Thursday, 18 March 2010

Friends in need...

Financial Times reported that Germany decided not to come to Greece's financial aid, but rather that the country should turn to the IMF if it will need financial assistance.

The Greek government has already said it would turn to the fund as a last resort, but both the European Central Bank and the European Commission have also resisted any such move.
Speaking in Brussels on Thursday morning, George Papandreou, the Greek prime minister, told European lawmakers there needed to be a European solution to his country’s debt problems on the table, and that he would prefer this to IMF intervention, even though he insisted Greece did not need any money.

“We are not going to default,” he told a special committee of MEPs in the European parliament. “We are saying that we don’t need this money.”
The government in Berlin still believed that Greece would be able to manage without external financial assistance. “But if it does need help, it will have to come from the IMF,” he added. The chancellor had decided that any other solution would be legally and constitutionally impossible.
The German decision is critical to any common position by the eurozone states on some form of bail-out, because Berlin would inevitably be the largest contributor.

Wednesday, 17 March 2010

SA consumers expect better times ahead

During 1Q2010 the FNB/BER Consumer Confidence Index rose by a further 9 index points to a level of +15 which is the single biggest increase between two consecutive quarters in five years. Furthermore, the CCI is now at a slightly higher level compared to the one that prevailed before it plunged 2 years ago. However, the current level of +15 is lower than the levels of +20 and above prevalent during 2006 and 2007.

The FNB/BER CCI is based on three questions, namely the expected performance of the economy, the expected financial situation of households and the rating of the appropriateness of the present time to buy durable goods (such as furniture, appliances, electronic equipment and motor vehicles).

In terms of the components of the FNB/BER CCI, the 1Q2010 increase was caused consumers expecting the economy and their own finances to improve during the next 12 months, as well as fewer rating the present as an inappropriate time to buy durable goods compared to the 4Q2009 survey.

The substantial improvement in consumers' willingness to buy durable goods is impressive. However, this rise needs to be put in perspective, consumers remained cautious relative to the heydays of 2006 and 2007. In contrast, consumers' optimism about improvements in the economic performance and their own finances in 12 months' time is currently close to the high points of 2006 and 2007.

Source: FNB, Cees Bruggemans, chief economist

Tuesday, 16 March 2010

The surprise package...

On March 9 last year (2009) financial markets reached their nadir during the financial crisis.

But the recovery has been spectacular and surprised most analysts. For example, the S&P 500 has risen 68.6 per cent over the past year; 204 stocks in the S&P 500 index are up 100 per cent or more, 33 are 300 per cent higher or more and two are up 1,000 per cent or more!

Monday, 8 March 2010

Invest in the future...

Martin Wolf, senior economics editor for the Financial Times opined in of his columns that the private sector should start to invest in the future and not relying on another credit-fuelled consumption spree to save the day for the global economy. Here are some excerpts:
Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure.
By "success", I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By "failure" I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale.
Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear.
Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.
I can envisage two ways by which the world might grow out of its debt overhangs without such a collapse: a surge in private and public investment in the deficit countries or a surge in demand from the emerging countries. Under the former, higher future income would make today's borrowing sustainable. Under the latter, the savings generated by the deleveraging private sectors of deficit countries would flow naturally into increased investment in emerging countries.
Yet exploiting such opportunities would involve radical rethinking. In countries like the UK and US, there would be high fiscal deficits over an extended period, but also a matching willingness to promote investment. Meanwhile, high-income countries would have to engage urgently with emerging countries, to discuss reforms to global finance aimed at facilitating a sustained net flow of funds from the former to the latter.
Most people hope, instead, that the world will go back to being the way it was. It will not and should not. The essential ingredient of a successful exit is, instead, to use the huge surpluses of the private sector to fund higher investment, both public and private, across the world. China alone needs higher consumption.
Let us not repeat past errors. Let us not hope that a credit-fuelled consumption binge will save us. Let us invest in the future, instead.

Not all swans are black...

David Bowers of Absolute Strategy Research wrote the following sober-minded article, appearing in the Financial Times, in which he reminds investors not to ignore potentially good news amidst all the negativity:

Three years ago we lived in a world that thought it had tamed macroeconomic volatility through independent central banks and inflation targeting. ‘Black Swans’ - low probability but high impact events – were thought to have been eliminated by sophisticated risk management and securitisation. Investors and companies were lulled into thinking that ‘All Swans were White’. With the benefit of hindsight we now know that nothing was further from the truth. In retrospect, the biggest mistake during the Great Moderation was to imagine that the business cycle was dead – rather than simply in suspended animation.
Three years on and we find ourselves in a world where ‘Black Swans’ are everywhere. Investors and corporates alike live in constant fear of low-probability, high-impact events. They have hunkered down in defensive mode and now wait for their competitors to make mistakes. Global multinationals continue to cut costs as though there is no tomorrow.
However, with apologies to the philosopher Karl Popper, the sighting of just one White Swan should disprove the thesis that ALL Swans are now Black. And wouldn’t it be ironic if that ‘White Swan’ turned out to be the rediscovery that the business cycle was not dead? Indeed, the biggest macro shock for many investors may not be another downturn - the ‘double-dip’ that dominates today’s Conventional Wisdom - but rather a strong cyclical recovery spurred on by the massive fiscal and monetary stimulus.
Investors are now convinced that a whole flock of macro “Black Swans” are set to undermine markets in 2010 and beyond. For many, the fears relate to private sector deleveraging, and are focused on anaemic consumer spending, persistent high unemployment and weak housing markets. For some, it is the lack of bank lending to small and medium sized companies that prevents a pick-up in investment and sustained economic recovery. Or that the counterpart to rising private sector surpluses is ballooning public sector deficits that will become increasingly difficult to finance. For others, it is the withdrawal of quantitative easing and the prospect of rising rates that are certain to undermine any recovery.
The reality, however, is that US household consumption is not in freefall. Indeed, personal consumption is currently two per cent above its December 2008 low, and as a share of GDP currently stands close to its all-time high. But what has been unprecedented is the corporate response: massive cutbacks in capital spending, inventories and employment. In short, last year’s US recession was due much more to a rise in the corporate rather than the household saving rate.
The big question now is whether companies have cut back too much. Has corporate spending been pared back too aggressively for the current levels of household spending? Could the corporate sector be more surprised by the resilience of the current level of demand than by a ‘double dip’?
If companies rehire workers that were fired last year, rebuild inventories that had been run down to their lowest operational level, and re-authorise capital spending abandoned at the height of the credit crunch this would come as a shock for the ‘Black Swan’ bevy. It would help lower unemployment and so underpin consumer confidence, bring down loan charge-off rates and help restore the credit multiplier of the banking system, as well as raise nominal GDP growth to a level that would have a major positive impact on the budget deficit.
The emergence of a corporate-led recovery could have some radical implications for investment strategy. For a start, it would shake fixed-income investors out of their complacency, particularly at the front end of the curve. It would also accelerate the transition already underway in equity markets away from last year’s liquidity-driven regime towards a greater focus on equity fundamentals, such as earnings growth, together with the possibility of a major pickup in M&A as corporates restructure their businesses.
If the corporate sector stops running itself for cash and starts investing ‘for tomorrow’, then it is still possible that this ‘Ugly Duckling’ of a recovery could yet turn into a beautiful ‘White Swan’. It is time that we reminded ourselves that not all Swans are Black.

Thursday, 4 March 2010

Actively passive

More and more investors have over the past decade started to accept that it is very difficult indeed to outperform the market. Hence, we've seen an increase in the market share of passive funds relative to actively-managed funds.

Mark Hulbert of MarketWatch reported on the latest trends as published by Morningstar:

Morningstar calculates that, a decade ago, more than 89% of mutual fund assets in this country were invested in funds whose managers were actively engaged in beating their benchmark. By the end of 2009, in contrast, the actively-managed share had dropped to 78%.
To appreciate how big a shift this is, consider that the 22% that is passively managed now totals $1.7 trillion.

Might this marked shift towards passive management have made the market more easily beaten? That's an intriguing question, since the markets' much-vaunted efficiency comes from so many investors trying to do better than simply buying and holding. That means, ironically, that in a world in which everyone is invested in an index fund, the market would be quite easy to beat.
Don't get your hopes up, however. There is still more than enough money devoted to beating the market to keep it as efficient as ever. For example, the assets that remain invested in actively-managed funds remain huge -- some $6 trillion, according to Morningstar.
Furthermore it is worth remembering that investment managers who are trying to beat the market trade much more frequently today than they did a decade ago. So, even though active fund managers have a smaller market share than a decade ago, on average they today are more aggressive in their active management. These two trends largely cancel out, leaving little net effect on market efficiency.
How hard is it to beat the market?
My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn't impossible to outperform the market over the long term, the odds are stacked against us.
And, unfortunately, despite the tantalizing possibility that the last decade's trends might have lessened those odds that are against us, they most likely remain every bit as steep.