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| Adrian Mastracci, president of KCM Wealth Management, says “Economic activity is still robust. However, keep a firm grip on your investment policies and a keen watch on the business confidence signals." |
For Immediate Release
Vancouver, BC (May 5, 2005): Adrian Mastracci, president & investment counsel at “fee-only” Vancouver based KCM Wealth Management comments on the state of the all important business confidence.
The state of business confidence does not receive the same attention as consumer sentiment. However, it is very important to the health of global economies. Especially to our US neighbour, the largest economy in the world.
Many sales executives say that booking the next order continues to be a challenge. Businesses have little wiggle room to raise their prices in a low inflation environment. This places pressures on growing the profits and forces companies to keep costs low.
As an example, IBM announced yesterday that it would reduce its work force by 10,000 to 13,000 employees, taking a US 1.3 to 1.7 billion restructuring charge in the second quarter. This cutback has adverse rippling effects for all companies who supply IBM. Now multiply that by the number of companies who are pursuing a course similar to IBM. The difficult jobless recovery is still in our midst.
The lowest interest rates in four decades are not sufficient to make companies borrow much. Those that have precious cash are leaving it on their balance sheets. On the other hand, the US saving rate has dropped from 9% in 1995 to around 1%, while the borrowing consumer is swimming close to dangerous waters.
The US government budget deficit and trade gap continue to mount, together representing about 10% of GDP. The appetite for such consumption means today’s children are saddled with a bigger bill to pay when they grow up. And, someone will have to pay for it.
The April 2005 report on the US service sector from the Institute for Supply Management was clear. It’s expanding, but more slowly. So is the manufacturing sector. Such data gives businesses more reason to pause and be cautious.
Fierce competition is rampant in virtually every sector. The auto industry is sick and in need of a makeover. Two of the biggest names in corporate America, General Motors and Ford, have now achieved junk bond status. The US dollar has fallen against other currencies and causing much havoc for importers. Energy costs continue to be a wild card.
A robust business confidence outlook plays a significant role in the health of global markets. Nevertheless, how can we tell when business confidence reaches this point?
It is far from an exact science. Business confidence gives rise to more jobs, more wages and salaries, a brighter outlook for retail sales and higher interest rates on fixed income investments. I can hear all the retirees shouting hurray.
One economic signal of confidence is when companies stop reporting considerable layoffs. That is a sign that a sense of stability and improved predictability returns to the marketplace. A slowdown in layoff numbers has been achieved, however, it seems that we still have some ground to cover.
Companies will have brought their costs substantially into line when workforce reductions are no longer on the minds of business executives. Consequently, investors, consumers and business leaders will have more confidence about making long-term commitments.
These commitments are an important part of healthy economic and investment climates. Everyone is looking for these.
My view of business confidence goes like this:
- An improved business outlook will assist investors realize their expectations.
- Investors should never lose sight that asset mix decisions have the biggest impact on their portfolio than any other factor.
- It is important that investors follow prudent strategies designed to attain the personal goals.
- Companies prepare business plans. Investors ought to prepare investment plans, preferably the written kind.
- Expect the investment marathon to serve up some bumpy patches along the way.
Economic activity is still robust. However, keep a firm grip on your investment policies and a keen watch on the business confidence signals.
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