As an investor in today’s world, you have to stay on top of trends not just in your domestic market but changes in the global economy. Here are three new global forces that will have an impact on your investments in the coming months.
Rising Incomes of Chinese Workers
Recently the City Government of Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 RMB, or about $140. Many other cities are expected to follow suit. The typical Chinese worker still earns just $200/weekly, but rising food and housing prices, as well growing labor unrest is nudging wages upwards. Increased wages means increased demand for discretionary spending such as cars, cosmetics and household goods. Increasing wages also pulls more people into the labor force, some of them traditional caregivers such as housewives. Together these two trends are likely to lead to increased demand for consumer goods as well as retail food chains. Companies positioned to benefit from this change are MCD, YUM, GM and PG.
On the other hand, the increase in wages will make the “Made in China” label costlier. While some manufacturing units will move to other developing countries such as Vietnam and Bangladesh, many high tech products will continue to be produced in China at higher cost in the short term, which will then be passed on to the consumer. U.S. hardware companies like AAPL, HP, INTC, Lenovo (LNVGF) and AMAT have huge manufacturing operations and supplier relationships in China, which will impact their profit margins.
Rising Corporate Cash Piles
Due to growing economic uncertainty and soaring deficits, Corporate America (and Europe) are hoarding cash like there’s no tomorrow. Non-financial companies in the Standard & Poor’s 500 have a record $837 billion in cash, according to S&P. US corporate income in excess of expenses is at 0.8% of GDP. By squirreling away cash instead of investing in machines and new employees, companies may be counteracting the government’s fiscal stimulus, boosting unemployment and stifling chances of a robust economic recovery for developed nations. Unless businesses feel reassured about the federal deficits in the US and Europe, as well as confident about consumer demand in they will see little incentive to spend their hoard, hampering the very economic growth they are looking for.
Deflation and Inflation
The specter of deflation is looming over the US and Europe, even as protests against rising food and energy prices grip cities in India and China. Deflation puts a tight ceiling on companies’ ability to increase revenues, thus paying off debt and increasing their profitability. With a fall in the cost of production, companies that are overly dependent upon a cost advantage will find themselves squeezed as their competitors with superior quality will lower prices. For example, TGT may have an advantage over WMT in such a scenario, AAPL over DELL, PFE and JNJ over generic drug manufacturers.
On the other hand, inflation in emerging markets is likely to lead to political uncertainty as governments are rattled by public outcry. The growth in consumer demand that US companies have incorporated in their forecasts for China and India may not materialize in the coming quarters. The valuation of foreign stocks and ADRs will fall as inflation hits export-oriented growth.
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