents. From an economic guidance perspective, this means little change to the status quo – perhaps some adjustments in the social and benefits arena – but nothing to derail the progress of the German economy.

In France, president Hollande appears to be making fewer blunders but is not addressing the challenges of the bloated state, generous retirement provisions and onerous individual and corporate taxes.

In Italy, the Berlusconi era has finally drawn to a close – although there is a rumour that his friend, President Putin of Russia, might appoint him Russian ambassador to the Vatican! That would give the former PM a diplomatic passport and immunity from house arrest. Politically, there’s no strong leadership and economic reforms are not happening. There will probably be yet another election in 2014, but it’s likely to be just another shuffle of the same pack of cards.

The southern fringes will continue to be influenced by the North African troubles; Egypt is unstable, Syria in the middle of a brutal civil war. There will continue to be a drain on Turkey, in particular but also continued refugee crises across the Mediterranean. Economic news from Portugal, Spain, Greece and Cyprus is minimal, which is good news. It may be time to call the end of the Euro shocks.

My forecast:
Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 2.8% in 2016, but individual countries will still perform at markedly different rates. All of the Latin countries are still in the recovery ward, but showing signs of better health. Germany is likely to be more stable, with growth gradually improving from 2014 – 2016/7, perhaps peaking at 3.5%. I would not be surprised by some relatively disappointing growth figures for Germany in a couple of quarters of 2014. Real growth for Germany requires more of a recovery in the southern fringe.

France continues to struggle and 2014 does not look to have a favourable out-turn. Recovery will require political change, either of leadership or of direction.

Italians are used to weak / no government and growth of 1.5 – 1.8% should be achievable in 2014 with gradual improvement through to 2016.

Smaller countries, particularly those in Eastern Europe, offer real potential for growth. Ireland appears to have weathered the crisis and has a positive outlook, and general acceptance of their fate (albeit still with some political upheaval) is appearing in Spain, Greece & Portugal.

UK
Despite the headlines screaming about the good economic news from the last few months, we are not completely out of the woods yet. In my June commentary I referred to further problems emerging in the financial services sector and they were duly uncovered. It will take several years for that sector to return to pre-crisis levels of contribution to the economy.
The recent statistics do show improved activity across almost all sectors, which is good news, but there is a disconnection between the employment statistics and the output statistics. The implication is that we are now much less productive than was the case in 2007. The Bank of England has set a “knock-out” for increasing interest rates only when unemployment falls to 7%. It may be that productivity increases absorb some of the growth before businesses take on more staff; interest rates are likely to remain at present levels through 2015.
The longer term significant risk is energy supply and policy; we’re heavily reliant upon imported gas, have not developed new nuclear and the environmentally friendly generation is slow to fill the gaps. Shale oil & gas would appear to be favoured technology.
Growth rates of 2.5% in 2014 and 2.8% in 2015 seem likely.
USA
Prospects in the US remain very positive, largely due to shale gas. The most positive politico-economic news in several years is the recent agreement, yet to be passed by the legislators, to withdraw the sequestration imposed by the fiscal cliff and replace it by planned savings.
President Obama has not shown a great interest in business and that seems unlikely to change, so there will be little government stimulus to the economy.
Manufacturing operations are being relocated from formerly low-cost environments (South America, China) to the US to take advantage of the low oil and gas prices. The knock on effect of this transition can be nothing but positive for the US as a whole, with a young, well educated population.
Growth rates of 3-5% during the period to 2016-7

Brazil
The run up to the sporting events has attracted to worlds attention to the country and given the disadvantaged of the population a platform to protest. There’s an outcry against building football stadia whilst the countries hospitals, roads and housing are in dire need of investment.
A large young population, significant natural resources and gradually improving infrastructure, no doubt given a step change by the World Cup and the Olympics give cause for optimism. I note with interest that Jaguar Land Rover announced a manufacturing facility in Brazil recently. I think that’s a very early move.
Growth rates of up to 6 or 7% are possible in the period to 2016 with the Olympic effect but I’d expect to see a slow- down in 2017-2018, with growth falling back to 4-5%.

Russia
Continues to benefit from significant natural resources and will show good growth in the mid to medium term. There’s a substantial middle class that don’t have a political voice and any attempt to represent their opinions is met with repression. Doing business in Russia is challenging and requires that you have the right connections.
Over the medium term, growth of 5-6% is likely. Over the longer term, the big question is what will happen on the political front when Putin goes. That could cause major instability.

India
Faces challenges from its own political system; it remains a country of great potential with excellent education, the use of English as a business language and a young population. There is vast inequality between the richest and most influential and those who are not so fortunate. It’s noticeable that a court found a colonial era law applicable (it happens to be about homosexuality) overturning a more recent ruling. Businesses face some interesting challenges! Growth rates of 4-5% in the period to 2017

China
The relatively new leadership have taken some significant steps to eliminate or reduce corruption; there are fewer ostentatious displays of wealth by the political elite and domestic IPO’s (initial public offerings) have been frozen whilst investigations into some very doubtful public companies are carried out. There’s a new atmosphere and some more rigour applied to standards and procedures.
All of this helps to reduce the risk of political disturbance between the haves and the have-nots, so the outlook continues to be positive.
Growth rates of 7-9% are most likely

“Greater China”
I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The possible exception to this is Thailand, where the present PM seems unlikely to survive the current unrest. That makes investment decisions tricky, so perhaps Vietnam or Malaysia will benefit.
Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.
The political risk in this area is conflict with North Korea, which would heavily affect South Korea.
Growth rates could be exceptional at up to 10 – 12%

Japan
It has been a quiet few months for Japan. There’s still the challenge from the Fukushima plant overhanging any prospects for dramatic growth, together with the somewhat sclerotic corporate structures. The worlds’ 3rd largest economy will continue to grow slowly.

MENA
The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.
The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.
It is difficult to be optimistic for prospects in this region.

Australasia
The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe December 2013

In the Times yesterday was this headline

Crowdfunding clampdown may hit small firms hard

and below is my take on this from over a year ago

Crowd Funding & the FSA – or UK vs. the USA

Posted by Tim Luscombe at 01:00, October 3 2012.

I have been looking at Crowd Funding for one of my clients, let’s call them XYZ

Crowd Funding is where many investors pool small amounts of money to invest in a business, or perhaps to support a charity or an artist.

XYZ have a substantial user base who have paid several hundred pounds for the first generation products.

They need to raise some funding for the development of the next generation of products, so asking the existing customers to contribute £20 or even £50 (perhaps in return for a discount on the purchase of the new product) seems to make some sense. The individual risk is pretty small, the company gets to develop the next generation of products, everyone wins.

Then you look at the FSA guidance on Crowd Funding and their conclusions quoted below:

Keep in mind that almost all crowdfunds are not authorised by us and you will not have access to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.

We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.

We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.

We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.

I find this difficult to accept as an appropriate response to the circumstances we are considering. I can see how this guidance might apply to investors looking to back start-up businesses with substantial amounts of capital, but really? For investment of £20 or even £100 what are the FSA thinking of?

As I have previously commentated, where were the regulators when the financial crisis blew up? Where was the FSA then?

In the US, the JOBS (Jumpstart Our Business Startups) act comes into force next year. This encourages investment, regulating the middlemen and setting limits related to net worth or income for the individual investors. Why aren’t we doing something similar?