J.P. Morgan: The World Economy and Biotech Investment




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Video title: J.P. Morgan: The World Economy and Biotech Investment
Released on: January 08, 2010. © PharmaVentures Ltd
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In this episode of PharmaTelevision News Review, Fintan Walton talks with Stephen Walters, Chief Economist at JP Morgan Australia.

Filmed at AusBiotech 2009, they discuss:

• The world's economies
• Natural resources vs. high technology to support Australia's economy
• Biotech investment
• Quantitative easing
The world's economies
Fintan Walton:
Hello and welcome to PharmaTelevision news review here in Melbourne, Australia. On this show I have Stephen Walters, who is Chief Economist at JP Morgan based in Sydney, Australia. Welcome.
Stephen Walters:
Thank you.
Fintan Walton:
Stephen, you are an economist, 2009 has been a dramatic year for the Australian economy and all the economies in the around the globe, but we are coming through to the end of 2009 things are starting to change, so what do you see happening now as we go through the last quarter of 2009 and as we enter 2010?
Stephen Walters:
It's certainly been a challenging 12 months and I think it was almost date be the start of the crisis back to last September when we had a big investment bank in the US filed and effectively straight away financial markets seized up and even major economies around the world including those in Europe, in the US and Asia and even Australia started contracting, but you are right we have seen vast improvement in the last six months, we have seen economies now starting to grow and including Australia now has reported back to back quarters of growth since that contraction in the economy in the fourth quarter, so that's very positive. And even the news for the bigger economies like the US and the UK and Europe is substantially better. The UK unfortunately is still reporting negative GDP growth which was a surprise last week, but the US economy is now growing and of course the US is still the world's leader and that's very positive and reflecting that better environment we've seen now equity markets improving and in fact most of the major equity markets around the world are now up 40 to 50% from their lows. So I suggest we are over the worst of the crisis hopefully it's over probably won't really know that until where in the future looking back and we can actually pin point the month that had ended and I hoping it's around now, but we can't be certain.
Natural resources vs. high technology to support Australia's economy
Fintan Walton:
Why was it that for Australia, Australia was able to get out of this sooner than in anybody else?
Stephen Walters:
It has been remarkable with Australia, we've got some, some big natural advantages of course which is our resource base the iron ore, the petroleum, the base metals that demand for those resources has been very strong in the last six months, helped a long way by lot of government stimulus in the major economies, but for example our export to China have gone up 50% in the last six months alone, so that's extraordinary growth, so I think that's part of it. Secondly we didn't have those big fractures in our banking system that say the US for example suffered very badly as did the UK, we've got a very sound banking system a well regulated banking system and we didn't have those issues we would say poor quality mortgages that a lot of the rest of the world had so that's another big factor. And I think thirdly the fact that our policy makers both our central bank and our government had plenty of policy ammunition to work with. We had budget surfaces and quite high interest rates, so in fact when the crisis hit we were able to respond pretty aggressively and pretty quickly and I think those factors have really helped.
Fintan Walton:
You've mentioned the importance of the natural resources here in Australia as a way of making sure that the economy is held up, but of course we are here at in Melbourne we are attending the AusBiotech Conference and this is an area of high technology of new technology some which are attached to risk and so forth, so as an economist looking at Australia how important is the emergence of technology and innovation as opposed adjust the position in the sense to the natural resources and for the future economy of Australia?
Stephen Walters:
Look I think it's by the challenge and an opportunity for our economy, the problem for hi-tech type industries like pharmaceuticals and biotech's and some of the medical devices for example is that is difficult to get attention in an economy like Australia, where lets be honest what we do, do best and what we have done best for 50-years is dig resources out of the ground and send them off to China and Japan and Korea that, that is our big competitive advantage. And I think that's where growth in the economy is coming from right now is from that opportunity we dig those resources out of the ground and then put them on ships that's pretty straight forward. The problem is in an environment where bankers for example and those providing finance to those sort of start-up industries and non-resource related industries have been burned and some of them have are not wanting to take risky decisions now. So the problem is that they are taking the easy decisions or the low hanging fruit for example which is mining industries and infrastructure industries and public housing and those sort of issues that are quite easy to fund and quite easy to deliver rather than harder sort of longer-term investment decisions like these start-up industries and hi-tech and biotech for example, but my message is I think once we get out of the crisis and back to a more normal type economic cycle investors will wanna take risk again.
Fintan Walton:
Yeah.
Stephen Walters:
The things will change at the moment risk is still something that lot of investors don't wanna take and that's a big problem for non-resource industries, but things will change, it will be slow but we will get back to a normal risk taking behavior of investors.
Biotech investment
Fintan Walton:
But the investment game of biotech is really, really does belong to wealthy nations and Australia is in a position to be a wealthy nation, so isn't there a relationship even though their natural resources are is a driver for wealth, driver for growth it does allow Australia to play in the biotech game?
Stephen Walters:
It does and we have like you say very high per capital income, we are one of the fourth or fifth highest in the world in terms of per capital income behind the US and a couple of Scandinavian economies. So yes we are well placed with that, I think one challenge again now is while there is a lot of appetite for example retail investors to invest directly in the stock market most of them have made their returns over many, many years by investing in the mining companies, they need to be educated in terms of that there is also investment opportunities in other industries and that would change, but I think there is an appetite for risk taking behavior by retail investors unfortunately so unlike the US where investors are very clearly inclined to take risk on say biotech type investments, Australian investors are less so, so they need to be educated, and again that will take time, but we will get there.
Quantitative easing
Fintan Walton:
Right. Now we've experienced not just in Australia but around the world we are seeing the stock market's rise considerably in fact at quite a rate over the last few months of this year, now there is lots of reasons for that, one of the reasons that has been muted has been the quantitative easing, the release of money effectively into the economy, one do you believe in that if that's the case and two what � how do you see this playing out are we likely to � or have the hockey stick and the things go up are we gonna have the W where we gonna path the potential downturn again, what's your view on that?
Stephen Walters:
Our view is that we are not having a sort of the W shape cycle that was a risk probably six months ago that we were gonna get some sort of rebound because of the quantitative easing that central banks were engaging in and effected by cutting interest rates to effectively zero in the major economies and simultaneously governments where out there spending vast amounts of tax par funds to support growth and support banks. We are getting a big rebound in growth rate now and I think that's why equity markets generally are performing very well, there is always a risk we do have some sort of double dip set back, W shape cycles of popular shape from a lot of clients that I speak to, I think that's unlikely, I think we are through the worst of the crisis here it's always very difficult to imagine what some of the big risks may be going forward, but it does look like we are getting back to a normal type of cycle, but the problem is when you go through such a dislocation in your global economy and your global financial markets and your banking systems it does leave some damage.
Fintan Walton:
Yeah.
Stephen Walters:
And I think therefore we do look at things like potential growth which is another way of saying the economic speed limit has come down a little bit, because I think we have destroyed a lot of capital here, we've changed some risks taking behavior to risk aversion type behavior and that needs to change. And I think that takes many, many years to get back to the sort of potential growth rates we were enjoying just as recently as two-years ago.
Fintan Walton:
But isn't there an argument that the economies have actually been over stimulated?
Stephen Walters:
I would argue most economies probably are over stimulated right now, we've got interest rates at zero in the US for example, fiscally in Australia for example, the fiscal stimulus our government pumped into the economy years among the largest in the world as a share of the economy. So even that our economy is not in recession to me that's an over stimulation of our economy and it does mean that, that governments need to recalibrate those stimulus packages. And our own government is suggesting they don't want to do that, they are still talking about the need to keep consumers for example spending money, the risk with that is if governments aren't willing to pull back on there stimulus other parts of the big the central banks for example need to do the work for them. And we've already seen interest rates go up in Australia, we saw interest rates go up in Norway this week. We are gonna see more of that as we move through the next 18 months as the stimulus will get withdrawn.
Fintan Walton:
So are we going to then likely to see the shape all that to having a W which is a dip down that we have the economy going up and then we end up with on a platter or a slow growth over the next few years as a major correction that has to take place, because of the huge debt that governments have picked up, is that likely to happen?
Stephen Walters:
I think that's right, I think that's probably an accurate depiction of what we are looking at here, it's a very strong rebound right now, but that's a pretty conventional inventory led manufacturing type industry up swing, that's fairly straight forward you realize your orders are picking up you don't have enough stock on your shelves you make more stuff that's pretty straight forward. The more difficult part of the cycle is what happens next and that's when you need firms investing, firms hiring, you need consumer's spending money and feeling confident. And it looks like that's happening, but that's harder to sustain in a conventional manufacturing up swing which you've already seen. So, and as I've said you've left some dents, this crisis has really done some damage. And I think it makes it harder to sustain the cycle, but our view is that we're cautiously optimistic.
Fintan Walton:
Stephen Walters, many thanks for coming on the show.
Stephen Walters:
Thank you.
Stephen Walters
Chief Economist
Stephen Walters joined JP Morgan in October 2001 as senior economist and was appointed chief economist in July 2004. Prior to joining JP Morgan, Stephen was senior economist with Access Economics in Melbourne and international economist with Norwich Union in the UK. Stephen also spent seven years as an economist with the Treasury in Perth.
JP Morgan
JP MorganAustralia broad product capabilities in Australia. As one of the few full service and fully integrated investment banks in Australia, JP Morgan also provides commercial banking, and treasury and securities services. The firm's offices are located in the financial centers of Sydney and Melbourne. In 2008, the firm expanded its global footprint with the launch of a New Zealand branch in Auckland. JP Morgan's history in Australia dates back more than 130 years to the founding of Ord Minnett. Today the firm provides products and services to corporations, financial institutions and government clients. The firm has market leadership positions across a wide spectrum of financial products and services � mergers and acquisitions, corporate strategy and structure, fixed income and debt capital markets, equity and equity capital markets, equities research, custody, funds administration and treasury and securities services.