Israel set to benefit from global trends

Goldman Sachs: Technological changes yield lower inflation, higher growth.

Israel appears to be "well-placed" to harness resources based in intellectual capital, technology and innovation to benefit from developments in the world economy, Peter Oppenheimer, head of European strategy at Goldman Sachs in London, told reporters this week. "[Israel] has a lot of comparative advantages in things like technology and pharmaceuticals," he said, commenting after the release of his report on opportunities stemming from globalization and technological change. "If every [country] maximizes its comparative advantage, the whole is greater than the sum of the parts, that's why you do get a boost to aggregate growth with less inflation," he said. The report, titled The Globology Revolution, concluded that growth and inflation volatility will stay low, while company profit margins remain structurally high. The combination of technological changes, globalization and the emergence of Brazil, Russia, India and China - referred to as BRICs - as giants in world markets, he said, "is causing lower inflation and higher trend growth globally. In addition, volatility has moderated as global economic integration has increased." The report termed the coalescence of these factors "globology." Concerns that this level of integration has increased correlation between economies and reduced investors' ability to spread risk through diversification do "not seem to borne out in practice," Oppenheimer said, noting that trends in bonds and equities are still negatively linked and that correlation between sectors is "not especially high." Therefore, he said, it is still possible to diversify risks. Real long-term interest rates are likely to adjust further as companies increase capital spending and acquisitions and emerging economies reduce savings, while the equity risk premium is likely to fall, the report suggested. "We would focus on companies close to the sources of production and those that benefit from increased [capital expenditure]," the report said, noting that demand for commodities and capital infrastructure is likely to grow. It also forecast stronger demand for high-end branded products, particularly among the growing consumer, brand-savvy classes in emerging economies. For instance, Oppenheimer noted, increased travel by members of the Chinese middle-class is boosting penetration of European luxury goods in that country. The "seismic" structural impacts of the "globology" combo on output, inflation and volatility, he said, are of a scale and nature last seen following the Industrial Revolution, though markets and society are absorbing the changes at a faster rate than in previous centuries. "Falls in the cost of capital spending and increased productivity are facilitating lower costs for the corporate sector in general. Many of the cost and productivity benefits of technological change are yet to emerge (they took a long time to emerge in the 19th and early 20th centuries)," the report said, adding that "these factors suggest that corporate earnings can stay high relative to GDP trends."