Thursday, 29 October 2009

Out of the doldrums... reported that the US economy grew in Q32009 by a surprising 3.5% after recording four quarters of negative growth. Alan Rappeport wrote the following report:

The US economy grew for the first time in a year as an aggressive array of stimulus measures brought an end to the longest period of contraction since the Great Depression.
US gross domestic product grew at an annualised rate of 3.5 per cent in the third quarter after shrinking in each of the past four quarters, Wall Street analysts forecast that the economy would grow by 3.2 per cent.
Boosting growth was an upturn in consumer spending, residential investment and strong government spending. The impact of government stimulus measures succeeded in jolting the economy during the latest quarter, as the soon-to expire first-time home buyer tax credit and the “cash for clunkers” car rebate programme lifted residential investment and chipped away at car inventories.
Consumer spending, which accounts for about 70 per cent of economic activity, rose by 3.4 per cent after rising by only 0.9 per cent in the second quarter, while the surge in car demand lifted durable goods purchases by 22.3 per cent. Personal consumption expenditures added 2.36 percentage points to GDP growth.

The Federal Reserve said that most parts of the US are seeing stabilisation or growth, but that the rebound has remained weak. The Fed pointed to renewed strength in residential real estate and manufacturing but expressed concern about commercial property.
Economists at Goldman Sachs argue that the recovery will be “sluggish” with inflation and interest rates remaining low. They warn that headwinds abound with small companies underperforming, the labour market stretched, state and local budgets cutting back and a persistent excess of housing supply.
Analysts suggest that unemployment, which tends to lag behind during an economic recovery, will continue to be a drag on future growth.

Thursday, 15 October 2009

No quick recovery expected...

Kevin Lings, chief economist for South African asset manager, STANLIB summarised the key points from the latest IMF's World Economic Outlook (October 2009):

Overall the IMF raised the world growth projection for 2010 by 0.6 percentage points to around 3% (PPP basis) (relative to their forecast in July 2009), but highlighted that a subdued recovery lies ahead.

The global economy appears to be expanding again, pulled up by the strong performance of Asian economies and stabilisation or modest recovery elsewhere. The pace of recovery is slow, and activity remains far below pre-crisis levels. The pickup is being led by a rebound in manufacturing and a turn in the inventory cycle, and there are some signs of gradually stabilising retail sales, returning consumer confidence, and firmer housing markets. World trade is beginning to pick up and commodity prices have staged a comeback. Global activity is forecast to expand by about 3 percent in 2010 (PPP basis), which is well below the rates achieved before the crisis.

In the advanced economies, unprecedented public intervention has stabilised activity and has even fostered a return to modest growth in several economies. Advanced economies are projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year.

Emerging and developing economies are generally further ahead on the road to recovery, led by a resurgence in Asia. Many countries in emerging Europe have been hit particularly hard by the crisis, and developments in these economies are generally lagging those elsewhere. In emerging economies, real GDP growth is forecast to reach almost 5 percent in 2010, up from 1.7 percent in 2009. The rebound is driven by China, India, and a number of other emerging Asian economies. Other emerging economies are staging modest recoveries, supported by policy stimulus and improving global trade and financial conditions.

Looking ahead, the policy forces that are driving the current rebound will gradually lose strength, and real and financial forces, although gradually building, remain weak. Specifically, fiscal stimulus will diminish and inventory rebuilding will gradually lose its influence. Meanwhile, consumption and investment are gaining strength only slowly, as financial conditions remain tight in many economies.

Downside risks to growth are receding gradually but remain a concern. The main short-term risk is that the recovery will stall. Premature exit from accommodative monetary and fiscal policies seems a significant risk because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand. In general, the fragile global economy still seems vulnerable to a range of shocks, including rising oil prices, a virulent return of H1N1 flu, geopolitical events, or resurgent protectionism.

Extending the horizon to the medium term, there are other important risks to sustained recovery, mainly in the major advanced economies. On the financial front, a major concern is that continued public skepticism toward what is perceived as bailouts for the very firms considered responsible for the crisis undercuts public support for financial restructuring, thereby paving the way to a prolonged period of stagnation. On the macroeconomic policy front, the greatest risk revolves around deteriorating fiscal positions, including as a result of measures to support the financial sector.

Current medium-term output projections are much lower than before the crisis, consistent with a permanent loss of potential output. Investment has already fallen sharply, especially in the economies hit by financial and real estate crises. Capital stocks levels are falling. In addition, unemployment rates are expected to remain at high levels over the medium term in a number of advanced economies.

Many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand and imports. This will help offset subdued domestic demand in economies that have typically run current account deficits and have experienced asset price (stock or housing) busts, including the United States, the United Kingdom, parts of the euro area, and many emerging European economies.

In advanced economies, central banks can (with few exceptions) afford to maintain accommodative conditions for an extended period because inflation is likely to remain subdued as long as output gaps remain wide. Moreover, monetary policymakers will need to accommodate the impact of the gradual withdrawal of fiscal support.

The situation is more varied across emerging economies; in a number of these economies it will likely be appropriate to start removing monetary accommodation sooner than in advanced economies. In some economies, warding off risks for new asset price bubbles may call for greater exchange rate flexibility, to allow monetary policy tightening to avoid importing an excessively easy policy stance from the advanced economies.

Wednesday, 7 October 2009

Sending the Greeks back to school...

If you know something about investment phrases like alpha and beta you ought to know something about investment management, but perhaps not after all!

Paul Amery wrote the following blog article that was published on

The conventional wisdom is that ETFs and other index-tracking vehicles are designed for beta (market exposure) and that active managers pursue alpha (value added through skill). But what does this actually tell us?
Do our well-used Greek letters help us make sense of the investment landscape, or do they actually hamper us in managing money? As James Montier pointed out in an article published in 2007, as soon as you use the terms “alpha” and “beta,” you are invoking the spirit of the capital asset pricing model.
And, unfortunately, CAPM doesn’t actually work in practice.
Why not? Apart from some questionable assumptions about frictionless trading and investors having identical goals, the key problem with CAPM is that it assumes that stock returns are normally distributed. In other words, the theory requires that stock prices follow a random walk, with the price movement in one period entirely independent from that in all previous periods, and having no bearing on the future, either. This “Brownian motion” assumption produces the famous bell curve of statistics when one measures the percentage gains and losses over many time intervals.
However, while the bell curve accurately maps many phenomena in nature—people’s heights and weights, for example—many studies have now shown that it is inaccurate when describing financial market movements. Stock prices, which reflect the collective mood of millions of people, move according to far wilder trajectories, and there is plenty of evidence that markets have “memory”—which shows up in the serial correlation of returns. Even volatility tends to occur in “clusters.”
By viewing the world through the lenses of “alpha” and “beta,” you are automatically assuming a linear relationship between risk and return, with risk measured only according to a bell curve framework. Take away the framework, and the terms have no real meaning at all. So why do we persist with them? Part of the reason for the continuing popularity of the Greek letters is that we use them as a kind of shorthand—beta for passive, systematic, indexed; and alpha for active, more subjective, discretionary. And, of course, in the fund management world, while beta has meant (relatively) low fees, the claim of being able to source “alpha” has been the road to riches for fund providers.
But, just as it’s possible (and indeed, statistically likely) for the self-proclaimed alpha-seeker to deliver below-market performance, it’s just as likely that well-thought-out, entirely model-driven systematic approaches can generate superior returns over time.
I would like to see a great deal more systematic strategies offered to investors in ETF format. As ever, the challenge will be to make these investment approaches understandable and transparent, without losing their competitive edge. But there are surely great opportunities out there for those who can hit the correct fund design. Isn’t it time to send at least two of our friendly “Greeks” back to the language classroom?

Thursday, 1 October 2009

How the IMF views the way forward recently reported on how the International Monetary Fund views the economic recovery in their bi-annual World Economic Outlook:
A recovery in the world economy is now under way, the International Monetary Fund said on Thursday, but it warned there were many obstacles to sustained rapid growth. The IMF rejected forecasts for either a rapid V-shaped recovery or a double-dip recession, saying the recovery will most likely be “weak by historical standards”.

The IMF is no more optimistic about the medium-term outlook, insisting that growth prospects depend on resolving two difficult challenges: the weakness in the banking system
; and the persistent unwillingness of countries with large trade surpluses to boost domestic demand and become motors of world growth.
The economic crisis, which resulted in the deepest global recession since WWII, has led to a permanent loss of output, the IMF said. Most economies now have a large amount of spare capacity which is likely to keep inflation low, in spite of the extraordinarily expansionary monetary and fiscal policies undertaken by central banks and governments around the world.
But for the first time in more than a year, the IMF’s economic declarations have not become more gloomy. It has revised higher its forecasts for world growth, reflecting its view that there was now a much lower risk of the recession turning into something even nastier.
“Strong public policies across advanced and many emerging economies have supported demand and all but eliminated fears of a global depression,” the World Economic Outlook said.
The IMF forecast that world economic output would rise by 3.1 per cent in 2010 after contracting by 1.1 per cent in 2009, an upward revision of 0.6 percentage points for 2010 from its most recent forecast in July.
Emerging economies will grow much more quickly than advanced economies, the IMF says, with growth averaging 5.1 per cent in the emerging world, even including the troubled central and eastern European regions, and only 1.3 per cent in rich countries. Central banks of rapidly growing emerging markets might have to raise interest rates soon.
In the short-run, the IMF believes the recovery will be sluggish because “the policy forces that are driving the current rebound will gradually lose strength, and the real and financial forces remain weak”. Unemployment is forecast to keep rising across developed economies, so the recovery will feel “jobless” in most countries.