Tuesday, May 19, 2009

The Green Shoots Brigade

Being in business, talk about green shoots in the economy provides a psychological boost in confidence. However, with trillions of dollars serving as manure for the economy, there better be some green shoots. The stock market rallies, the banks announcing profits, etc. but have the fundamentals really changed ?

Economies that have been overly reliant on some segments like finance, or primarily- for-export manufacturing, grew exponentially when the times were good, and dropped like rocks when the economy faltered. The recovery and hence the green shoots will mean different things in different regions. In India the coming to power of a strong (hopefully) progressive government, together with a fairly large domestic consumption and infrastructure spending could lead to strong green sprouts that can sustain growth. However, the opportunity will be lost if factional politics rules the roost. In Europe, talk of green shoots is still too early. In the US it is hard to differentiate great government (Barack) salesmanship from the facts. The details of return to profitability of banks are still murky. For example Goldman Sachs announces positive results, but then you notice it had shifted its reporting calendar to exclude December 2008 results. Now banks are lining up to repay TARP funding, but under circumstances that are still not very clear. JP Morgan wants to repay $25B of TARP funding, yet in April announced continued and potentially large losses in its credit card and home equity business. China with a large cash reserve and a strong political will to keep its population employed is also showing some signs of the shoots being sustainable. South East Asia with a mix of countries in various stages of development is a curious mix. Thailand is more involved in factional or feudal politics than on tackling bread and butter issues. Malaysia has announced a viable plan, even though it is mired in political infighting, Singapore is trying to continue to focus on areas of the economy that can provide employment and continue the Singapore story of social and political stability. The risk however to SE Asia is that to varying degrees most of the countries are overly dependent on exports. Additionally, some of the differentiators that countries in SE Asia possessed in the past are now easily eliminated with the excess capacity of factories and manpower in China, and with changes in taxation structures in the US. So a turn around in China and India will not necessarily spill over quickly to SE Asia.

The next 18-24 months will continue to be a roller coaster, hopefully with dampened amplitude in the oscillations. In the mean time the adventurous will have many highs and lows in the market, and a majority of the folks will have to concentrate on growing their business by providing products and services of true value to the customer. From a policy perspective, sustained growth should now take precedence over short term growth that is overly dependent on a couple of sectors. Diversification of business and industries will again become popular for a while. In the mean time the green shoots brigade will shout, the markets will fluctuate, the brave will make or lose a lot of money and the rest will continue to be confused!