From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Dec 18 2007 - 15:23:14 EST
Structural shifts keep world profit party up all night September 6, 2007 By Graham Mason (Graham Mason is the chief executive of Prudential Portfolio Managers in South Africa) The main risk to global profits, which are at unprecedented highs, would be a sharp slowdown in global economies - an event that is very unlikely to occur any time soon. We believe conditions that could result in a sudden erosion of profit share are simply not in place. Price:earnings ratios are not elevated and there is unlikely to be any sudden reduction in profits as firms embark on major capital initiatives. In fact, global equity markets are offering incredible value because investors have short time horizons and are overreacting far too easily to short bursts of volatility. It is a good opportunity for investors who are willing to take a medium-term view and tough enough to withstand the emotional challenges posed by short-term price volatilities. Local equities are a good example of where value is available for global investors and prospective returns are likely to reward rather than disappoint. Equity markets are paying investors a high risk premium because the popular view is that earnings have surprised on the upside for so long that a mean reversion must be on the horizon. In contrast, our view is that investors are simply slow in coming to terms with a changed global environment. We live in a world where profitability can be very high. Elevated levels of return on capital can be sustained because structural characteristics of the global economy are very favourable to earnings. For example, the global supply of labour has roughly doubled in recent years, as eastern Europe integrated into the world economy, followed by China and India. As a result, wage pressures have been very subdued, thereby increasing the return on capital. Complete text: http://www.busrep.co.za/index.php?fSectionId=642&fArticleId=4020292
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