Tag Archives: japan
Emerging Markets Aren’t The Answer To Investors’ Woes
http://www.ft.com/cms/s/0/e59381b4-d4d8-11e2-9302-00144feab7de.html#ixzz2X2Hjr9g5 By Merryn Somerset Webb Economic growth is no guarantee of returns to investors I’ve talked to a good few interesting people in the past week. But two are of particular interest at the moment. The first is David Stockman, author of The Great Deformation, The Corruption of Capitalism in America – a book that has been at the top of the bestseller lists in the US since it came out in April. The second is Dambisa Moyo, the almost impossibly glamorous author of, among other must-reads, How the West Was Lost: Fifty Years of Economic Folly and The Stark Choices Ahead. Both were – and I guess this is obvious – deeply pessimistic on the future of the US in particular. While their arguments are far from identical, they are both convinced that America, with its insistence on using monetary policy to mismanage interest rates and distort markets, along with its badly structured welfare state and low prioritisation of education, has a sad future ahead of it. Stockman was once director of the Office of Management and Budget in the US (under Ronald Reagan) and Moyo was named as one of the 100 most influential people in the world by Time magazine. So it is worth listening to both of them. I also happen to think they are mostly right. Politicians in the west, caught in traps set by their short electoral cycles, have made a nightmare series of bad decisions about public spending, the roles of the state and of course about what we should think of as money and how we should price that money. Then there’s the demographic profiles of western countries, with their growing numbers of older people; economies designed to grow on the back of consumer spending don’t grow much as their populations age and cut back spending. It is hard to see where a return to credit and baby-boomer style economic growth will come from. It is a lot easier to make up a good story about how emerging countries, with their lower debts and younger populations, will see fast economic growth than it is to come up with one about how the US will – although now there is the prospect of energy independence on the horizon, it is clearly getting a tad easier. But it’s a big step from being able to say that one group of countries will grow faster than another in gross domestic product terms to saying that you should expect stock markets in the faster-growing group to outperform the rest. Several studies have shown that this isn’t often true. The opposite very often is. Many explanations have been offered for this, but I suspect it comes down to the way the proceeds of growth are distributed at different stages of growth. When a country is growing fast, wages are most likely to be growing fast too – so more than you might expect goes to labour over capital. Rapid growth also gives companies one-off opportunities to build market share. If they take it, prioritising volume over margins, they won’t make much in the way of profits – possibly for many years. Then there are the many governance issues in emerging markets: state ownership, family-controlled companies, dodgy property rights and so on. These tend to ensure that the majority of the spoils can end up going to the minority of shareholders. If you look at it all like this, surely it would make sense to say that one should pay lower prices for companies based in emerging markets (as is the case in Russia, which I advocated recently), regardless of how fast it looks like those markets might grow. After all, you are taking more risks. There’s likely to be a long wait before the dividends start rolling in, and the longer you have to wait for something the higher the risk that you will never get it. We should pay a premium not for emerging market growth but for the kind of steadily rising profits and dividends we are more likely to get in the west. This is all something to bear in mind as you look at the carnage in emerging markets over the past week. Bonds, equities and currencies have all been clobbered. Investors who bought at high prices to get exposure to economic growth are now finding that there is something worse than paying a premium for the wrong thing. It’s not getting even that thing. So as the cheaper yen makes emerging market exports look less competitive, as China clearly slows down and the debate begins about the end of quantitative easing in the US, they are selling. But here’s one thing to note before you dismiss Asia and Latin America out of hand. One day, all the markets we now think of as emerging will be developed. They’ll turn their minds from all-out economic expansion to profits and at the same time their populations will demand proper governance and the odd dividend. Then their markets will soar. With that in mind, a nice little chart was slipped to me over a pub table by Tim Guinness of Guinness Funds a few months ago. It looks back at Japan’s economic growth and its stock market performance. The latter ran at 10 per cent or so a year from the early 1950s to the 1970s as the country industrialised and invested. In 1955 Japan had 5.2 cars per thousand people. By 1966 that number was 79. In 1970 it was 168. The stock market rose, but not in a particularly spectacular fashion. But around then, the Japanese economy shifted gear down to more like 5 per cent growth as the country entered a later industrial shift to a more consumption-based economy. Look at a chart of the Nikkei and you will see what happened next. It rose steadily throughout the 1970s and went completely nuts in the 1980s. So here’s something to think about. In 2000, China had 4.9 cars per 1,000 people. In 2012 it had 74. By 2016 – or maybe earlier – it should have close to 168. It should also have seen growth fall to 5 per cent or below. A few years before then might be good time to invest. Merryn Somerset Webb is editor in chief of MoneyWeek. The views expressed are personal. Continue reading
Unwinding The World’s Biggest Economic Experiment
http://www.ft.com/cm…l#ixzz2X2Dkv6m2 By Gavyn Davies When the Fed does change direction, tightening often comes in a rapid series of interest rate rises ©Bloomberg On Wednesday, the chairman of the Federal Reserve announced that the greatest experiment in the history of central banking might be nearing its end. Ben Bernanke’s announcement included many caveats, but the financial markets did not miss the message. Since 2009, the central bank has been buying financial assets – US Treasury bonds and some types of corporate debt – paid for by an expansion of the monetary base (so-called “printing money”). This kept interest rates low, which damaged savers but helped indebted businesses and households. It has also been the major prop for financial markets. Within about a year, if the Fed’s plans come to fruition, the US government deficit will need to be financed from private sector savings – not by the central bank. Asset markets will be left to fend for themselves as the biggest buyer withdraws from the arena. That is why some hedge funds sold off bonds this week, causing a big drop in their prices – the flipside of which is a rise in borrowing costs (or “yields”). Mr Bernanke has expressed consternation that adjustments to the path for the Fed’s balance sheet, such as the one he announced this week, can have such a profound effect on the bond market. But investors are making logical inferences from central bank behaviour. The Fed does not change direction often. When it does, tightening often comes in a rapid series of interest rate rises that are not fully anticipated by investors. Furthermore, when the Fed was supporting markets, investors had to seek out new sources of income to replace declining interest receipts on their government bond holdings. In this so-called “reach for yield”, some of them leveraged themselves up to buy into emerging markets and bond funds – positions they are now dropping sharply. It is impossible to be sure where deleveraging will end. The last big unwind – a much smaller one – started almost exactly a decade ago. On June 25, 2003 the Federal Open Market Committee met amid expectations of a cut in the interest rate from 1.25 per cent to 0.75 per cent. Vincent Reinhart, the committee secretary, opened the meeting with some gallows humour. “On Friday”, he said “I was in line with my 11-year-old son to purchase Harry Potter and the Order of the Phoenix . . . It is somewhat longer than the briefing papers the committee has received. But it, too, considers an alternative world filled with uncertainty and great perils”. Alan Greenspan was chief wizard at the Fed that day. Mr Bernanke, more radical than he is now, was there, but mostly stayed silent. The committee was fully aware of the dangers ahead when it decided to cut the federal funds rate by only 0.25 percentage points. The market concluded that the Fed was preparing to tighten policy sooner than expected, and sharply adjusted expectations for where it thought rates would be in the years ahead. The same thing happened this week. The previous big Fed exit, announced on February 4, 1994, was even more dramatic. It was a day that triggered such turbulence that it is etched in the memory of all bond traders. Working as a Goldman Sachs economist, I was on the bond trading floor when the Fed released an innocuous-sounding statement. The FOMC had decided “to increase slightly the degree of pressure on reserve positions . . . which is expected to be associated with a small increase in short-term money- market interest rates”. Pardon? After a few moments, there was an explosion of noise as realisation set in. The market was unprepared for the Fed change, Investors were over-leveraged and knee-deep in Mexican debt and mortgages. Equities emerged relatively unscathed. But before the bloodbath ended that November, the survival of the US investment banks was at stake. Mr Bernanke wants this time to be different. His main weapon will be transparency and forward guidance. He says the Fed will end its asset purchases only if unemployment falls below 7 per cent, reducing the risk of tightening before the economy can take it. Short-term interest rates will stay close to zero for a long time after that and eventual rises will be gradual. He wants bond prices to fall slowly, leaving time for the financial system to adjust. There are two risks with the Fed’s exit plan. The first, raised by Paul Krugman and other Keynesian economists, is that it sends a premature signal to the world economy that the central banks will tighten before the private sector recovery has achieved escape velocity. This has happened before: the Fed made this error in 1937-8 and the Bank of Japan in 2006. Macro-economists such as Michael Woodford argue that the main economic effect of the Fed’s asset purchases is that they signal to households and business that the central bank is serious about keeping short rates lower for longer than normal. These stimulatory effects could now be reversed. If so, the US recovery might peter out, taking the global economy down with it. The second danger, in sharp contrast, is that the Fed has left it too late to bring market exposures under control, in which case the unwinding might take bond yields and credit spreads much higher than economic fundamentals seem to justify. In the famous phrase of Warren Buffett, the legendary investor, we only discover who is swimming naked when the tide goes out. Higher bond yields would spell danger for the financial system – and would mean rising mortgage rates at a time when the US housing market is only just starting to recover. The exit from quantitative easing was always going to be long and arduous. There is no historical playbook for the central banks to follow. Like a fighter pilot who has experienced combat only in a flight simulator, the real thing might be very different. The central bankers are confident that they have the technical tools to finish the job but, as Mr Bernanke admits, it will be like landing that plane on an aircraft carrier, and possibly in stormy seas. The writer is chairman of Fulcrum Asset Management and writes a blog on macroeconomics on FT.com Continue reading
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333 Haycock Road, Hope, Tasman – Listed wit Nina James – Re Max Elite – Nelson New Zealand A balanced coexistence between our natural environment and the spa… Continue reading
