Reports 1997

Index 1997

– December 1997,– The threat of IT, Turmoil in Asia

– November 1997, Consolidation in the French defence industry – Turmoil in Asia

– October 1997, Israel, an outlook – Rotating stocks into small and mid caps

– September 1997, Sense and nonsense about diversification – The Market in volatility

– August 1997, II, Financial Affairs

– July 1997, German Forces for the next millenium – The future of Hong Kong stocks

– June 1997, Indonesia, a country at the crossroads – Lean but not mean – A financial update

– May 1997, II, Counter the terrorist threat

– May 1997, Investing in South-East Asia

– April 1997, Securing your investments – The Zaïrean dilemma

– March 1997, The volatile stock market – Syria versus Israel

– February 1997, The World in 1997

– January 1997, Financial Review

December 1997

December 1997

The threat of IT – Turmoil in Asia

The threat of IT

IT, or information technology, has become a major factor in the civilian world but also in the defence sector. IT improves the quality of life, things go faster, better and with lesser input.

IT means more than just the collection and dissemination of information. It encompasses the whole spectrum of everything what you can do with information. The jamming, the falsification, the manipulation, the collection, the processing, the emitting, the targetting, dissemination and so on. Information does not only play an important role in the military but also in all parts of the civilian society. The goal of IT in the defence forces is to reach a superior management of your own forces and to attain the ultimate victory as described by Sun Tzu: “vanquishing the enemy without fighting”. The decisive force multiplier of the future is therefore information. The side who possess the information dominance will most probably win the next conflict.

The giant leap forward because of the introduction of IT has also shown the achillesheel of modern society and their armed forces. IT is very susceptible to intrusions from the outside. With only limited resources you can enter IT systems and change their operation modus or even destroy it. Where as military systems are more or less protected against such intrusions, however they are certainly not invincible to intrusions, civilian systems are on the other side very easy to penetrate.

Most countries but also terrorist organisations are putting more attention into capabilities to exploit the weaknesses of the modern society. They are not only targeting military systems but especially civilian systems which are an absolute necessity like power systems, telecommunication, finance systems, sewage and water purification complexes and logistic systems which supply the necessary items to an urbanized society. If you destroy the command and control systems of modern society it will come to a standstill within a week. The same is ofcourse true for the defence forces as we have seen in the second Gulf War when the Iraqi forces were immobilized when their C3, Command, Control and Communications, systems were destroyed or jammed.

The military and especially the governments of the more developed countries are preparing themselves to fight the war on information. Several study groups have been launched to find out the weaknesses of our modern society and ways to eliminate or at least minimise the impact of IT warfare on a developed society.

This is just the beginning of a new kind of countering modern warfare. Therefore should the efforts to stay ahead in IT warfare be intensified. Study groups and firewalls to limit intrusions into IT systems are not enough. The intruders should be automatically tracked and indentified and at best active systems should be introduced to strike back at the intruder and eliminate his IT capabilities.

We should never forget that the development in the IT sector is moving ahead at an astonishing speed. And the basis of IT is knowledge which can be learned by everybody and can be moved across borders without a possibility to stop it. That is why we should continuously improve the capabilities on IT to stop rogue states and terrorist groups exploiting the possibilities of IT.

Turmoil in Asia

The Asian miracle has turned sour. The peculiarities of the Asian countries, like the protected home market, the availability of easy and cheap loans and the system of nepotism and cover ups, were the main reasons for the dramatic economic situation. After the devaluation of most of the Asian currencies and the subsequent fall of the stockmarkets all over Asia the last of the walls of Asian prowess fell down. The already stressed Korean economy and the problems in Japan were the last nail to the self esteem of Asia.

The Korean system which created in two decades the worlds tenth economy became victim of the trap they had created themselve. The Korean government builded there economic rise on a number of large companies, the Chaebols. Those chaebols were supported by a protected home market and very cheap loans to grow into global operators in a number of sectors, like steel, memory chips, electronics and cars. The already stressed markets were flooded by cheap products from Korea and the price was driven down even further. Then the devaluations of the Asian currencies destroyed the already small profit margins of the chaebols. The repayment of loans of as well the chaebols and the Korean government became increasingly difficult and finally the weakest of the chaebols had to file for bankruptcy and the government had to ask for support of the IMF.

This is a short summary of the beginning of the economic downfall in the northern Asian region. In the mean time the drop of the Nikkei, the Tokio stockmarket, under the 16.000 level forced the financial institutions in Japan to asses their position.

The Japanese financial powerhouses, or better former powerhouses, are finally coming to terms with their actual financial situation. Several institutions including the fourth largest and oldest broker, Yamaichi, went out of business. But it seems as Japan finally is introducing the necessary steps to clean up the mess after the bubble economy of the eighties bursted.

The bad loan problem has to be solved. As long this is not the case the Japanese banks will continue to feel the pressure of insolvency and they will not be able to grant loans to new enterprises which could stimulate the growth of the Japanese economy. As long as the bad loans stay on the balance sheet the Japanese economy will be in a vicious circle with only the export market as a small relieve.

The Japanese government has to open up the market and introduce harsh measurements and regulations to eliminate this problem. A number of banks will go bankrupt because of this but the survivors will emerge stronger as ever before. This is the only option to pull Japan and a great number companies out of the problems.

An economical and financial healthy Japan can than be the stimulant to push all other Asian countries to introduce the necessary steps to regulate their economies. Only after new regulations are introduced and the specific Asian “values” eliminated international investors and the national investors will be willing again to invest and re-start the economic boom. The devaluation of the currency, as happened because of the internal problems, will not suffice to solve the problems. It will promote the export on the short term but it will also destroy investment opportunities on the long term.

The investments are the pre-condition to stimulate trade and the economy. The importance of capital will only increase in the future because labor input growth is already to expensive to make an impact. There are other countries which offer cheaper labor costs than most of the Asian countries. The Asian Tigers and Tiger-cubs have to become investors into high tech and innovative production to maintain the impressive growth figures.

Asia is still a very promising region but the market has to be opened, the financial institutions regulated and the government influence minimised. This will be a guarantee to economic growth and political stability. The Pacific area can become the most important area in the next millenium but only if they can get their act together. This has nothing to do with Western values but just with a sound fiscal, economic and business policy.

November 1997

November 1997

Consolidation in the French defence industry – Turmoil in Asia

Consolidation in the French defence industry

The end of the Cold War, the peace dividend and the following economic problems which surfaced in Europe destroyed the market of most of Europe’s defence industries.

Where as most of western Europe’s defence industries are publicly owned in France the majority of the companies are state owned or they possess a controlling stake in the firm. While the others could adapt to the new situation the French companies could not. The structures and the staff of those companies stayed the same.

Several governments in France tried to change the situation but the difficulties with the law, a number of employees at the large defence contractors are civil servants, unions and also their own policy were the reason that none of the plans could be implemented to streamline the defence industry.

The Chirac government tried to merge the French defence industry, through privatisations, into several leading groupings which at their turn could be merged into an European group with a stong French influence.

The election brought however the socialists to power which limited the influence of president Chirac. The socialists were not favour of privatisation which is nearly a precondition for further cooperation with other European companies.

The socialist led government also wanted to revitalise the defence industry. To keep the election promiss, to stop the privatisations, they propose a part privatisation were the government still wil be the dominating power.

Essentially this means that there will be a very large French defence company with mergings and holdings in all important defence producers. The privatisation of Thomson-CSF is called off. Instead it will merge or exchange stocks with Aerospatiale, Dassault and Alcatel. Another Thomson-CSF joint-venture with DASA, TDM formerly Thomson Brandt, should on the other hand exchange stocks and merge with GIAT. Further alliances with smaller companies will be constructed as well with the objective to create a very large company with allround capabilities for land and air forces systems.

This new Thomson-CSF conglomerate would be the leading company in Europe in electronics and aerospace and a major player on nearly all other fields. This state-owned or at least state controlled giant will possess none what so ever attraction to cooperate with. The future of such large gouping will be bleak because they will not be an attractive partner in the next major armaments programmes. And cooperation with European partners will be absolutely necessary to finance those programmes.

The creation of an European defence industry to support the major programmes or to counter the large US companies will only be possible without the Thomson-CSF conglomerate. The French gigant would in every cooperation/merger automatically take over the leadership of the operation. The French government ownership/control increases the dominance of the grouping. And this will be unacceptable to the other partners in any future cooperation.

The consolidation of the French defence industry is a necessary long overdue affair. But the creation of one dominating French group will prove to be the wrong way. Any further European integration will be impossible. It would have been wiser to create two or three French companies which could integrate in the European scene on terms of equality.

Turmoil in Asia

The Thai currency crisis and the collapsing stock market of Bangkok was the initiation of a crisis in first South East Asia which later also hurted Hong Kong and even reached the Western stockmarkets.

The fast growing economies of Asia which seemed to be unstoppable were in fact mixed with fatalities like nepotism, failing currency management, lack of financial regulations in the banking system, an underdeveloped infra-structure and uncompetitive production and services in the commercial sector. The countries is Asia and especially South East Asia did actually possess more economic and also political problems than one might have thought.

The “tigercubs”, Thailand, Indonesia, Malaysia and to lesser extent the Philipines, experienced the largest declines in the value of their currencies and the stockmarkets. But the fatalities mentioned above are also the widest spread in the “tigercub” countries.

The advantage of South East Asia was their cheap labor, a relatively well educated population, an advantageous investment climate and a promising market for the future. The “tigercubs” where able to develop theirselves into prosperous economies. This prosperity was at the same time the major cause of the nepotism, a failing currency policy, the bad loans, the lagging development in the infra-structure and the failing business development.

These difficulties could have maybe overcome by a continuing economic growth and foreign investment but the rise of the US dollar made the local currencies an easy target to the international money traders. And it was this weakness which the start of the nightmare, the devaluation and the consecutive drop of the stock market. But the internal weaknesses of the “tigercubs” were to many and already to far penetrated in the society that a happy end was very unlikely.

Hong Kong was dragged into the crisis mainly because the Hong Kong government tried to keep money traders out by rising the intrest rate to keep the connection with the US dollar and because of problems which came forward at the development/building companies in the already overpriced real estate/property market.

The Hong Kong collapse was the start for a worldwide drop in stock prices. All markets are for a more or lesser extent influenced by the Asian economies/markets. The international finance system is interdependent to a larger extent than most had imagined. The Western world will however be able to recover itself from this correction within a month. The Asian region however will need much more time to restore the trust of the investors before they will comeback.

It is therefore of the utmost importance that the Asian “tigercubs” governments start with the reconstruction of their economic system. Those changes are necessary because without it they will never receive the support of the IMF and neighbouring countries, the trust of international investors and to get back on the fast track of growth.

The Asian stockmarket is now however cheaper than ever before, they have lost more than a third of their value in the last month. It might be early but a number of stocks look very interesting at the moment. This same is true for the Western world most stocks are becoming very attractive.

In Asia one should limit its purchases to Hong Kong, Taiwan, Japan and possibly Singapore. The companies which are active in the electronic-, trading, finance and transport sectors with a high export potential will show the best results in the last two months of this year.

The western stockmarkets will also see a lot of growth, before the end of the month it will have reached the same level as at the beginning of October 1997. We maintain our listing as given in our report of August II, 1997. They are as we call them quality stocks with a lot of potential even if we have reached the same high levels as we have seen before. You could add to that list Merck, Miravant Medical, J.P. Morgan, BankAmerica and Banc One, after the decline these stocks are bound to show some impressive growth in the next quarter. The energy and oil exploration companies will also see some extraordinary growth, the coming winter and especially the rise in tension in the Middle East are the main cause for it. You could think about Mobil, Occidental Petroleum and Atlantic Richfield.

October 1997

October 1997

Israel, an outlook – Rotating stocks into small and mid caps.

Israel, an outlook

Since the election of the Benjamin Netanyahu coalition into government the situation in the Middle-East has changed dramatically. Not only the political landscape changed but also the economical and social situation turned into misery.

Netanyahu promised in his election tour peace with security but the reality brought, ones he was in power, insecurity without peace. The peace process has been put on ice. The Israeli government considered the needed action to sustain the peace process as a danger to the security of Israel. It restarted the building and enlargement of settlements on the West Bank, it demolished houses of Palestinians which were allegedly illegal and it did to a certain extent destroyed the economical buildup of the Palestinian entity.

The Netanyahu government could not stop the suicide bombings which happened every time the peace process seemed to get going again. Netanyahu accused the Palestinians for not doing enough to destroy the terrorist organisations of Hamas and Jihad. The Palestinian authorities are however not competent and lack the intelligence organisation to combat those organisations. A further problem with the terrorist organisations is their cell structure which makes eliminating them very difficult. And the Hamas is not only active with violence against innocent civilians but it also has a very large humanitarian organisation. It supports schools, medical centers and poor people. By destroying this part of Hamas would mean an end to the Arafat government in the Palestinian entity. Especially if Arafat is not able to replace the services of the Hamas humanitarian organisation.

The political change

The internal situation in Israel is no more stable than during the previous government, probably even less secure. A large number of people are dissatisfied with the situation. The Israelis because the terrorist organisations continue with their “senseless” bombings and the Palestinians because their chance for an “independent state” is getting very unlikely.

Netanyahu seems to get away with his confrontational policies which supposed to bring more security to Israel while at the same time keep as much influence and territory as possible. The opposition in the Knesset but also the people on the street can not stop nor change the policy of Netanyahu.

The international community disapproves this policy but without backing this disapprovement with any sanctions. And as long as Israel is supported by the U.S.A. it does not have to care to much about the feelings abroad.

This policy will however deliver no security on the long term, it is even doubtful if it can guarantee any security on the short term. All the actions of the Israeli forces in Israel, the West Bank, Gaza and even in Lebanon proved to be very ineffective and expensive in terms of human lives.

The external postion is even as bad. The security zone in Lebanon is becoming more and more a killing field for Israeli soldiers. Even the most elite of the IDF, Israeli Defence Forces, get massacred in Lebanon by a reinvigorated Islamic resistance of the Hezbollah, Amal and even the Lebanese army.

The relations with the Arab neighbours seems to deteriorate with the day. Only Jordan tries to save the peace process. There are even rising tensions with Syria who is accused by some Israeli military officers of preparing a war against Israel to regain the Golan.

The internal and external position of Israel is undermined by the one-sided approach of Netanyahu who promised peace with security but delivered insecurity without peace.

The social and economical situation

Since the election of Netanyahu and freezing of the peace process the economy has turned bad. The growth has returned to low levels, the state expenditures are not inline with the diminishing tax returns and the unemployment is rising again. The peace process was the stimulant of an incredible economic growth in Israel. But the harsh policies of Netanyahu destroyed the confidence of foreign investors, hampered the export of Israeli products and even reduced the consumer demand in Israel.

The weak Israelian economy and the even worser if not to say disatrous economy of the Palestinian entity could be the seed of even more instability in the future. In this situation there easily starts a reinforcing spiral of social misery which leads to a greater attractiveness of extreme religious organisations in Israel, Gaza and the West Bank.

The fundamentalistic groups in both territories are already becoming more powerfull because of a growing membership and especially in Israel because of the important role they play in the coalition government.

The deteriorating economy will reinforce their influence in the society. This will eventually increase the contradiction between the two opposed groups, Judaism and Islamism. Between those two fundamentalistic groupings peace will be impossible and a disaster only a matter of time.

The Israel – Palestine relation

If we consider the difficulties described above it will be absolutely necessary to give the peace process which started in Oslo another chance. The two important parties, the governments of Israel and the Palestinian entity, have to come together again and start talking to implement the Oslo accords.

To get peace with security sacrifices are necessary by both parties. The Israeli goverment has to grant the Palestinian entity the means to build a viable economy in their own territory. By this way Arafat will be in the position to eliminate the humanitarian part of the Hamas and eventually will also be able, with Israeli training and suppport, to eliminate the armed wings of the Islamic terrorist organisations.

The Palestinian authorities in cooperation with Israeli security services should do their best to minimise the influence and actions of the several terrorist organisations. They should do this not only if there is heavy pressure from Israel and the U.S. but make it a part of their policy. If a thorough plan is carefully executed the terrorists will have difficult job to survive.

In the mean time total security will not be possible for Israel but if the peace process will be fully implemented the terrorist threat can be minimised. This together with an economical recovery of Israel and the Palestinian entity will be the only possibility for a lasting peace. The Arabs and the Israelis will not become friends but in this way they can live together. That is a mighty advance on the hostility from this year.

Rotating stocks into small and mid caps

The New York stock exchange showed its volatile behaviour in the last month. The blue chips of the Dow went down and up where as the Russell 2000 seemed to outperform all expectations.

We remain however positive about the future of the blue chips. Therefore we maintain our buy rating on the stocks we listed in our last report. We envisage a continuation of the volatility but at the end of the year we expect the Dow Jones Industrials at around 8.200 maybe 8.400. The large caps, the multi-national companies, with a low P/E rating and an attractive product package and export potential still offers some very good chances to make a more than average return.

The small and mid cap stocks will also see some impresssive growth on the short term. They might even outperform the big caps on the short term. The booming American economy will be a guarantee for the performance of the Russell 2000.

We like the following mid and small cap companies. They will most probably show a better performance than their counterparts. In the defence sector we like Tracor, Stanford Telecom, Viasat and Orbital Sciences. In the transport sector we expect a lot from US freightways, Comair and Atlantic Coast Airlines. Further we like companies like Method, Vesta, Swiss International, HS Resources, Coach USA, Baker Fabric, Analog Devices and Measurement Specialties.

All these stocks could be an interesting investment but we prefer the larger international companies because they offer a better potential on the long term and that is the game we like most.

September 1997

September 1997

Sense and nonsense about diversification – The market in volatility

Sense and nonsense about diversification

Diversification, the policy of companies to move in areas which do not belong to their core or traditional activities. Most of the larger and successfull companies in the western hemisphere at some time tried to diminish their dependency on their traditional activities and increase their sales and profits by buying into or start on their own capabilities in new very promising markets.

In Asia a number of companies started as diversified companies and they became very succesfull in their operations. These conglomerates are active in numerous fields ranging from financing to steelmills and electronics.

What is the right or better policy to pursue, concentrate on the core activities of your company as most business consultants will tell you or diversify or stay diversified as some especially Asian companies do.

The western experience

The activities of companies in the western hemisphere were mostly limited to the fields in which they started. Only if the company was successfull they started to move in to other businesses. Those businesses where in the first time mostly related to their original activities.

The move into other areas was out of a surplus of cash which needed to be invested and the success some new trades, like technology, had shown which was very attractive to an investor.

Only a few companies started as a conglomerate, mostly they where involved in the trading business or put together through acquisitions of an investment house.

The basic idea behind the conglomerate was that the different divisions of the holding could support eachother. The element of synergy should deliver a better and more profitable company. And being involved in more than one business means being less dependent on the well being of that particular business.

The results of those conglomerates were mostly disappointing. Some divisions did very well but the profits of these were used to cover the losses of the loss making divisions. After some time the decision was taken to sell or close down the loss making or worser perfoming divisions and return to the core activities.

A number of respectable companies followed this path like Exxon, AT&T and Daimler Benz. They all tried to move into areas which were new to them. After some time they have sold those divisions which did not deliver what was expected.

The synergy did not produce better results, the divisions could not work together, the costs were going up every month or the divisions were inadequately managed to deliver the return which was expected.

And these four elements are the main problem why diversification did not bring the expected advantages. Synergy is only working if the elements which should work together can do something for eachother. If this is not the case, there is no reason to combine them.

To make diversification effective and create synergy the different divisions should be able to work together. But the divisions mostly have a different business climate and hierarchy. A particular climate and hierarchy can be very succesfull for one business but could be absolutely disastrous in another business. The management team of the holding company should consider this and create and stimulate a system which is best for each business but at the same time be the impartial broker to induce cooperation between the divisions.

If you enter a new business the start up costs can be high and the returns in the first years can be disappointing. These high cost and low returns combined by a incapable system of cost control will make diversification look like a horror trip. Some knowledge and financial stamina is therefore necessary to enter a new business. The new operation should be like a chrystal ball to control the financial situation. At every moment the holding company should be able to evaluate and question the policy of the management but at the same time give them enough space to run the operation.

The management of the holding company and the divisions is equally important to make a conglomerate work. The holding company should support the management of the divisions. They are the specialists and know what is needed to make a certain operation successfull. To much meddling of the holding company will destroy the creativity and profitability of the division. The management of the division should on the first place improve the position of the division and only after that look what it can do for the group or holding.

The conglomerate is not a grouping in which one part is saving the other part but a business concept were one division maybe helping the other division. Each division stays responsible to deliver sales and profits and at the end create a financially strong and independent holding company.

Most of the multinationals in the West considered their diversification plans as a way to support the core activities and become more independent from one business. They were not able or willing to accept the idea that diversification would change the business structure of the company. The management did not behave as the management of a holding company should do. The intrests of the core activities were still the center of there attention.

Only a few companies became successfull conglomerates. A company like General Electric behaves as a good holding company. Another example is General Motors which had a bad start because they wanted to use the capabilities of new acquired companies to support their main car business but later changed their policy after some big disappointments. GM let companies like EDS and Hughes manage themselves with little interference of the GM management and consequently they became very profitable operations.

Conglomerates in Asia

The rise of the Asian economies is based on the performance of a number of large conglomerates in each of the tiger economies. Everybody knows them; Mitsubihi, Matsushita, Mitsui, Hyundai, Samsung, etc. These large companies were build with the help of the goverments in each of these countries. The goverments furnaced them capital, a protected home market and support inresearch and legislation.

The conglomerates operate in nearly sectors of the economy. They have chemical, electronic, steel mills and processing, services, financing companies.

The wide spread of operations where for one part a necessity and one part wanted. It was necessary because all those companies started in relatively backward economies they had to take care that all parts which were needed for the production had to come together at the right time. The only way to do that was to start and operate so many companies themselves.

It was a wanted development because the goverments of those countries sensed that if they wanted to promote the economic development, the economy had to be supported as efficient as possible. To support only a few companies would bring the highest returns and the fastest economical development.

Most of these heavily diversified companies proved to be efficient and successfull. Even when these economies and companies belong now to the developed world the performance of most of those conglomerates did not loose their dynamics and profitability.

The diversified company has proved to be a successfull concept in Asia. The conglomerates could develop itself into global players and the national economies could get out of the misery which was effectively left behind after the second world war.

The conglomerate?

After considering the western and eastern conglomerate it can be stated that a pro or contra is not possible. In the West a conglomerate can be successfull if the conditions are right and the rules as mentioned above are implemented. The return to core activities is easy and profitable but to become or stay a conglomerate can be as profitable and will promise an even brighter future. But the companies in the holding should be in the best case complemental/supplemental, independent, have the appropriate management and the support of the holding company.

In Asia the conglomerate was a necessary and wanted developement to promote the the economical development. But even now the conglomerate is still an efficient and profitable company.

The conglomerate will be in existence in the future and probably with better results on the long term but it is more difficult to manage.

The market in volatility

The Western stock markets showed there volatile behaviour in the last two weeks of August. The markets reached their best marks but also had two corrections. But the market could nearly regain their former position before turning down again.

The US stock market was under the influence of a bad bond market, threats of inflation and computer sell programs. At the same time many investors became nervous about the large caps and started to rotate their holdings into mid and small cap stocks.

The mid and small cap stocks had shown an impressive performance in the last three months. Where as the S&P 500 had a return of 6 % the Russel 2000 showed a healthy 12 %. The situation seems the same as a year ago when the nifty fifty of the Dow became appearently exhausted, the small cap stocks were the one which promised the bigger growth.

It is therefore not a bad policy to look into the stocks of the Russel 2000 to spread the risk in your portfolio. But on the long term, three to five years, the Russel 2000 will not be able to outperform the Dow.

The big players of the Dow could be less performing in the second part of the year but there are still a lot of companies with low P/E ratio which still offer some growth. You could think about Salomon Brothers, NCR, ITT industries and Rowan companies.

The correction of these weeks will not last forever, the economic forecasts are simply to good to make the correction lasting to long. But however do not expect the same impressive growth as in the first half of the year. At the end of the year we expect the Dow at around 8000.

It is however possible to increase your stock holdings, in that case we favour the above mentioned stocks with a low P/E ratio and a number of the stocks we mentioned in our last update.

The volatility will however continue to harass the stock market with even a larger correction, possibly around October, but do not get exited about that, the losses will be recovered within a month. If you want to be on the safe side you could however hedge your holdings but only if you are in need of money in the last quarter of the year. Otherways it is only a waste of money.

August 1997, II

August 1997, II

Financial affairs

Manage your portfolio

Nowadays everybody has to do something to secure an income if one is retired, want to buy something expensive or wants an extra source of income. It is therefore of the utmost importance to start building your own portfolio as soon as possible.

There are essentially two ways to do it. First is ordering your bank or financial institution/advisor to buy some stocks, bonds or fund which will deliver the best return according your accountmanager. Secondly, is to manage your portfolio yourself.

This is possible even if you do not possess the same infra-structure and knowledge as the financial houses do. The information delivered by the internet, CNN, CNBC, newspapers and more specialized financial/business magazines is more than enough to do it yourself. Especially because your are investing for the long term result.

Your portfolio should be balanced and aimed at the long term. This way your portfolio does not inhibit not to much risk and also delivers the certainty of getting an extra income. The risks of your investment can be limited by decreasing the size of the stock part of your portfolio.

A portfolio which will deliver growth, an extra yearly income and certainty could be look like this. 10 % should be invested in property funds, 25 % in bonds and the remaining in stocks. To get the most out of stocks, the selected stocks should be the so-called blue chips. The larger international companies with an attractive package of products and a healthy balance sheet. These stocks promise growth and wil take care that you do not have to change the composition of your portfolio every week or month.

The 65 % of stocks should be spread over the stockmarkets of the world. You could select individual stocks in the developed world and for example the Asian/Tiger funds of Templeton or Morgan Stanley in the developing nations. A good division is 30 % in US stocks, 27,5 % in Western European stocks, 7,5 % in Japanese stocks, 7 % in Hong Kong/Chinese stocks or funds, 7 % in South East Easian funds, 8 % in Russian/Eastern European funds and 8 % in South American stocks and funds.

By using funds in developing or less developed nations you can get the profits of the emerging markets and at the same time circumvent the information, legal and financial problems which are connected with investments in developing nations.

Managing your own portfolio will secure your financial future and at the same time leaves you in control of your money. And it is nice to do.

The markets

The performance of the leading stockmarkets of the world has been staggering. There have been growths figures of up to 45 % in some markets, with individual stocks sometimes doubling their value.

The professional investors got nervous about this growth. But they could not get out of the market. The pressure of the market to deliver growth in their portfolio at least equal to the market index forces them to continue the game.

The correction which happened in the second week of August was nothing more than an expression of this nervoussness. A weakness in the bondmarket and the expiration of optionseries in the same week set off the sell programs of several stockmarkets. This correction was immediately taken as an excuse to take profit. The markets lost in week between 5 and 10 % in value but considering the growth of the first half year the losses are minimal.

The price of stocks have got expensive but till now they are still more or less in accordance to the financial situation of the economy. A fundamental analysis of several stocks showed that there is still more growth possible. The market will also recover itself from the losses pretty fast. It is now very attractive to buy some extra stocks in the coming weeks, they are now cheaper than for two weeks.

The US market

The US stockmarket will be even after this correction an interesting place with some growth potential. The growth will not be that impressive as in the preceding 18 months but within two years they will see some very impressive growth.

The following stocks will show some decent growth figures. AMEX and Citicorp in the financial sector. GTE and AT&T in the telecommunications sector. Intel, Motorola, Compaq, Sun micro systems, HP, Lucent technologies, Honeywell, IBM and Dell in the IT sector. Sears and Kroger in the retail sector. Exxon, Texaco and Schlumberger in the oil business. The pharmaceutical sector will also see some growth after a disappointing July. Companies like Pfizer, Eli Lily and Bristol Myers-Squibb. Further we like General Motors, General Electric, Boeing, Northrop Grumman, AMR and Delta Airlines.

The German stockmarket

The German market was the best performer in July of the European stockmarkets. The correction will just be an opportunity the buy some new stocks. The German economy is climbing out of the recession. A change in the tax system as proposed by the government will be a step in the right direction to further stimulate the economy.

German stocks remain high on the list of buy stocks. We like the multi-national companies with a high percentage of export. Companies like BMW, Daimler Benz, MAN, Siemens, Thyssen, Hoechst, Bayer, VEBA, VIAG, RWE, Metro, Dresdner Bank, Deutsche Bank, Allianz, Muenchener Ruck. and Hochtief.

The Swiss market

The Swiss stocks are one of the best performers of Europe. The Swiss companies have to rely on the export market to remain profitable. The question is can the SMI keep that growth as before. The Swiss stocks will be profitable but probably they will not show the same impressive growth as before.

The Swiss pharmaceutical gigants Novartis and Roche will show some growth. Their product range and their research capabilities still hold some nice products for the future. Further we expect some growth from ABB, Nestle ans SMH.

The FTSE 100

The British stockmarket will continue to grow, in line with the US market. The British exporters will adjust to the more expensive pound and the implications of a possible interest rate rise will also not hamper the economic growth. Therefore we maintain our advice for the British market. After this correction to buy some of the stocks of the FTSE 100.

The following stocks are on our shortlist; British Aerospace, British Airlines, British Petroleum, SmithKline Beecham, Glaxo Wellcome, Cadbury Schweppes, Grand Met., Tesco, Unilever, BarclaysBank, Royal Bank of Scotland and HSBC.

The French stockmarket

The CAC 40 is highly influenced by the performance of the French economy. The problems experienced there will limit the growth of most of the French stocks. But some will do better than others.

The companies who can hold against the tide are Elf-Sanofi, LMVH, l’Oreal, Carrefour, Canal +, Dassault Aviation, Soc. Generale and Total.

The South-east Asian market

The Asian market is in difficulties because of the currencies problems of several countries in the region. Only the export oriented companies of Japan and Hong Kong/China will offer some opportunities on the short term. The chances on the long term are very good for the region. Especially the Korean, Taiwanese and Chinese market will outperform the others markets in the region.

The best performers of the Japanese market will be Canon, Matsushita, NEC, Sony, Toyota and Yamanouchi Pharma.

The Hang Seng also has some very good performers; Hang Seng bank, HSBC, Hutchinson Whampoa, New World Development, Swire Pacific, Shangri-La, Shun Tak Holdings and Sino Land.

The other Asian countries are for the private investor, as said before, better covered by country funds. In about two to three years the situation will be different. Those countries are slowly adjusting their laws and finance regulations to a Western pattern afterwards investing in those countries will become much easier.

August 1997, I

August 1997, I

A place for Eastern Europe in Europe

Eastern Europe in Europe

Europe, especially Eastern Europe has to live up to the new demands of a new era. They have to make the choice of integrating into Europe or go their own way. The Balkan, “little” Yugoslavia, Croatia, Bosnia, Macedonia and Albania have however no choice. They are dependent on the goodwill of Western Europe and the U.S. and will be in the short term no candidates to become a member of Europe’s most important organisations.

The political-economical situation has changed dramatically since the dissolution of the Soviet Union. A sharp division between the rich West and the poor East has come into existence. The countries of eastern Europe have applied for membership of the two most important western/European organisations, NATO and the European Union.

They consider membership as a tool to satisfy their security needs and to improve their deplorable economic situation. But sometimes one might think that they do not correctly estimate the full implications of being a member of those two organisations.

TheWest on the other hand wants to support the reconstruction of the East but their approach is characterized by caution and political games.

There is however one great misunderstanding, the East expects to much of the membership and the West is limiting the burden of the enlarged organisations to the financial question.

NATO

NATO experienced some difficulties after the bankruptcy of communism. They had lost their “raison d’etre”. NATO had to re-direct their goals. A new threat had to be “invented”. There are numerous threats available in this world, so NATO enlarged its area of responsibility and first targeted terrorism, international crime, fundamentalism and socalled rogue states as the primary sources of danger to the security in the world.

The end of the superpower status-quo turned many dead believed conflicts and hatreds alive again. And an organisation as NATO is badly needed against so many threats.

Europe also needed NATO to solve or stabilise the continent. The war in former Yugoslavia is an example of the necessity of NATO. But there was another reason for the existence of NATO, the former communist states in Europe wanted to become members of this highly succesfull security alliance. They want to be protected against the might of Russia and at the same time belong to the European family.

The West was very cautious in their actions. Yes, they wanted to enlarge the NATO eastwards, but slowly and only with the most advanced countries. Advanced in the sense of that they possessed the best track record with the introduction of democratic government, a capitalistic economy and reforms in the armed forces. The other countries have to wait for the next round.

This caution is ofcourse sensible but it discourages the other countries in their development and it will give Russia an opportunity organise its resistance better against any further enlargement of NATO. The limited enlargement, with Poland, Hungary and Czechia, is from a strategic point of view also not very effective. It not only weakens the alliance and Europe in a possible conflict but it also splits the alliance because some European countries wanted other countries like Rumania to enter NATO. The U.S. were however against any enlargement with other countries. By stating that there was a conformity over Poland, Hungary and Czechia all other proposals had no chance. Indirectly, it was the U.S. who decided who was allowed to enter NATO. The U.S. president has to persuade the U.S. Congress about the enlargement of NATO. And a way to get the approval of the U.S. Congress was to minimise the cost, so only three countries were invited.

The costs of enlargement is not yet specified. There are several estimates, but none of them is applicable because there is not any certain policy of how to integrate the newcomers. The level of standardisation in equipment and doctrines and the construction of logistic support is still not determined. The cost factor is a bad argument to limit the number of new entrants to three.

The greatest burden to the West is not financial but it will be more of keeping the East in line with the policy of the alliance. There is a potential danger that the new members view NATO as an element they can use as needed and that the bill is paid by the alliance.

The political instability and the still large government controlled economy is a better reason to keep the South-East European countries out of NATO. The reason to keep the Baltic states out for the moment is not to upset Russia. But this will prove to be very ineffective, an enlargement of NATO with the Baltic countries in the future will be more difficult because of the regained power of Russia at that time.

NATO can be an effective instrument to promote peace and stability in Europe. The number of partners should be as large as possible. All partners in the alliance should have the same rights, and more important, understand the rights and above all the duties which grow out of NATO membership.

European Union

The European Union has created a peacefull area in Europe where the economy of its member states can prosper. The free-trading area has slowly developed itself to a union with independent states who have chosen to co-operate which eachother and are even willing to surrender power towards the E.U. This becomes clearly with the introduction of the European currency, Euro, at the turn of the century. Even when some countries do not participate at the start of the Euro, probably they will do later, the European Union is becoming more and more an established entity in this world.

One of the leading ideas of the E.U. is the promotion of economic development. Through the years, economic less developed areas were supported by the E.U. Most countries of Eastern Europe want to become members of the E.U. The reasons for this membership are: they want to belong to Western-Europe; they want an entry to the large market and they want the support of the E.U. to develop their economies.

But the situation is partly equal as with the NATO, the countries who want to be members expect a lot of suppport of Western-Europe. But as a member of the E.U. the member states have to surrender some of their national power to Brussel, follow directives from Brussel and respect the rules of democracy and human rights.

The surrender of national power could be difficult for countries who just regained their rights to govern themselve. The new elected governments may have the tendency to consider every infringement to their national power as unjust.

The members of the European Union have put the entry card into the union to high for some countries. The potential members should accept the rules of a democratic state, respect the human rights and transform their economy. The level of change is, as with NATO, the decisive factor.

The countries invited to become a member on the short term are limited to five, the ones who have maid the biggest progress to change their societies. So Poland, Czechia, Hungary, Slovenia and Letland are invited to join the E.U. on the short term. The other interested countries will have to wait for another eight to ten years.

The E.U. should, between the introduction of the first and second group, support the countries who are not allowed in as much as possible to make the entry of those countries as soon as possible. The E.U. and the NATO should not hold those nations out of the European group but involve them in the enlargement process, even if they are not yet a full member. It is very important to stimulate them to change their country into a democratic market economy.

The new members should not expect to much financial support from the E.U. The E.U. has to change its management, agricultural- and structure fund policy to survive on the long term with so many new but relatively poor members.

But being a member will be good for the economy of the new members. They will get an entry to the large internal market, be a member of Western Europe and they still will receive substantial support from E.U. structure funds.

Conclusion

Most East European countries wish to become members of NATO and the E.U. They consider membership vital to their development and their security.

Only the most promising countries will be allowed to become members of both organisations. The old and new members should not expect to much of the enlargement of both organisations.

The new members should not expect to receive security and financial support as something natural. They also have to make a contribution to NATO and the E.U., the new member have to comply to the rules and participate in NATO and the E.U.

The West, or old members, of both organisations should not underestimate the burden they will have to carry because of the enlargement. The burden will not only be financial as the level of financial suppport is still not determined because there are no detailed plans available which are feasible and politically acceptable to be implemented. The West should also help with advice and co-operation to promote democracy and the market economy in the East.

The West should actively support Eastern Europe to bring them into the fold of the NATO and E.U. Only if those countries accept and implement the values of both organisations a peacefull and socially acceptable economic recovery is feasible.

The West should try to incorporate as much countries as possible into the E.U. and NATO. This will induce all nations to do their best in attaining Western standards in their policy which increases the chance for a bright future.

Caution and a balanced approach towards the enlargement is very good but to much caution will destroy the dynamics of the development process in Eastern Europe. A new Europe has to be in place before new and more serious dangers will surface on the long term. A united Europe which strong connections to the East, Russia, can guarantee freedom and prosperity in our part of the world.

July 1997

July 1997

German Forces for the next millennium – The future of Hong Kong stocks

German Forces for the next millennium

After the re-unification with Eastern Germany the Federal Republic of Germany got in deep financial troubles because of the unexpected high costs of the re-unification. This together with a very slow growing national economy makes the entry into the monetary union very difficult if all conditions set in the Maastricht treaty of 1992 have to be fullfilled.

But even without the monetary union, the German expenditures have to be brought in accordance with the revenues. This will mean more savings on all budgets. The allocation of the armed forces will also be up for an assesment. And if the armed forces are not able to re-engineer their whole organisation structure and the attached political worldview, a number of very important programs will be eliminated and the armed forces will end up as an ineffective dinosaur in a dynamic world.

The armed forces have to be re-structured to meet the challenges of the future. They will have to improve their capabilities and at the same time do their utmost to limit their part in the national budget. Further they will have to give the greatest possible support to the defence industry. The survival of the defence industry is a part of the defence of the country. It is responsible to deliver the best possible equipment to the armed forces and to maintain its high technological know how. It will be however difficult to perform this act on the rope but it is possible.

The army

The German army, the largest of the three services, is divided into the main defence forces and the reaction forces. The idea behind this plan is not bad, but it is to much aimed at the problems of the past. The army have become through the division in main- and reaction forces a divided force, the reaction forces will be the modern attractive force while the main defence forces wil be the outdated force which even have not enough means to train and maintain their, respectivily, personell and equipment decently. Already a large part of the rolling stock of the main defence forces are unable to do their job. And the difficulties will only increase in the future.

There are also three major problems within the army. First, the army is divided into two parts. Second, the divided forces will not be able to work together and in a lesser part will have difficulties in co-operating with allied forces. Third, there are not enough funds available to maintain and improve the reaction- and main defence forces.

The above mentioned problems have to be solved if the German army wants to be reckoned with and fullfill their tasks. Like to improve the operability of the forces, to maintain an effective modern force and support the national industry. These goals can be reached, and at the same time save some money, but the army has to be changed.

Since the dissolution of the Warsaw pact the security situation have been changed dramatically in the world. The clash between the massive forces of East and West is now a thing of the past. To meet the threat of the future the armed forces have to be mobile but also need the highest possible form of protection. Information technology will thereby play a vital role in intelligence, planning and execution of future military operations. There will be a digital revolution as is now happening in the US Army XXI program.

The German army has to conform to this revolution otherways it will be left behind in operational capabilities. The army with its main and reaction forces will be to large to change to a digitised army. It is also to large to modernise its equipment on a one for one basis.

The security environment makes it possible to limit the number of divisions necessary to fullfill the defence needs of Germany and at the same time be present at some multinational operations.

For example the number of divisions could be reduced to 3 armoured, 1 mountain/light infantry and 1 airborne division. To improve the sustainabiltiy and maintainability the square division should be re-introduced. This will mean that the total number of brigades will be 20 or maybe 21 brigades.

These brigades will be modernised to full digitised status with new or modernised equipment, instead of an army with outdated and partly updated equipment. The number of MBTs needed can all be modernised to A5 status, every division would get its own batallion of Tiger battlehelicopters and this equipment could be maintained and the military trained properly.

The armed forces should be reduced by around 60.000 men, this can be reached by eliminating a number of brigades and by streamlining all headquarters and support and maintenance forces.

The reductions in manpower generate savings of 1.8 B. to 2 B. DEM a year. Further results of the reduction is a large pool of equipment which has to be repaired and which can be sold or delivered at friendship prices to neighbours and allies. This will bring another onetime 1 B.+ DEM. Another advantage is that it will bring work and future customers to the German industry. The savings and extra profits can be used to reduce the defence budget and at the same time modernise the defence equipment.

All these measures improve the fighting power of the army, deliver the defence industry work and a secure long term equipment planning, savings in the defence budget and maybe most important trust in the future. The industry can prepare itself on a steady demand of the army with production runs which are acceptable. For example, the number of new MBTs needed would be aroung 1800 to 2000. Together with the export potential this would mean at least a production run of 3000 vehicles. The same is true for all other equipment producers.

The Air Force

The air force and the navy will be relativily untouched by the changes in the armed forces. The air force has to be modern and up to date. The security situation gives us the one time possibility to limit the number of air planes available in the coming years but it will give us a full capability within 5 years. This includes the absolute necessary introduction of a new air defence fighter, the Eurofighter.

But also the air force will experience some losses in staff. It has to change their organisation structure about divisions and wings. This will bring a number of savings and at the same time limit bureaucrazy in the air force and increase efficiency in the air force.

The air force has to rely in the future on a squadron system for its (strike)-fighters, a bit like the US Air Force. The number of planes in each squadron has to be increased to 24 planes a squadron. The air force will end up with 6 squadrons with the Eurofighter for air defence, 5 squadrons with Tornado in the strike role, 1 squadron Tornado ECR and 1 squadron Tornado in the recce role. This can be completed in the medium future by another 5 squadrons of CAS/BAI or multi-role planes. These multi-role planes are nice to have and are only than affordable if the economy allows it, but it will be a boost towards the German aerospace industry to participate in the development of a plane like the JAST.

Beside the forces listed above the German air force should also possess a dedicated rapid deployment force or UN support force. This wing should consists out of a squadron air defence planes, a squadron strike planes, a flight of Tornado ECR and a recce flight.

In the mean time before the introduction of the Eurofighter the organisation structure has already to be changed to the new one. The number of planes should be increased in the air defence squadrons to 18 F4F planes, later 24 Eurofighters, and the Tornado squadrons have to be transformed as soon as possible.

The change to the force structure as listed above will bring savings in money and equipment. Until the introduction of the Eurofighter the number air defence planes, F4Fs, can be reduced to about 110 to 120, including the training planes in the U.S.A., and excluding 18 MIG 29.

The changes proposed here will result in a more efficient and cheaper air force, which will be able to fullfill all operations which are demanded but which is also up to date in equipment, including the Eurofighter, a new transport plane (FLA) and possibly a new CAS/BAI or multi-role plane.

The Navy

The navy, Marine, the smallest of the three forces will experience no cuttings in the number of staff. They are like the air force better structured to meet the challenges of the future, they are the least bound by cold war structures.

But the navy has to accept a short time cut in their capabilities. This cut is necessary to cut the costs of running the fleet and to prepare itsef for the next century.

The navy should lay off the three destroyes of the Lütjens class, the operating costs of these ships are relativily expensive and they are experiencing some other problems with the ships. Reduce the number of type 206A submarines to eight, if the first four type 212 submarines are introduced, the two oldest frigates of the Bremen, F 122, class should be eliminated simultanous if two extra F 123 are introduced and finally the missile FACs should be withdrawn quicker than planned.

This would give the defence budget some extra breathing space and would make a some funds available to make some lead-in investments to a new capability of the navy.

The navy should have the funds to acquire over next 5 to 8 years another two Brandenburg, F 123, class frigates, six type 124 air defence frigates, another four type 212 submarines, introduction of the first of the 15 type 130 corvettes by 2002 and finally four type 702 replenishment vessels should be introduced between 2000 and 2004.

This program seems to be very large but it would create a credible naval force which is up to the high demands of the future. The savings which could be made now, a balanced budget and the re-organisations in the armed forces would make this plan possible.

Another advantage of this plan is the boost to the naval industry which would get an balanced delivery schedule on development and production for the future.

Accepting a capability loss now will mean a stronger and better balanced navy in the next millennium. And the strategic situation allows us to redesign the armed forces and at the same time balance the national budget without endangering the security and political ambitions of Germany.

Conclusion

There is at the moment a need in Germany to cut the expenditures of all departments. The armed forces will also have to pay their part.

The role of the armed forces should be evaluated. The changed security situation places a new demand on the armed forces. It is the duty of the armed forces to conform to that situation and meet the challenge.

The aims of the armed forces can be compressed into:

– save money;

– improve or maintain military capabilities and still be able to fullfill all demanded orders;

– and stimulate the defence industry.

All these aims can be met by a reduction in manpower and by a shift in organisation structures and doctrines.

The army has to reduce its manpower by 60 to 65000 men and the air force by 5 to 10000 men. These cuts will save over 2 B. DEM a year. These cuts are possible through a reduction in fighting units and major change in the command, support and maintenance structure. The number of second line, support, forces can be limited through the use of new technologies and a more efficient organisation.

Further savings are possible through the reduction/elimination of equipment. The savings on maintenance of these old systems are already respectable. The equipment can thereby be sold and will deliver another extra saving to the armed forces. We should not forget the defence industry who will gain double, first by repair orders for the redundant equipment and second by getting new clients to whom the goods are sold.

The benefits from the sale of redundant equipment of the army, air force and navy will be around 2 to 2.5 B. DEM. The savings realized through the decrease in maintenance can be estimated at 800 M. DEM a year.

The profits from the sale of equipment are enough to finance the lead-in costs for the production of the Eurofighter and Tiger and for the procurement of two frigates. All other modernisaton plans can be fullfilled through the yearly savings on maintenance and personell. The plan we envision will also give a reduction in the defence budget of 1998 and 1999 of 1 B. DEM each year. The budget for the year 2000 will however have to be raised again to at least the 1997 level, not accounting inflation, to meet all our modernisation plans.

The German armed forces can meet the high demands of the next millennium. The strategic situation gives us the opportunity to change the armed forces without endangering Germany. And, maybe the most important asset, it will bring hope, or a chance for the German defence industry to play an important role in the European defence industry. And this is for the best of the German economy.

The future of Hong Kong stocks

This month will see a change in the position of Hong Kong. It will return to the motherland. It can be an opportunity to even more growth than ever before. If the Chinese government can hold its promise not to become directly involved in the Hong Kong economy and if Hong Kong can improve its infra-structure with the Chinese backlands it will have a very promising future.

Hong Kong has the capital and know how to become the centre of development of a very large part of China. If it can live up to those expectations a number of Hong Kong stocks possess the potential to grow over 25 % this year. The Hang Seng index could be easily over the 17.000 mark at the end of the year.

This is however an optimistic picture. If the Chinese take to much influence in the Hong Kong politics the economic dynamic could be stopped. Hong Kong could turn into a liberalized version of Shang-Hai with the same problems with growth and development.

The Hang Seng could become very volatile and in the end loose ever more of its important position in Asia. The best way to handle this situation is to keep your investments in Hong Kong but hedge them against fluctations in the stock market. Normally we do not like to hedge our investments, we do like to build on the strength of a market and its best stocks. But in this special situation you can protect investments with options running for three and six months.

At the end of the year the situation has to be evaluated and then we will know more about the intentions of the Chinese government. It will however be very unlikely that the Chinese government will destroy the economy of Hong Kong. It is to valuable and they themselve have invested to much capital into Hong Kong to destroy it. They have to protect their holdings from unwished developments. It seems also more likely that they will support the economy of Hong Kong more than ever before.

So for now we still believe in Hong Kong as a promising market with a prosperous future. Our advice is to stay involved in Hong Kong and even enlarge your holdings of stocks in the Hang Seng, especially the blue chips. The blue chips will be on the long term the more stabile and profitable. They offer the best between investments in China and international connections and investments.

June 1997

June 1997

Indonesia, a country at the crossroads – Lean but not mean – A financial update

Indonesia, a country at the crossroads

Indonesia the island rich country with many peoples and cultures are at a point where the upcoming new intelligentsia/elites are questioning the right to govern of the sitting government. In the last thirty years or so the country has been under the rule of president Suharto and his Golkar party. The regime can not be described as a social democratic example but the achievements of the last three decades are remarkable.

Indonesia has transformed itself from a poor underdeveloped country, with a per capita income of under 100 U.S. dollar to a developing country with a capita income of over 2.500 US dollar in 1996. It even can be considered as one of the new tiger economies with annual growth figures of over 8 percent.

The economy and the businesses are doing fine but the people of Indonesia also did get a share of the wealth. Hunger has been eliminated, housing has been improved and all get a basic education. And the people who are living in larger towns or cities are even getting a higher education.

There are problems of creating enough jobs in Indonesia but if the economy can maintain the growth of the last years things will work out allright.

The many youngsters who have experienced no hunger, have received a higher education but also have some difficulties in getting a job are questioning the integrity and capabilities of the ruling regime. Which admittedly have been involved in nepotism and are creating a state where large groups are maid dependent on the government by jobs and subsidies.

The irony of it all is that those who benefitted most of the Suharto regime want now some change, the youngsters with the support of the opposition want to change the government. They are convinced that the social-, political- and economical situation can be improved if they are in power. They do not have the patience to wait and are now trying to convince to people of their ideas by talking but also by violence.

But the regime of Suharto partly through thier policy of grants still receives a lot of support in the countryside. And this with the support of the armed forces, the bureaucrazy and the better off in the cities will guarantee a majority in the election for the president and his Golkar party.

It is still to early for the opposition to claim victory, they are not yet able to change the outcome of the election. Suharto will get the chance to continue the work it started three deades ago. This will be good for the business community because the unrest created by the opposition during this election is not very good for Indonesia and in particular to the business and the trust needed to to attract capital from abroad.

The Indonesian society has been changed and the youngsters of now will get a chance to introduce some of their ideas and limit the the power of Suharto and his family but not so radical as wanted. They will have to wait for another five to ten years to gain enough support to replace Golkar. But notwithstanding all that Indonesia is already at the crossroads to a new era where the country will move towards a developed democratic society with a strong opposition party.

Lean but not mean

During the last ten to fifteen years the business community has been shaken by reorganisations. The companies had to change to survive in a increasing global competition. In essence sales had slumped, cost increased and competition from cheap labor countries increased.

The recession forced a lot of companies to adjust to these new circumstances. Even the largest of companies were forced to rethink and evaluate their strategy, organisation and products. A lot of consultants came up with theories of re-engineering, core-activities, cost-reduction and the capital market also wanted their share with shareholder value.

The companies in need responded mostly to the advice of the consultants by a combination of cost-reduction and selling companies which did not belong to the core-activities of the company.

Cost-reduction translated itself into the elimination of the labor cost because they are relativily expensive and above all very easily implemented with quick results on the balance sheet. The sale of parts of the company which were accumulated during the fat years and the hype of diversification also increased the profit and reduced costs.

The little tricks, of cost cutting and selling off, which were used worked out well on the short term, the stock price went up, the profits increased and the company looked good again.

After five to seven years the sales and profits went down again and the same was true for the stock price. And again more cost could be reduced by firing more staff and by the elimination of costs like research and development, cleaning and catering and so on. The same trick worked again. But it was not a solution to save the company on the long term. It was simple a way of downsizing in capabilities which improved productivity but at the cost of lesser possibilites for the future.

The theories of re-engineering, cost-reduction and only keep on core-activities are good to use to become lean and mean. But the way in which they were used only resulted in a lean company without any strategy or vision for the future. And to survive on the long term it is necessary to become both lean and mean but not to lean because there is some fat necessary to introduce innovative processes and products.

The idea about lean and mean is eliminating unnecessary costs to improve productivity and to become mean by creating an efficiënt and effective production base and at the same time invest in the future by maintaining a credible R&D department which is in touch with the customers to satisfy their needs and wishes.

A company has to have a well defined strategy, a flat organisation, a balanced financial policy, an open and sensitive R&D capacity, a flexible production capability and a custom minded sales department. It is easy to define the conditions for a successfull company but often difficult to implement. Which became clear after a number of companies had to reorganise themselves several times to maintain the same return on investments.

If to much attention has to be given towards the balance sheet and share holder value a company will become lean but not, which is as important, mean. If companies do not respond to the demands of the future they will miss the train and a second chance is nowadays impossible.

A financial update

The markets performed well last month. May was this year not the month of “sell in May and go away”. Nearly all markets where in a winning mood, with the exception of the CAC 40. The CAC 40 experienced a downturn after the first round of the election showed up with bigg losses to the conservatives and a possible take over of the left. But what will happen in the coming months is still open.

The forecasts for the economies of the world are promising for the Americas, Europe, including Eastern Europe and Russia, Japan, Hong Kong, Philipines, Taiwan, Malaysia, Australia and under circumstances Indonesia. The other forecasts for the other South East Asian countries are bleaker. They will not be able to achieve the same growth figures as before.

Even if the U.S. stock market is expensive there a number of stocks which continue to offer growth. On our short list of U.S. stocks are the following listings: Citicorp, J.P. morgan, American Express, Bell South, Compaq, Motorola, Sun Computer, Sun Microsystems, Lucent Technologies, Procter & Gamble, General Electric, Textron, Pfizer, Eli Lily, Exxon and Boeing. As promising companies we also advice AT&T, IBM, Schlumberger and Texaco.

The Japanese stock market will continue the growth which started to take off this year. The companies we still like: Sony, NEC, Matsushita, Mitsubishi Corp., Mitsubishi H.I., Toyota. Two other companies which we like to include on our list is Canon and Yamanouchi Pharma.

In Europe we also still see some possibilities. In the United Kingdom we upheld our advice for Beecham Smithkline, British Aerospace, British Airways, British Petroleum, Cadbury Schweppes and Barclays Bank. Further we see some potential in British Telecom, Glaxo Wellcome and Tesco.

The German stock market is being influenced by the precarious situation of the German government budget. But the following companies will still show some growth; BMW, Daimler Benz, Allianz, Deutsche Bank, Dresdner Bank, Siemens, Bayer, Hoechst, VEBA, Viag, and Thyssen. But also RWE and Metro are promising, and if you want a more risky investment Hochtief is what you are looking for.

The biggest gainer of last year is Switzerland and one might ask how long they can continue this. The pharma giants Novartis and Roche will continue to be good investments. This is also valid for UBS.

Another difficult market is France. The French elections damaged the growth of the French stock prices. And these could loose even more ground if the socialists will win the the election. The damage could be limited if the socialists would continue with the policies to introduce the Euro and support the European integration. The CAC 40 will be an interesting market in June because the big slide of May will restore in June. The level of restoration will however depend on the policy of the party which will win the elections. June will consequently be a very good time to buy into the CAC 40. Companies like Elf-Sanofi, LMVH, L’Oreal, Carrefour, Canal +, Soc. Generale and Total will offer some very good growth chances.

May 1997, II

May 1997, II

Counter the terrorist threat

Terrorism

Terrorism, the curse of mankind. Terrorism in one of its many forms exists already for many, many years. But in the second part of the twentieth century it became a more imminent danger through the use of modern very powerfull weaponsystems and the shift to civilian targets.

Terrorism and resistance could be seen as the same side of a coin, it depends on the viewpoint at which you are looking at the phenomen. But it is always aimed at the power which is in charge, legally or illegally.

But the right or wrong of terrorism is not the subject we are talking about. We will talk about the means terrorists are using and how to combat them.

The terrorists armory

The weapons of the terrorist are mostly military style weapons and the home-made weapons. The category of military style weapons range from normal conventional pistols, assault rifles, machine guns and rocket launchers to anti-personell and anti-tank mines and other forms of explosives.

The home-made weapons are mostly a combination of explosives like C4 or Semtex with a makeshift fuze and timer. But also the explosive can be home-made which ofcourse mostly will result in a very powerfull but also very unstable device. It is relatively easy to construct explosive devices, a talented science student or even an average intelligent person can put them together from house, kitchen and garden equipment.

A new threat could emerge if a terrorist group is starting playing around with NBC devices or the possibilities in the advanced technological society.

The NBC threat should not be overestimated because there could be difficulties in building them and especially in using them. I would not say it is impossible to build a nuclear device but it is certainly difficult to create the right infra-structure and get all the necessary ingrediënts together. The construction of a biological or chemical device is much easier. The lab and the construction facilities can be build into a large house or even better a farm. The ingrediënts of a BC device are mostly obtainable in the open market. Most of the items needed are also necessary in the production of normal civilian products. The building of the weapon is not the problem, the problem is the effect of NBC weapons. The implications of the use of NBC weapons are so devastating that there is no advantage in using them. NBC weapons are only usefull as a threat not suitable to be used.

A more realistic threat to society by terrorists is the use of information technology. Most of the important parts of a modern society are controlled and steered by computers. Energy supply, airspace control, defence systems, financial markets/banks and so on. All those computers run on software and are in some way connected with each other. The introduction of a virus could easily derail a whole society. The relatively easiness to build a virus and the harmfull effects in relation with the little danger during a virus assault on the computersystems will give terrorist organisations a easy way of making a statement and to fight for their cause. This is the danger which is very present to the society.

Counter Terrorism

The elimination of terrorism is possible by trying to eliminate their causes and by good intelligence by the law-enforcement organisations. All other means to counter terrorists are only usefull in limiting the actions of terrorists but in the end not effective in stopping the terrorist threat. For example scanners for explosives and weapons. It is very usefull to have them, especially if a weapon or bomb is intercepted, but no scanner is 100 % certain and there are other ways to get the weapons there where you want them if you really want to.

The same is true for systems to counter assaults on computers. You can install anti-virus programs, build fire-walls and tunnels to eliminate unwanted programs and communication but there are always ways to get around them. It is a race between breaking the defence and building a new defence against unwanted programs.

So the most effective way to eliminate the terrorist threat is based on actions and the position of the government. All terrorist organisations are based on a perceived injustice by the government. The government should try to eliminate or minimize the causes of those groups. By doing so the terrorist organisations will loose a lot of support and they might even be persuaded to give up the armed struggle and fight instead in the parliament. This is also valid for groups who want to overturn the society. Because with every action of the government to eliminate perceived injustices the terrorist organisations will loose the support they desparately need and make them more vunerable to the actions of law enforcement.

The other defence against terrorism is good intelligence, the law-enforcement organisations have to identify all possible sources of trouble/injustices and the people which are in some way connected with those troubles.

The groups have to be watched but not suppressed because then you will loose them out of sight and they become uncontrollable. If there is a group which have turn violent which is not yet listed use the same method. Identify the causes/reasons to become violent, indentify the people with a interest in those causes and watch them and interrogate the surroundig environment. Only by applying these common “police” methods it is possible to circumvent terrorism or stop it shortly after it has surfaced by arresting and putting before a court of justice the violent group and dissolve the aims they were trying to reach.

Additional powers to the law enforcement organisations and more laws to create a false sense of security are absolutely not necessary. They will only be contraproductive.

IN-SE Services

Intelligence – Security Services

Categorie archief: Reports 1997