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Investment Indicators Globalisation and migration By Michael A. Blank, Managing Director Senior Advisor, Credit Suisse Private Advisors, Miami, Florida, USA Globalisation is all about the spread of trade, ideas and people. World trade is continuing to grow at a rapid rate, not just along historically more conventional lines, as for example from America to Asia or vice versa, but along new pathways as well, for example within Asia itself. Then there is the spread of ideas. This development, which includes the spread of technology and of intellectual copyrights, sometimes leads to tension between companies that invest in production facilities abroad and the locations that are being invested in. Nevertheless, we are facing the challenges and opportunities of outsourcing, and the emergence of potential new global leaders in some of the emerging markets. Within the company sector, we also can see the push and pull between emerging markets and the developed world.   Globalisation could be described as a development in three phases. The first phase would be the globalisation of space and government, such as the great migration flows of the late 19th century and the beginning of the 20th century, where a significant proportion of the European population shifted from Europe to the Americas or to Australia. The globalisation of governments was followed by the globalisation of companies, which started maybe about a century ago. Now we are in the third phase, where we are seeing the globalisation of the individual. We have seen migration on an astonishing scale, both within countries from the rural areas to the cities, but between countries as well. Of course, what comes first to mind is migration in the developing world. For example, we have had 500,000 people from Poland immigrating to the UK over the last several years. But there is virtually no country around the world that is not feeling the effects of migration in one way or another. Rapidly increasing migration, whether geographical or social, is carrying millions of people out of poverty and up to higher echelons of modern society's income scale. The primary catalysts behind this trend, in our opinion, are increased future job prospects for immigrants created by the aging of host countries' populations, and salary rises designed to maintain long-term social security in developed countries. Access to the banking system for those at the lowest end of the income range is consequently a growing necessity. This emerging population dynamic, resulting in a primary need to transfer money back home to support the families of successful migrants, has spawned demand for very low-priced (but very widely sought-after) basic retail banking services. Within five years, these once-new clients may have become regular, established retail banking customers, able to support growth and supply cheap deposit funding for the banks. Fast-growing emerging markets We see increasing demand for basic goods like energy in the long term, infrastructure (eg, power generation, transportation technology, and construction), commodities, basic healthcare, etc, and we expect more intense competition for the access to increasingly scarce resources. We see demand growing in the wealthy G7/8 economies, but also with high net worth individuals in emerging markets. China, for example, not only has 200,000 millionaires, but also a rapidly growing middle class with a huge desire for luxury and premium goods. Further, we are faced with the healthy living story, driven not only by the baby boomers retiring, but also by longevity doubling up. This theme touches sectors like healthcare, wellness and beauty, tourism and retirement (housing and financial products that protect wealth offer a steady income and protect purchasing power). We regard to energy, it is unlikely that sustained high energy demand can be satisfied by carbon-neutral energy sources such as wind, hydro and solar power, in our view. Demand for energy is rising and conventional power production still has a cost and source (mainly space) advantage. A sustained rise in oil prices and an increase in global electricity demand are also prompting a renewed focus on nuclear energy. Emerging market countries are leading the way, building nuclear facilities to feed their energy-hungry economies. In recent years, international oil companies (IOCs) have struggled to replace 100% of the oil and gas that they extract. The depletion of conventional oil reserves and the sharp spike in oil and natural gas prices have also prompted IOCs to focus their attention more and more on unconventional means of extracting fossil fuels. Oil sands, which make up two-thirds of the world's oil reserves, are, together with liquefied natural gas (LNG), the most promising alternatives to conventional oil and gas production. Globalisation is drawing investment into a wide range of industries aimed at improving collective and personal security. National defence budgets are arguably the most obvious form of spending on security. The supply of services has spread beyond the traditional public spending realm and now encompasses a burgeoning number of private companies; for example aviation, shipping, computer network security. Technology is central to adapting traditional surveillance and vigilance capabilities for use in the digital world, including e-mails, VoIP (voice over internet protocol) conversations, instant messaging and wireless telephony. Technology is advancing but it requires software engineers and electronics experts to carry progress further. Together with major political changes, globalisation has transformed the specialisation of production. Media and advertising companies are increasingly taking into account demographic developments and the growing number of immigrants. The Internet gives media companies a cost-effective way to reach customers in remote areas. Online networks have choking points. Within the Internet, these bottlenecks are opportunities for infrastructure equipment suppliers. Within the social network, they are opportunities for advertisers. The demand curve takes on new shape with a vastly increased consumer choice, and market potential is shifting toward millions of tiny demand categories. Re-rating of countries and companies The re-rating of countries is definitely a major issue. The business revolution of recent decades has entered a phase where developments, such as the outsourcing of knowledge work, the emergence of new global brands and the economic and political transformation of whole countries will lead to a re-rating of certain countries. There is no justification for penalising certain markets just because they happen to be part of the emerging-market community. Their stocks should be valued along the same criteria as stocks in developed economies. After all, we live in a world where an emerging market like China has transformed itself into one of the world's largest creditors. In the near future, we will see the emergence of new global leaders, which also applies to certain companies. Right now, some Asian companies in China and India are buying or building global brands and, as these develop, there would be no reason at all for these to be lowly rated. It is clear that we are in a shifting cycle in terms of which investment is the one that is doing best at any given moment. For example, we have just been through a period of several years where commodity prices did incredibly well. We have now seen prices of many commodities hit a plateau. Some of them have even come well off their highs. We believe the trend will resume, but that in a sense the baton has now been passed up to the next level, to the companies that make use of those raw materials. Many of them show very strong performances. Of course, within the company sector, we also can see the push and pull between emerging markets and the developed world. Clearly, there is a shift taking place here as well. Many companies in the emerging markets have tended to be relatively local. But, as we mentioned, we should gradually be seeing the emergence of new global champions. In the longer term, we think companies with exposure to the fast-growing emerging markets will tend to outperform. But investors need to balance such long-term trends against shorter-term economic cycles. Recently, in conjunction with the slightly slower global economy over the last six months, we have seen some of the developed-economy companies move ahead of some of the emerging markets. This can create a good entry point into stocks exposed to emerging markets, to pick up the long-term trend. The material on these pages represents the opinion of Credit Suisse Private Advisors and is not intended to predict or depict the performance of any asset class, investment sector or commodity. The information provided herein including excerpts, abstracts, and other summary material derived from third parties is believed to be reliable but no such warranty is made. Past performance is no guarantee of future results. These views are as of February 2007 and are subject to change based on subsequent developments. michael.blank@credit-suisse.com Real GDP growth by region