"Democratology" - The Next Phase of Globalisation ...

"Democratology" -
The Next Phase of Globalisation ...

By Greg Chapman, Australian Equity Portfolio Manager
County Investment Management Limited
June 2000

In the 15 years that County Investment Management has been managing assets in Australia, we have witnessed, and benefited from, an enormous amount of Structural change in economies and societies around the world.

The slaying of the inflation dragon, the demise of communism in Eastern Europe, the growth in global trade and the failure of the Japanese economic model - all have all had profound direct, and unexpected, consequences for financial markets.

More recently, as "Globalisation" has become an accepted part of the investment vocabulary, we have seen the emergence of a new catch-phrase to describe diverging global economic conditions - the "Old" and "New" economies. This representation of a dichotomy in financial markets has arisen as a combination of globalisation, free trade and technology have created an environment that has seen new, technology-related, industries prosper, and share market valuations exceed previously accepted norms.

However, having failed to find either the "Old" or "New" economy anywhere on my world atlas, I am tempted to conclude that what we are dealing is in fact a further evolution of the powerful "Globalisation" theme which has so dominated financial markets over the last decade. A more sophisticated analysis is, I believe, necessary to truly capture the structural forces currently at play in world economies and financial markets.

What is "Democratology"?

County has labelled the emergence of this new structural force "Democratology". We believe that this will be the successor to the now well accepted and, from a financial markets perspective, now well-discounted, "Globalisation" theme.

"Democratology" represents the potential implications of the interaction between:

Democracy - particularly as it impacts developing nations and their integration with the global economy and world trade, as well as the phenomenon of increased "consumerisation" in the developed world;
Demographics - the effect of the ageing populations of the developed nations and the emerging young middle classes within developing economies. Of particular relevance is the impact both these groups will have on global consumption and savings trends; and
Technology - the way in which the technology revolution develops, and the impact it has upon the way we live, as well as the way in which business behaves.

We believe that the way that these three forces interact with each other and with business and industry models, will be the most important driver of financial markets over the next five years.

Market Response

As with all major structural changes, the implications of Democratology may not be as clear as first thought.

The initial response by financial markets to the structural change has been to buy exposure to the most visible beneficiary - Technology shares. A combination of an extended period of economic expansion, high levels of money supply growth, rising disposable income and consumer confidence have resulted in the spectacular rise in the US Nasdaq index, and other technology related investments.

The extent of this speculation has been almost unprecedented and we believe this phase is now more than fully discounted by financial markets.

Australian Market Implications

County believes that the successful Australian company in the environment will, via a combination of technological advantage and barriers to entry, be able to compete on a global scale. These companies could potentially include:

News Corporation	Global media and technology convergence
Brambles	Pallet logistics
Computershare	Share registry management and technology
Westfield Holdings	Global shopping centre management
Aristocrat Technology	Software development for video gaming (poker) machines

Many Australian companies will also use new technology or e-commerce to strengthen their position in the domestic market, even if they lack global competitive advantage. This will come from either complementing existing distribution channels or significantly reducing cost structures. Some of the "old" economy industries that appear well placed, include: retail, domestic electronic media and financial services.

However, it is important to remember that most of the benefits arising from technology will ultimately be reaped by consumers. An assessment of the ability of companies to retain some of the benefits for shareholders, along with a realistic view of the overall valuation of the stock, will be the key to selecting outperforming investments.

The issue of realistic valuation is also a reminder that "value" stocks will continue to enjoy scattered periods of out-performance, however, the major beneficiaries of Democratology over the medium to long term will be companieswith superior business models - primarily "growth" stocks, whether they are technology or services oriented.

Summary

The "new" and "old" economies do not exist. Globalisation has entered its next phase - "Democratology"
Buying technology or "new economy" shares is a simplistic, and now potentially dangerous, way to gain exposure to this new environment. Business models of technology companies must be sustainable, and having passed that test, valuations must be realistic so shareholders can receive an adequate return on their investment.
Australian companies generally lack the brands, scale, technology and competitive advantage to fully exploit the era of "Democratology", however, some potential world leaders do exist.
For those Australian companies destined not to be world leaders, technology provides an opportunity to enhance distribution and radically reduce costs. These companies may still prove to be very attractive investment opportunities.

For further information, contact Greg Chapman
in County's Melbourne on 03 9611 3678.