Our great expectations

February 24, 2008

EVEN though you've heard about the "new economy'' and perhaps even the "experience economy'', a UK group has thrown yet another economy our way: the "expectation economy''.

The label attempts to capture the essence of 2008's demanding consumer arena. It is -- surprise, surprise -- all about those pesky, demanding consumers.

It is a reference to the fact that consumers are living in an information age and, for the most part, enjoying the highest living standards ever known. In this economy consumers have a long list of expectations they apply to each and every good and service.

Their expectations are based on a decade of hyper-consumption and a reliance on a mind-numbing array of new-style information sources which all help them track down, filter through and throw up not just basic standards of quality but the "best of the best''.

UK organisation trendwatching.com suggests that the expectation economy stands out from earlier economies from five to 10 years ago in that word of mouth now travels the world in a flash, making information flow and product launches instantly global.

So how will this impact on our hip pocket? If you are a direct share investor or have super funds under management, it already has.

Information flow is the lifeblood of markets and their participants. Investors rely on sources of information to help them make decisions and advisers rely on information to act as a filter for investors and speculators.

Last week's local blood bath in bank stock was merely a mirror of the blood bath already experienced in the US financial stocks.

Meanwhile, an investment community fully expectant that they would be spared anything other than first-class performance from their banking shares were in for a rude shock.

In quick succession the Commonwealth Bank and then the ANZ disclosed provisions for some significant exposures to the US sub-prime contagion.

While not altogether guilty of hubris, the investor community is nonetheless fed information by market observers and intermediaries who, like all parties, are wired into this global information flow.

The fall-out from the stock market crashes around the world will affect everyone in the short term and in lots of different ways.

It is important to remember that our markets and particularly the share markets are driven by fear and greed.

Investors are exiting the market in fear of what may happen in America. Some investors may have lost confidence in the future -- another consequence of the expectation economy.

Despite our exposure to global capital flows, it is important to note that this share market rout comes at a time when Australia's economy is more insulated from the US economy than at any time in the past 50 years.

But as the US economy does slow down it will affect our main trading partners China and Japan. This, in turn, may decrease the demand for some of our resource and products.

Not all markets are affected equally. House and apartment prices are not as volatile as share prices. The property market is the only investment market where the majority of players are not investors or speculators.

This means that as home owners or property investors, our property is underpinned by the fact that 70 per cent of properties are owned by owner/occupiers. And they don't sell their houses just because share prices are falling or because of the problems overseas.

As a home owner or property investor, your intention ought to be that you remain in the market for the long term.

Property is a long-term play and Australia's economic and property market fundamentals are still sound.

This means that any slowdowns in the property market will offer great opportunities for those with a long-term view to buy their new home or investment property.

Those with expectations of short-term or super-high returns will, like many novice players in the stock market, face disappointment.

In an expectation economy, share investors too need to align themselves with sound fundamentals.

Our banks, for example, are not a homogenous bunch. Some will be immune from the contagion effect arising from the US sub-prime crisis.

Offering high-risk margin lenders credit facilities and dabbling in securitisation of sub-prime lenders in the United States might make some older generation bankers shudder.

Investment banking outfits with products that cannot even be understood by the investment community need to be left to higher risk portfolios.

An expectation of top service and top quality -- in other words blue-chip -- is indeed the point.

That applies both to intermediaries who supply the information as well as to the investment itself.

Otherwise, adopt the Latin and legal mantra, caveat emptor (let the buyer beware).

* Morris Kaplan is author of It's Payback Time (Hardie Grant Books)

 

 

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