There is a new industrial revolution taking place around the world based on innovation. It is centred in California but there are pockets of it elsewhere in the United States and in a few places abroad. There are creative new companies being formed every day. Investors underestimate the significance of this change. It is not only in internet-based technology, but also in biotechnology. Over the next few years you will see blockbuster products being approved for cancer and heart disease. Alzheimer’s and Parkinson’s are proving harder to deal with. In information technology the primary beneficiaries will be Google, Facebook, Salesforce.com, Microsoft, Amazon, LinkedIn and a few others, but not Twitter, which I view as a company feeding off the primary companies driving the change. These new companies are making IBM a corporate leader of the past. The drivers are changing the way manufacturing is being done, inventories and transportation are being handled and all forms of communication are taking place. The earnings for these companies are open-ended. In biotechnology the new products will extend life and reduce invasive surgery, and who can say how much that is worth?
Overall I see the United States growing at about 2 per cent in real terms. To grow at 3 per cent you would need another building boom and I don’t see that happening anytime soon. The use of robotics will improve the productivity of industrial companies and profit margins will stay high, but it will be hard to bring down the unemployment rate. Technology is good news for the world because everything can be done more efficiently, but the bad news is that this means it takes fewer workers to perform the services or make the goods, and the only way to create jobs is through faster growth, which is hard to achieve in a mature economy. Take the banking industry, for example. Thousands of jobs have been lost there and the staff reductions aren’t over. We have to learn to live with a higher level of unemployment and there are social and political issues associated with that.
Quantitative easing
Germany is a curse. Europe needs more money to stimulate its growth. Europe is out of the deflationary recession that was caused by the austerity programmes that Germany supported, but it is only growing at 1 per cent now. It needs a dose of quantitative easing to grow faster, but Mario Draghi, the head of the European Central Bank (ECB), refuses to provide it. He has been encouraged by his German advisers to be wary of inflation, but more people in Europe are worried about deflation than inflation. The inflation rate in Europe is less than 2 per cent. Monetary easing would be good for the economies across the continent.
As for the other countries in Europe, I see renewed hope for the likes of Italy, Spain, Greece and Portugal — France however, remains unpredictable.The United Kingdom is surprising us by doing so well, but it is primarily because of the housing boom taking place there, driven mainly by Russian and Middle Eastern buyers.
In Iran, I am optimistic that there will be some agreement which will result in the country pulling back from its nuclear weapons development program. There are too many young people in that country who know what is happening elsewhere in the world and they want to be part of it. The clerics cannot hold them back indefinitely. I don’t have much hope for Syria. Al Assad and his oppressive regime are there to stay. The northeast could be broken off and become a part of Iraq, however.
Eventually I see oil production in the Middle East returning to pre-conflict levels and even moving higher. I agree with you, however, that increased production will not be enough to meet the demands of the developing world — especially India and China — and I see oil prices heading somewhat higher. As for gold, it has now been established as an asset class although it is not one embraced in Europe and the United States. It is a part of almost all institutional platforms in India and many other places in Asia. I think it has formed a base here at current levels, but I don’t know when it will move substantially higher. I think at least a small amount of gold should be in all portfolios.
Hard landing
Moving on to Asia, my conclusion on China is that the size and the diversity of the country present a challenge to how central government rules the country. As a result, the regional authorities have a lot of power and it is hard for Beijing to know if they are always performing in accordance with the intentions of the central government. It is true that China has ascended to the position of second largest economy in the world but that is because of the size of the population, not its per capita income. I don’t expect a hard landing, however, because they have enough control over the economy to avoid that. Still, I presently have no investments there. I also visited Japan and I am impressed by what is happening in their economy now. The people need to have more confidence that Shinzo Abe’s policies are working. I am making some investments in Japan. And in Myanmar, I see a big boom coming, even though the military is still in power.
As for the rest of the world, I am pretty bored. I think Indonesia is basically a commodities rather than industrial market and if commodities do well, so will the country’s equities, but I can’t predict commodity prices. In Latin America I am bullish on Argentina; Brazil will recover, but it is too early to invest now.
Finally, Everyone seems to be disturbed by the lack of volatility in the market, but volatility is the product of excesses and there are few excesses now. The US stock market is fairly valued, the economy is healing and the US bond market has settled down to a new low-yield level. The Middle East is not likely to blow up. Despite all of this, a lot of people are afraid and because of that the market should to go higher. Europeans are under-invested. Saving the European Union and the euro preoccupied investors over the past two years. As the economy strengthens, there will be more structural change — a banking union and more fiscal convergence in Europe.
Byron Wien is the vice chairman of Blackstone Advisory Partners LP
