April 1998, II

Economy and financial affairs

The economy

The world economy has been influenced by the Asian economic downturn. The problems which have come down on South Korea, Thailand, Malaysia, Indonesia, Philipinnes and to a lesser and different way in Japan will suppres the worldwide economic growth by nearly a percent.

The measures taken by the countries in the region, with support of the IMF, have already delivered some improvement. The fall in currencies and the stock market have been stopped and the stocks could regain a part of the value they lost in the last half year. The exceptions are Indonesia and Japan. The Indonesian government is hesitating to implement the harsh measures needed to stimulate the economy. And Japan fails to regulate the financial industry and to boost the economy. In both countries there is a lack of trust with the people and the international investors that the government is serious about the policy they need to introduce. They are afraid of window dressing by the governments.

If Indonesia and Japan finally do the right things the whole Asian-Pacific region could start to rebuild the economy and become again the economic tigers they used to be. The third and certainly the fourth quarter of 1998 will therefore see some substantial improvement in the economies of the region. It will take however two to three years to get back at the position in which they were before the Asian crisis.

The other Asian countries like China, India, Pakistan, Taiwan and Vietnam were able to keep their economies going on and are expected to grow in 1998 between 5 and 8 %. This stability have been an anchor to the countries in trouble and will continue to be in the future.

As the majority of the Asian countries could stabilise their economies, the other parts of the world have overcome the first shocks of the Asian crisis and are back on the winning track.

The economies of South America are the exception. The policies taken to limit the influence of the Asian problem will limit the economic growth to 3,4 % in 1998.

The problems in Africa are not so much connected to the Asian problems but are more or less home-made. The natural disasters and the several armed conflicts limited the growth last year to 3,2 %. The African economies are however expected to bounce back and a growth is expected in 1998 of 4,6 %.

Russia is also to see more growth in 1998, 1 % against 0,4 % in 1997. The economy will slowly grow out of the problems which were inherited after the collapse of communism. Russia has to bring its fiscal and tax policy and collection in order to create a growth boost in the future. All other necessary factors to be successfull are already present in Russia. If they can get there act together the economic development in Russia can be even more impressive than the economic growth of the Asian tigers in the last two decades.

The East European countries also have felt the influence of the Asian crisis. But they could handle the consequences and turn the economy in the right direction. The economic growth for the region in1998 is expected to be around 2,9 %. Some countries have still a lot of difficulties in getting their economy on order but especially Poland, Hungary and even the Czech republic will see a healthy growth figure in 1998.

The European economy will be among the better performing in the world. An expected growth of 3 % for 1998. The economic cycle will turn in Europes favour. The impact of the Asian crisis have been less then expected. Every improvement in Asia will on the other hand only improve the European figures. The high unemployment figures will be reduced in the coming years. The implementation of the single currency and further integration and expansion of the European Union will prove to be other factors of growth.

Finally the U.S. economy will continue to be growing. The Asain crisis have come on the right moment for the U.S. economy. The necessary raise of intrest rates to temper the fast growing economy and the threat of inflation could be circumvented by the reduced demand out of Asia which tempered the growth a little bit. The economic growth in in the U.S.A. in1998 will be around 3 %. This means a stabile, balanced and sustainable growth for the future.

It can be concluded that the overall economy is in a very good shape. The U.S.A and Europe will see more growth in the coming years. Any reduction in Asia will be absorbed by Europe. The growth in the European Union, Eastern Europe and Russia will undo all discomfort out of Asia.

Financial affairs

If the majority of the economies in the world continue to grow this will be good for the companies in the world. The growth in earnings and profits will be somewhat lower than in 1997 but this is more because of lesser possibilities to reduce costs than of a lower demand.

We therefore upheld our forecasts on the market. The bull will go on in 1998. The incredible rise of the first three months will not continue at the same pace in the next nine months. The stockmarkets will see a more volatile behaviour in the second and third quarter of the year. A correction will be very likely in the coming months. Probably at the end of the second quarter. The 10 to 15 % correction will be recovered in two to three months. The U.S. and European indexes will probably see an increase of 20 % and 35 % at the end of the year.

The growth will be widespread over several sectors. Within each sector there will be however some companies who will stay behind. Stock picking will be very important in the coming months.

We upheld our advice of January II, 1998. The majority of the companies selected in that report will continue to outperform the market. It covers the most important sectors which will see growth.

There are still some opportunities left to invest. Beside the stocks we listed in January II, 1998, the following sectors in the U.S.A. could prove to be attractive. The office furniture, the chemical, heavy industry and leisure industry could deliver some outperforming companies. But be aware there are a lot of underperformers around.

We like Minn. Mining & Mfg. and Ikon in Business supply. In the chemical sector, Du Pont and Monsanto. Even the heavy industry could offer some improvement with companies like Deere, UCAR International and Danaher. Finally in the leisure industry we like Sun International, Starwood, Premier Parks and Steiner Leisure.

The European stock markets are covered well by our advice of January II, 1998. The problem are the Asian stock markets, they will not be outperformers in the second quarter. A number of South Korean and Hong Kong companies could make profits up to 50 + % in the first quarter, the problems in the area are far from solved. New acquisitions are therefore not advisable in the second quarter.