“Toyota is to export thousands of US-built sport utility vehicles and pick-up trucks to the Middle East and Latin America to relieve a glut of unsold models at its North American dealerships.”
Wall Street Journal, October 31, 2008
It is often said that when the United States sneezes, her trading partners catch a cold. As we near the end of a tumultuous 2008, this maxim has never rung more true. The “decoupling” of the U.S. economy from its principal trading partners has proven to be wishful thinking for the time being. Countries that depend heavily on exports to the United States are facing the prospects of a protracted recession.
That said - we do believe in “decoupling,” at least over the long term. As the Financial Times quote above indicates, Toyota is diverting production that was intended for North America to emerging market countries in the Middle East and Latin America. While this is a short-term inventory reduction plan, we believe that this is a sneak preview of a fundamental change in direction that many exporters will be making in their corporate strategies in the years ahead.
For nearly two decades, Japan’s premier companies have reacted to stagnant domestic demand by aggressively exporting to North America and Europe. Now, with these two trading blocks likely entering a long-term, demographic-driven depression like the one suffered by Japan since the early 1990s, Japan’s top companies will have to reorient themselves again, this time to the demographically robust emerging markets. American and European companies will no doubt follow.
We should be clear: this transformation will not happen over night. It will take time for the promising emerging market countries to reorient their economies to focus more on domestic consumption, and the adjustment will be painful at times for the countries involved. Ultimately though, the capitalist system directs investment to the areas that have the greatest profit potential, and these areas are in the developing world.
On a side note, the November 1st edition of the Financial Times reports that, despite the global credit crisis and bear market, MasterCard™ just launched a new premium credit card in partnership with Kazkommertsbank, targeting ultra-high-net-worth individuals in Kazakhstan. The “Diamond” card actually has a 0.02 carat diamond embedded in the plastic and is laced with gold leaf. Male cardholders will have a golden winged horse inlaid into their cards, while female cardholders will have a golden peacock. The card will have a $1,000 annual fee and comes with the services of a dedicated 24-hour personal manager. This follows the release of the similar “Royale” card issued in Dubai. Clearly, the era of conspicuous consumption is not dead everywhere in the world.
So, while the United States and Europe face years of economic adjustments, savvy businesses are clearly directing their attentions elsewhere. If we are to prosper as investors, we need to understand the changes ahead.
By 2010, the number of Boomers with dependent adolescents will begin a long-term decline. Our investment strategies must change focus to allow more foreign market exposure than in recent decades. Portfolios must be prepared to follow the example of Toyota and MasterCard™ and emphasize the new and developing markets around the world.
