Tagarchief: European countries

April 1998, I

April 1998, I

April 1998, I

The road towards European Defence integration – A note on India

The road towards European Defence integration

Europe, the continent is moving to further integration. The European Union starts to unify its monetary policies under the aegis of the single European currency. This will automatically lead to a more or less identical fiscal policy in Europe. The single currency is a way towards political integration through the backdoor. The countries who are now outside the single currency area will be forced to become members after a couple of years. Otherways they will loose to much on the trade with other single market countries.

The single currency, the Euro, will promote the internal trade in the Union. It will not eliminate the difficulties in Europe with unemployment and the rising costs of the social wellfare state. The benefits of the single currency will not be visible on the short term but on the medium and long term it will bring substantial improvements to the employment figures and the fiscal deficits of all member states.

The single currency is a step towards improved co-operation in Europe. Till now it was largely aimed at economic goals but the rules of the single currency will force them to increase the co-operation to fiscal and political fields.

The integrating process will be re-inforced by the continuing globalisation of all aspects in the world. Problems will become ever more difficult to solve on national level. This requires solutions on a higher, greater level, the European Union. The democratic nature of such an Union can be maintained by elections on European level, national/regional level and county level. To protect the people even more there could be an European constitution which is protected by an independent court system. This way there can be no violations of the rights of the people, and they are the ones which are reason for the existence of the European Union and the main beneficiaries of the Union

At the same time the political leaders are pursuing another field of co-operation. The diversified and often small defence industries of Europe should move together through a carefull integration process to compete on the world market against the large U.S. corporations like Lockeed-Martin and Boeing. Another impetus to integrate is the creation of a common defence market in Europe.

The common defence market in Europe will deliver the companies the necessary scale to be competitive in business. But the companies should be managed with great care to avoid any nationalistic sentiments. These would destroy any further co-operation in this field. And finally the member states should abolish article 223 of the treaty of Rome. This article exempts the defence sector from the rules of free trade. Such an article is a joke in a community like the European Union.

The next step would be a move towards an unified foreign and defence policy. A clear and fully implemented foreign and defence policy will be to much asked in the coming years but a first step towards increased co-operation could be one of the possibilities. The decision taking could be done on national level with some negotiations with the member states. In most cases the differences between European countries are not that large and a compromise is always around the corner. The executive could then be transfered to an E.U. organisation.

For example, an integration of the defence forces in Europe will increase the capabilities of the defence forces at the same or even lesser costs. This leaves all participating countries the same capabilities at their disposal as they had before the integration. The changes are only of an organisational and traditional nature. As an additional benefit, the common defence market/industry will be much easier to achieve.

European forces versus U.S. forces

The U.S.A. possess without doubt relatively the largest and best military forces in the world. There are other countries who have more men in their forces but they do not have the superior equipment and training of the U.S. forces. Or there are countries with more or less equal equipment and training but who do not have the numbers to make an impact.

An example of the last are the several European armed forces who have some very fine equipment and training but are to small in numbers and to little in scale. With scale we mean that France and the U.K. do possess aircraft carriers and amphibious capability but they are no comparison with the Nimitz class aircraft carriers and the Marine Corps, respectivily.

The armed forces of the member states of the European Union are to fragmented to make an impact. They are only usefull in a major conflict if they cooperate with eachother. And even then they will need the support of the U.S.A. The individual European forces are large enough to be used in low intensity and/or small conflicts with third world countries but are incompetent in a medium to large scale conflict.

Where as the U.S. military is capable to operate globally, the European countries, even when they co-operate, are only able to be effective in a medium scale regional conflict at best.

If we compare the capabilities and the financial side of the U.S. forces and the combined European forces the result is awfull. Europe should be, considered the defence budget of approx. $150 B. of the European Union countries, at least half as capable as the U.S.A. with approx. $ 250 B. to spend. But at best they are just as third as capable.

In the power projection sector Europe could have 6 full size aircraft carriers instead of the 5 light carriers of the U.K., Italy and Spain and the one or two medium French carriers. The same is valid for the the amphibious forces. The capabilities of Europe are to limited to become a major threat. They have only 10 LPH/LPD type carriers and a 20 + LST/LSD type carriers. The majority of the ships are old and small to modern standards and are thereby in need of replacement. Only a few are or are going to be replaced. And finally the European navies possess a lot of frigates, corvettes and FAC’s. The fleet should be better balanced with a few more destroyers, lesser but more capable frigates, more corvettes and lesser FAC’s and patrol boats.

The air forces air in a better shape considered a large part of the equipment. This is of the same category as the USAF’s equipment. See the performance of the Mirage 2000-5, the Tornado and the future Eurofighter. The air forces have two major problems, first the lack of unity, no individual country is strong enough to go for it alone. Regular exercises with eachother improve co-operation but are not enough to really create an united force with the impact of the USAF. And second, there is a shortage of long range wide body transport aircraft, which makes world wide operations impossible.

The land forces of Europe are in better shape but they lack the structure and organisation advantages of the U.S.A. This leads to an unacceptable overhead and consequently to lesser people on the fighting line. A part of their equipment is outdated, they are in need of more modern MBT’s, AFV’s, SP artilley systems and battle helicopters, and finally the organisation structure has to be adjusted towards the demands of information warfare.

Essentially, he European armed forces do have more soldiers under arms then the U.S.A. but the utilization is inferior in Europe. This means that the European side has to improve itself. The integration, reorganisation and streamlining of the European forces will deliver an improvement in capabilities of at least 20 % at the same costs.

An approach to improvement

The armed forces of Europe need an improvement in organinsation, equipment and efficacy. With this particular sensitive subject the approach should be comprehensive and with care not to offend the members of the Union.

There are shared interests for the existence of defence forces that make it possible to build an integrated defence force for Europe. These are more or less the same for all European countries. The job description of the defence forces could look like this. The main tasks of the defence forces in Europe are to protect the territory, people, lanes of communications and the interests/values of the members of the union.        There are a number of particuliar interests of nearly each country in the union. These also can be satisfied by the use of a common European defence organisation.

During the integration process every countries sovereignity, traditions and national sentiments should be considered. If we are aware of this we should take care that the members should hold an indirect control system over the defence forces and get a kind of drawing rights on a part of the forces if they are in need of them. The number of troops available to each member state should be depended on the input of resources of each country. This way they can protect their particuliar interests with the advantage of the knowledge that a massive group is supporting them, even when it is indirectly.

This is going to be a slow process of integration if it wants to succeed. There first has to be a poltical body with representatives of all participating countries to have the ultimate control and the budget authority. These can interact with the national parliaments and the E.U. commissions and parliament. Second, a kind of joint chiefs of staff, JCS, has to be created who are responsible for the day to day command and the military affairs in general. For example, the acquisition of equipment should be according to the military specifications which are specified by the JCS, e.g. the best available systems for the best price, to circumvent political motivated buys. If this structure is set up we can move on to start with new syllabi on the schools and academies to get the new professional military person in Europe. After the first courses and graduates we can start integrating and reorganizing the actual forces of each member into one organisation. The set up of the education system and the first steps to integrate the forces go hand in hand. This way there can be anticipated on any problems which may arise on the JCS integration masterplan.

The whole integration process will take a 10 + years to implement. This way national sentiments can be handled with care and new systems acquired at better costs and integrated into a new more capable defence force.

Conclusion

The integration of the defence forces of the member states of the European Union would be a logical step on the way to an intergrated/united Europe. After the creation of the single market, the single currency, the growing influence of European institutions and directives and finally the birth of a common defence industry, it is now the right moment to integrate the defence forces.

The goverments have the responsibility towards the people to provide them with the best security available at reasonable costs. Therefore the integration of the defence industry and the defence forces will provide an improvement in capabilities, including global reach, and a better utilization of the available resources.

Only if there is a strong defence force which is worldwide deployable, Europe can play its role according to the position it has in the world, at least the economic world.

A note on India

India, the largest democracy in the world, is at the crossroads towards a new India or on the return to an archaic society. The elections did not created a clear winner but it reinforced the position of the fundamentalistic Hindus in India. The Bharatiya Janata Party, BJP, has become the largest party. With the support of several, up to 17 regional parties and independent members of parliament, they could take over the government.

The coalition government will most probably not introduce the fundamentalistic BJP policies as promised before the elections. If they would implement the policies it will mean an intensification of the tensions in the region and most likely a devasting war between the several religions in India, conflict with Pakistan over the divided province of Kashmire, border quarrels with China about Tibet and the province Arunachal Pradesh in the North-East.

The diversified coalition government will most likely be occupied with the avoidance of internal differences in the coalition and solving the economical problems of India. The conflicts with Pakistan and China are of less pressing importance. The reconstruction of the temple at Ayoda might be important to the BJP but they are not willing to sacrifice the coalition government and risk the emergence of internal unrest / civil war because of the religious temple. The government will leave the Ayoda temple case to be solved in the future. A decision will be to costly to india and its government.

The policy of India

The policy of the coalition government under the leadership of the BJP will be aimed to stimulate the economy and bring it back to a growth figure of 7 – 8 % per annum and to stabilise the national currency, the rupee.

The Asian crisis did not really hurt India, the rupee only dropped a small 10 % last year. The tight and controlled currency policy and the protected market of India limited the devasting downfall which happened in other Asian countries.

The nationalistic BJP wants to promote the economy by supporting the agri-cultural sector, the majority of the Indians live on and from the land. This is therefore considered as an important element which should have an appropriate role in the economic growth. The countryside does not have the technology, financial resources and acreage to introduce dramatic improvements in the agri-cultural sector.

The government also want to support the economy by giving Indian companies space to grow, they want to protect the Indian companies against the competition of foreign companies. Thereby giving Indian companies a chance to adjust to and integrate in the world economy. This fits perfectly in the BJP view that multi-national companies have no place in India. According the BJP those companies only want to make money in India which will then leave the country. In the end it would bring no gains for India.

Foreign companies are only allowed to enter India for large infra-structural projects like airports, roads, harbours and energy/power plants. These expensive and long term projects forces foreign companies to become involved in India for a long time.

The lack of international investment could however limit the growth and will leave India out of the development of technology. The creation of a developed economy will become much more difficult, or even impossible, without the financial and technology support from abroad.

The new government will ride a dangerous path if they exclude the international community. It might be able to stimulate some extra growth on the short term. But a lasting 7 – 8 % growth per annum will be impossible without participating in the world economy.

The Indian government should evaluate their economic policy. The BJP’s policy of economic nationalism might look attractive and will be popular in the countryside but it will exclude India from the economic development and growth it wants to create. Closed societies have rarely shown impressive lasting growth and revolutionising technologies. You can have just one thing at a time. Closed and backward or open and advanced.

But the coalition partners will probably force the BJP to adjust their economic ideology. This would leave India on the road to a open society with a balanced economic growth. India has to continue the liberalising process wich was started by the former governments. The Asian crisis is setback in the region’s development but it is the right way to go.

Standaard
January 1998, II

January 1998, II

January 1998, II

Portfolio management in 1998

1997 have been a year of incredible growth figures in the stock market. The first three quarters of the year were an investors dream. It seemed as the market knew only one direction: Up. The last quarter brought back the reality, what can go up can come down. Volatility was the word which can be best used for the situation in the final quarter of 1997. Big number number losses but relatively small percentage losses have been recorded, which could be straighten out within one or two months. But the year as a whole have been good to the investor.

Disappointing figures and some profit warning of some companies and especially the spreading economic and financial crisis in Asia created havoc, not only on the Asian stock market but they also had a major impact on the western stock markets. The markets in the West could recover from the bad news out of Asia but the uncertainty is still out there and waiting to strike back.

The volatility of last year will also be very active in 1998. Uncertainty about the outcome of the crisis in Asia and disappointing sales and profits in the coming year especially in comparison with the preceding years will limit the growth of the stock market. Only a small number of companies will show some impressive growth. 1998 will be the year of carefull stock picking.

A portfolio example

The balanced portfolio of 1998 will show some changes. The portfolio as a whole will be in the first six months of 1998 more defensive. The exposure to Asia should be limited and a higher percentage should be into bonds.

The coming months will be very volatile. The crisis in Asia will influence all other markets. Therefore you should put most of stocks outside Europe and the U.S.A. on hold. New investments should be into bonds and companies with the ownership and the majority of their sales into Europe and the U.S.A. They are the only companies with a better chance to gain something.

The allocation could be as follows; 55-60 % into stocks, 30-35 % into bonds and 10 % into property. The geographical allocation of the stocks could be; 38 % Europe, 37 % U.S.A., 5 % Eastern Europe, 4 % Russia, 3 % Japan, 2 % Hong Kong / China, 3 % India, 6 % South America and only 2 % in South-East Asia.

If your financial situation permit it you can invest directly into stock markets outside your home country. This can be done to the majority of the developed countries in the world. Beside the direct investment into particular companies one can invest into country or region funds which are offered by most of the major financial institutions. Fund investing is recommendable to countries like India, Russia and regions like Eastern Europe, South America and Africa. The regulations in those countries/regions, the scale of the market or the lack of available information about companies makes such a fund an attractive alternative to direct stock acquisitions.

Fund investing

As we have mentioned above fund investing can be a viable alternative if your financial resources are limited or if you want to invest in emerging countries with tight protective regulations, a small stock market or companies without a clear administration and information policy.

China and some South East Asian countries are examples of these peculiar countries/regions. To benefit from the possible profits in these markets several China/Asian/Tiger funds are available. At the moment it is however very dangerous to invest in these funds. The economic climate is to volatile to justify an investment.

India seems to be untouched by the developments in Asia. The Indian economy is showing stabile growth figures. The opening of the market have paid off. Several Indian companies, especially in the software sector, are becoming world players. The Indian stock market has shown an equal growth. The Indian law however is still restrictive to foreigners who want to buy Indian stocks. By investing in an Indian country fund you can circumvent these problems and still profit from the positive developments in India.

The situation in Russia is more complicated. The Russian economy has shown some improvement in the last year but the Asian crisis has become a threat to this growth. The Russian currency, the rouble, is because of the introduction of a new rouble with lesser zeroes and the Asian problems in trouble. The Russian government should be restrictive in their expenditures, improve the tax collection, limit organized crime and support the business development without the use of nepotism. If Russia can meet these conditions the growth will continue in 1998. Russian country funds will be an intersting investment next year.

Eastern Europe can be divided into two parts. The countries who are allowed to enter the European Union in the first wave and the ones who have to wait for the next round. The economic performance of the first group, Poland, Hungary, Czech Republic, Letland and Slovenia, can be described as positive despite the little problems some countries, like the currency and trade problems of the Czech Republic, have to rebuild their economy. An investment in a region fund with those five countries will be a good investment. The countries, like Rumenia, Bulgaria and the other Baltic states, who have to improve their economic and political situation before they are allowed to become a member of the European Union are worser off. An investment in a fund with those countries will show a worser performance. Unless you are willing to take a bigger risk this investment can better be avoided.

Africa, the former lost continent, is improving their political and economical situation. Stock markets from Morocco, Uganda, South Africa and Namibia are promising to show some growth in 1998. In a region fund with a number of these countries in their holdings could be an investment opportunity.

South America, the continent which have achieved growth which equals the growth of an emerging Asian country in the last years is now experiencing some negative effects of the Asian crisis. Especially Brazil is the most under threat from the devaluations. The Brazilian currency is under threat and the inflation is rising again. The government is having difficulties solving the problems. The impact of the Asian crisis on the other South American countries is not that extreme. The economic growth will be somewhat limited by the crisis. But a large number of companies will be able to stay profitable. A South America fund is a valuable addition to your portfolio. South America will recover faster from the consequences of the Asian crisis than most of the Asian countries.

Asia

The economical situation in Asia is horrorable. The financial system in a number of Asian countries have nearly collapsed. Only the intervention of the IMF and the international community saved them from bankruptcy. A large number of companies, in the insolvent countries, are also in deep trouble. They can not produce to market terms, they have accumulated a large stock of products, they have invested into to many unproductive glamour projects and are therefore unable to fullfill their credit obligations.

Especially Korea, Indonesia, Philippines and Thailand are affected by this unhealthy situation. Malaysia, Singapore and Taiwan are heavily influenced by the economic downturn in Asia. Japan and Hong Kong / China also have problems, which are similar to the other Asian countries, but because of their respectively financial and industrial resources and the protected currency and large promising home market they will be able to solve the problems with other means then outside support.

It is uncertain to what level the governments in Asia will implement the advise of the IMF, do the Asian governments really support the international demands? Only cosmetic changes to satisfy the IMF and the international community will not be enough to solve the problems. And if the Asian countries would try to export themselve solvent by price dumping they will also hurt their own businesses and economies. On the short term it will generate an extra flow of money to Asia but the already very small profit margins will become losses on every product they sell. This will become even worser on the longer term. If the Asian countries have to procure raw materials and equipment from other countries they will have to pay more because of the weakened value of the Asian currencies.

The Asian economic and financial crisis will affect all other markets in the world. Even at these low stock prices in Asia a buy could be unprofitable. We advise therefore not to invest fresh money in Asia and you should have liquidated or hedged your other holdings. Only a small number of companies in Asia will offer some growth but not enough to justify a buy or enlargement.

If you are willing to accept a higher risk one should limit its acquisitions to Japan, Taiwan, Hong Kong and some lonely riders in South East Asia. In Japan we like Canon, Matsushita, NEC, Sharp, Sony and Yamanouchi Pharma. In Hong Kong we like HSBC, , Hutchinson Whampoa, Swire Pacific and Cheung Kong. In Taiwan we like companies like Formosa Plastic and Taiwan Semi. Other companies in the region which will improve quicker and better from the losses of the last months are Singapore telecommunications, the telecommunication companies in the region look all very promising, Singapore Airlines and Sime Darby.

Europe

The economic situation in Europe is despite the large number of unemployed in some European countries good. All countries in Western Europe promiss an increase of GDP of around 2,5 – 3 % in 1998. All member countries of the European Union except the three who do not want to enter and Greece who does not qualify seem to become members of the single European currency, the Euro.

The economic growth of Europe will be less by 0,5 to 1 % due to the crisis in Asia. The first six months of 1998 will be the most influenced by the crisis. After that the economy will be able to adjust itself better to the new situation and the situation in Asia could be turned in the right direction.

Together with the U.S.A. Europe’s stock markets will show the best performance. The consumer markets of countries who lagged behind in the last years seem to take off in the coming years. This will stimulate the European economy, considering most of the external trade from the European countries is with eachother. The introduction of the single currency will stimulate the trade in the European Union. Companies which are prepared for the Euro can exploit the advantages of a single currency best and this will be very clearly in their stock price.

A number of European stocks will therefore be very promising. Some financial institutions with little exposure in Asia, the pharmaceuticals, the insurance sector, some telecommunication / technology companies, luxury equipment producers and some food companies.

In Germany we like BMW, Daimler Benz, Porsche, Siemens, Mannesman, Preussag, VEBA, VIAG, RWE, Deutsche Bank, Dresdner Bank, Allianz, Muenchener Ruck., Fresenius Medical, SAP and Wella. Those companies are very well positioned on the internal market and also have the U.S.A. as their most important export market. Other companies like BASF and Bayer who also have a large medical operation can see a profit next year but this depends on the performance of their chemical operation which have heavily invested into Asia. The Asia crisis could have a positive on the chemical industry if a number of Asian chemical companies are taken over or closed. But it can also have a negative effect if they would produce even more than needed and dump it on the market.

In Switzerland we expect a lot of Novartis, Roche, UBS, Nestle, SMH and the Zuerich Group. The Swiss multinatonals have the majority of their markets in Europe and the U.S.A. which will boost their sales in 1998.

The FTSE in London had a respectable growth figure in the last year. But also 1998 will bring a number of opportunities. We have listed British Aerospace, British Petroleum, British Telecom, Cable & Wireless, SmithKline Beecham, Glaxo Wellcome, Cadbury Schweppes, Diageo, Asda, Safeway, Tesco, Unilever, Scottish Newcastle, Barclays Bank, Royal Bank of Scotland and General Accident.

The French economy will also see some improvement which will be translated to the stock market. Some export oriented companies but also a few companies with only the French market as a target will show some improvement. In France we like Canal +, Carrefour, Promodes, Danone, Elf-Sanofi, LMVH, L’Oreal, Rhone-Poulenc, Louis Vuitton, Generale des Eaux, Society Generale and Total.

The Dutch AEX market will, with their large multinational companies, offer some opportunities for growth. We especially like ABN-AMRO, ING, Fortis Amev, Koninklijke Olie (Royal Dutch Shell), Unilever, AHOLD, Océ, Baan, Cap Gemini, Getronics, Royal Numico (former Nutricia), Nutreco, IHC Caland, Internatio Muller and AKZO. The fundamentals and the market forecasts of those companies promise growth in the next year.

The Italian market which has performed very well in the last years will also be promising in 1998. We expect more growth from Alleanza, Generali, Mediobanca, Banca di Roma, Olivetti, SAI and Cofide.

The United States of America

The second place were we expect a lot of growth is the U.S. stock market. The economy of the U.S. is still to good to change the course of the market. Companies in the U.S. with a large exposure in Asia will see a slow down in sales in the first six months of 1998. But a large number of companies, small and large cap, will show a positive result in 1998. It will be more difficult to sort them out but if the management, sales, profits, money flow and the product and production facilities are in order things will be promising in 1998. Ofcourse, as mentioned before, the exposure in Asia should be limited to 5 to maximal 10 % of sales.

A number of large cap, quality, stocks look very promising. We like AT&T, GTE, LCI, Bell South and Northern Telecom in the telecommunications sector.

A number of IT companies also offer some growth next year despite the lower stock price in the last quarter of 1997. We like Intel, AMD, Motorola, First Data, Computer Sciences, Honeywell, IBM, Compaq and Dell. Other companies which were badly hit could also see improvement next year, but later and at a higher risk, we mean HP, Lucent Technologies, Applied Materials, Unisys and the biggest gamble of all Oracle.

The financial sector, especially the regional institutions will offer growth in 1998. Like BancOne, Fifth-Third Bancorp and First Bank System. But also Salomon and American Express possess enough stength to continue their growth. The large international banks who are more exposed in Asia should not be written off. In three to six months the situation could be stabilised in Asia and Citicorp, J.P. Morgan, BankAmerica and Chase could easily regain the losses they experienced because of the Asia crisis. The crisis could have a positive effect on the large banks if Asia is implementing the conditions which were demanded by the IMF.

The insurance sector will show a good performance in 1998 and certainly the U.S oriented insurers like Travelers and Allstate.

The retail sector will have no interference of the Asia crisis and it is therefore an interesting investment, you could think about Kroger, Dayton Hudson, Kmart and Ingles Markets.

The food companies are also less affected by the crisis. Companies like Anheuser-Busch, Archer Daniels Midland, Sara Lee and Kellogg. But we also see an opportunity for consument producer Procter & Gamble.

Another protection against the Asian influence are the energy providers like Colonial Gas, Eastern Utilities and Atlantic Energy.

The oil producers and services industry is because of the slump in oil prices less attractive at the moment. But the demand for oil will increase in the future. On the short term they will more or less keep their value but on the longer term they will become expensive. We like large producers like Exxon, Texaco and Mobile. But also the smaller producers like Occidental Petroleum, Amarada Hess and Phillips are attractive. The oil services industry also possesses a bright future. We like Schlumberger, Diamond Offshore, BJ Services, Baker-Hughes and Transocean Offshore in this category. The reason to chose the services companies is that they possess the knowledge of deep-ocean drilling.

The best perfoming sector in 1998 will be the pharmaceutical companies like Bristol Myers-Squibb, Eli Lily, Merck and the darling of the stock market Pfizer.

Further we like General Electric, Lockeed Martin and Raytheon. We also like companies which are mainly domestically oriented like AOL, Staples, Schering-Plough and Sunbeam. And finally the first quarter of 1998 will also be profitable for the transport sector. We like AMR, Delta Airlines and Federal Express.

Not only the large cap companies will see growth. Also a number of small cap companies are very promising. The P/E ratio of small cap companies is at 14 or 15 where as the P/E of the S&P 500 companies is around 20. The orientation on the U.S. market is an another advantage. The small cap companies will maybe capable to beat the performance of the large cap companies in the first months of 1998.

In the small cap league we like Imperial Credit, Redwood Trust, Commerce Capital Investment Services, Method, Vesta, Swiss International, HS Resources, Miravant Medical, IRT technologies, Technitrol, Guildford Mills, Baker Fabrics, US freightways, Comair, Hot Topic and Landries.

 

 

 

Standaard