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Tweets from Jack Malvey’s Boston Security Analysts Society talk

BNY Mellon’s Jack Malvey spoke about the Search for Global Relative Value During the Great Transition Age, 2009-2025, to the Boston Security Analysts Society yesterday.

I tweeted some of the bits that interested me the most. I was especially interested to learn that he holds no bonds in his personal portfolio.


If YOU attended the session, I’m interested to learn your thoughts about it.

Whiteboard video: If you want to add some visual interest

A video that only shows you speaking about a financial topic can get boring. This is why I suggest you add some visual elements.

One way to boost your visual appeal to use a whiteboard, as Paddy Hirsch does. I discovered his video through a tweet by Cathy Curtis of Curtis Financial. Hirsch is senior editor for the Marketplace radio show.

Here’s the link: Fiscal and Monetary Policy.

If you try a whiteboard video, remember to

  1. Use a microphone that will record you even when you’re facing away from the camera
  2. Face the camera as often as possible
  3. Add diagrams or drawings to enliven your whiteboard notes–Love that drawing of Ben Bernanke!

If you’ve ever tried a whiteboard video, I’d like to learn about your experience.

May 1, 2014: I updated this post to change information that was no longer accurate.

Best European investment opportunities are cyclical, say strategists

European cyclical stocks and banks in the continent’s peripheral countries offer the best investment opportunities, according to Ian Harnett, managing director for European strategy at Absolute Strategy Research (ASR), a London-based macroeconomic research firm. He made his comments during “Europe: ‘This could be Heaven or this could be Hell,’ ” a March 17 presentation to the Boston Security Analysts Society.

Reasons to favor cyclical stocks from Europe’s core countries

Why cyclicals?

“Globally, excess liquidity will continue to make ‘risk assets’ more attractive,” said Harnett. Cyclical stocks in core Europe will benefit most from loose monetary policy and weak exchange rates.

More reasons to favor cyclicals include the following:

  • The VIX measure of volatility will fall closer to 10 by year-end 2011, in Harnett’s opinion
  • European Union stocks remain cheap, using 10-year trailing earnings per share–They are still below lows hit in 2003 and earlier
  • European cyclicals tend to do better when the yield curve flattens
  • Dynamic earnings growth will support these stocks

ASR’s perspective on Europe’s crisis

The main points I took from ASR’s description of Europe’s situation were

  1. The important of cyclicality
  2. A shift in relative cost of capital between core and peripheral Europe
  3. The survival of the euro

Europe’s woes have both structural and cyclical elements, said Harnett. However, he said, fiscal deficits such as we’ve seen recently are nearly always cyclical rather than structural. Harnett made his point with a graph showing the correlation between “Budget Balance as a % of GDP” and “Industrials Hiring Intentions.” “This has been a jolly good indication of deficits until now,” he added. “Europe’s woes are more ‘cyclical’ than ‘structural,’ ” he concluded.

Investors are moving into “safe havens,” such as Germany, at the expense of Europe’s peripheral countries, Harnett said. As a result, the core countries of Europe are paying an inappropriately low cost of capital. German consumer confidence is at record highs, so they are spending.

“The German locomotive can carry a very heavy load,” said Harnett. German excess demand is being funneled to Europe’s peripheral countries. Germans are vacationing abroad and buying peripheral countries’ exports. Trade imbalances within the euro zone are shrinking. Eventually, banks will benefit, especially in the peripheral countries, assuming they survive the current turmoil. ASR is currently very long on European peripheral banks and neutral on the banks of core Europe. Harnett added that he expects ASR’s next move will be to overweight core banks.

The euro is a political creation, so politicians will ensure its survival, according to Harnett. So your investment strategy shouldn’t bet against the euro, if you agree with ASR’s opinions.

For more on ASR’s views, go to “Japanese crisis good for European economies” and “U.S. companies may move supply chain home.”

U.S. companies may move supply chain home, says Absolute Strategy Research

U.S. companies may move more of their production back home, said David Bowers, managing director of global strategy for Absolute Strategy Research (ASR), a London-based macroeconomic research firm. He spoke during the Q&A session following “Europe: ‘This could be Heaven or this could be Hell,’ ” a March 17 presentation to the Boston Security Analysts Society.

The lessons of the past few years suggest that companies should bring their supply chain home to avoid “the risks of exchange rates or tectonic plates,” suggested Bowers. The disruptions caused by the Japanese tsunami have been in the news.

Ian Harnett, ASR’s managing director for European strategy, agreed, elaborating on Bowers’ exchange rate comment. Offshoring is based on low foreign exchange volatility, he said. But foreign exchange volatility is rising. Food price inflation will encourage foreign countries to allow their currencies appreciate. As a result,  labor costs could rise by as much as 10 times, depressing the wage advantage overseas. This argues for in-sourcing, Harnett concluded.

Guest post on emerging markets: What about China?

Emerging Markets for Dummies author Annie Logue discusses China in her guest post. I’m happy to welcome Annie’s second guest post for this blog. Her first was “Talking to clients about social investing.”

She’s also giving away one copy of her book to one reader with an address in the U.S. who comments on her guest post. Be sure to input your email address, so she can contact you.

How can you say that China is an emerging market?

When I was working on Emerging Markets for Dummies (Wiley 2011), I had a question from my editor that probably nags at a lot of folks who are looking at international investing: How can you say that China is an emerging market when its economy is so big?

Well, yes, China is big. China has the third-largest economy in the world, behind the European Union and the United States, but it is nevertheless considered to be an emerging market. That’s for two reasons. First, China has the largest population in the world, so its economy per person is quite small. Divide China’s $8.2 trillion GDP by its 1.3 billion people, the result is a GDP of $6,700, ranked 130th in the world, right between El Salvador and Turkmenistan. Compare that to the United States, with a per-capita income of $47,400. (The US is ranked 11th internationally in GDP; Qatar is first at $145,300 – and it is also considered to be an emerging market because its leaders are working furiously to diversify the economy away from oil.)

To the average Chinese person, the country has a long way to go to be developed. Although the growth has been phenomenal, the nation has nowhere near the prosperity of the United States, Canada, or Japan.

Second, China’s infrastructure is still developing. For much of the 20th century, there was little spending on public works. In fact, some misguided political efforts such as the Cultural Revolution led to the destruction of perfectly fine schools and roads. Modern China needs roads, schools, electric power lines, airports, and all of the other niceties of a modern nation. The major cities are mostly set right now, but the nation’s vast rural areas are playing catch up. Beijing reaped the architectural rewards of the 2008 Olympics, but it has only 22 million people. More than a billion other Chinese are living in places without spectacular public parks and swimming pools.

When looking at China and India in particular, their national accomplishments have to be considered in the context of their massive populations. The CIA World Factbook, which is a great reference for anyone discussing emerging markets, says that only 61 percent of the population over age 15 is literate. To put it another way, India has more illiterate people than the United States has people.

It’s not easy to for an economy to be large enough to meet the needs of all of its people. China and India have a great deal of risk, despite their enormous progress. However, the creativity and hard work that goes into the attempt make for some great investment opportunities, even now.

I’ll give away a copy of the book to a random commenter with a US mailing address who responds to this post by March 1, 2011. Enjoy!

“Has housing bottomed out?”–Karl Case and others on the U.S. housing market

The U.S. housing market was the focus of a December 2 presentation to the Boston Security Analysts Society on “The U.S. Residential Housing Sector: Are We Near the Trough?” Scott B. Van Voorhis, lead real estate blogger for Boston.com, moderated a panel including Karl E. Case, founding partner, Fiserv Case Shiller Weiss, Inc.; Laurie Goodman, senior managing director, Amherst Securities Group, L.P.; and Brian Kinney, managing director, State Street Global Advisors.

Case neutral on near-term future of housing prices

Karl Case, who’s well-known for his role in creating what’s now known as the S&P/Case-Shiller Home Price Indices, said he’s neither optimistic nor pessimistic about housing prices.

On one hand, Case is concerned about a potential fall in the number of home buyers if immigration falls and more adult children end up living with mom and dad. The 1990 census showed that we had 10 million people whom we didn’t know we had, said Case. He’ll feel discouraged if the 2010 census shows we’ve got a smaller population than expected due to a decline in immigration or other factors.

On the other hand, said Case, affordable house prices help.  You can buy a house today for half of what you would have paid on a monthly basis three years ago, he said. Low interest rates help, too.

In Case’s opinion, the next one-and-a-half years are likely to see a 0% change in housing prices. If prices don’t decline, we’re happy, said Case. Moreover, “When prices begin to rise, it’ll be a whole different ball game,” he added. A small number of people coming into the market can have a big impact on prices because valuations are set by a small number of transactions. In “A Dream House After All,” a September 2010 op-ed essay, Case said, “…a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision. And emotions can change on a dime.”

House price decline of 5%-10% foreseen by Goodman and Kinney

Case’s fellow panelists were more pessimistic, both projecting a house price decline of 5%-10%. Houses are affordable by traditional standards, said Goodman. However, that plus is offset by a huge number of houses and limited credit availability. This poses an obstacle to reform of Freddie Mac and Fannie Mae. Kinney agreed that reform will be a big challenge.

Geographic differences

Case pointed out that housing prices vary by region. For example, California suffered from a boom in house prices, but not an oversupply of housing. So it’s recovering ahead of states such as Nevada and Arizona that overbuilt. However, California accounts for one-quarter of the nation’s housing by value. That means as California goes, so goes the nation, according to Case. The state’s house prices have been rising since the spring of 2009.

Foreclosure crisis calls for dramatic moves

Goodman made the point that the foreclosure crisis isn’t over. She believes that about 95% of 5.2 million non-performing loans will eventually be liquidated. The government’s measures have stretched out the foreclosure crisis, rather than solving it, she said.

Principal reduction for mortgage holders who are “under water” must be part of the solution, said Goodman. The Home Affordable Modification Program hasn’t gone far enough, in her view. For the sake of the U.S. economy, the government should make principal reduction mandatory, she said.

She also suggested the following:

  1. “Increase credit availability to borrowers.”
  2. “…[re-qualify] borrowers who are in a home they can’t afford into one they can afford.”
  3. Offer immigrants “amnesty through an investment in housing.”

What do YOU think is the solution?

I’m curious to learn your take on the housing market. Please leave your comments below.

For another perspective, check out “Could Your Children Buy Your House?” by David Glen. Dave, whom I was delighted to meet in person for the first time at yesterday’s BSAS meeting, also discusses the panel.

 

Photo credit: cindy47452

Notable quotes from the CFA Institute’s emerging markets conference

So many great emerging markets presentations, so little time to blog about them.

Below you’ll find quotes or paraphrases of opinions voiced by speakers at the CFA Institute’s  “Investing in Emerging Markets” conference held in Boston on October 19. If these snippets pique your interest, watch the CFA Institute website for podcasts or other records of selected presentations. Also see my recent blog posts, “Bubble?–Emerging markets scrutinized by CFA Institute conference,” “ISI’s Straszheim: China’s interest rate hike is ‘tapping the brakes’,” and “Cautious optimism on emerging market stocks from SSgA’s Hoguet.”

Paulo Vieira da Cunha, Tandem Global partners

  • There is no decoupling. Two-thirds of global consumption and trade is in the advanced economies.
  • There are lots of interesting plays in Brazil today, if you are careful.
  • It’s very clear the Brazilian economy is overheated.
  • China was a big factor in Brazil’s post-2008 recovery.

Kristen Forbes, MIT Sloan School of Management

  • There are few options for emerging market countries to control the impact of capital inflows.
  • Experts disagree about whether emerging market countries should impose temporary taxes on capital inflows.
  • Academic literature says capital controls have little impact, especially long-term. At best, they can shift inflows to safer composition.

Sivaprakasam Sivakumar, Argonaut Global Capital

  • The best opportunities in India are investing in first-generation entrepreneurs. Look for the next Infosys.

Tina Vandersteel, Grantham, May, Van Otterloo & Company

  • When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
  • “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
  • Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

Cliff Quisenberry, Caravan Capital Management

  • There is a significant different between frontier countries in the index and the other frontier countries.
  • Country selection is more important in frontier markets than in emerging markets.

AlisonAdams, Alison Adams Research

  • Emerging markets’ share of global market capitalization could overtake developed markets’ share by 2030, according to Goldman Sachs.
  • Most emerging market governments are reasonably market-friendly.
  • Extreme events can present buying opportunities, as with the Mumbai attacks in India in 2008.

Cautious optimism on emerging market stocks from SSgA’s Hoguet

Emerging markets have been hot enough that the CFA Institute organized a one-day conference on the topic, held in Boston on October 19.

Here’s how George Hoguet, global investment strategist specializing in emerging markets at State Street Global Advisors, summed up his outlook when he spoke about “Decoupling or Contagion: How Will Fiscal Consolidation in Developed Markets Impact Emerging Markets?”:

The Great Recession has enhanced the secular case for investing in emerging markets, but the reduction in potential GDP growth in many developed markets will negatively impact emerging markets.

One of Hoguet’s comments resonated with me more than the others: “Japan as Number 1 is a reminder of the difficulty of long-term forecasting.” As a former teaching assistant for author Ezra Vogel, I remember the uproar about Japan’s predicted domination of the global economy. The Land of the Rising Sun had seemed unstoppable, which worked to my benefit when I led training seminars on “How to Do Business with the Japanese.” My, how times have changed.

Another warning from Hoguet: Economic growth does not necessarily lead to superior investment returns, as Korea shows. Still, he suggested that investors focus on large economies with sustainable domestic demand. He also recommended that investors overcome their home-market bias to market-weight emerging markets and be open-minded about newer types of investments, such as farm land and long-short funds.

One of the many pluses mentioned by Hoguet was that debt/GDP ratios are lower for emerging markets than for developed countries. In addition, current emerging markets are not “demanding” at about 13-times-earnings for the next 12 months,

We’re not in a bubble yet,” concluded Hoguet.

ISI’s Straszheim: China’s interest rate hike is “tapping the brakes”

“China raised interest rates and everybody is all upset about that,” said Donald Straszheim at the start of his Oct. 19 presentation on “China’s Growth Prospects and Risks” to the CFA Institute’s “Investing in Emerging Markets Conference.” Earlier on Oct. 19, China raised borrowing and deposit rates by 0.25% (25 basis points).

Perspective on Oct. 19 Chinese rate hikes

But Straszheim, the head of China research for ISI Group didn’t seem upset by China’s rate hikes. Instead, he presented it as a reasonable way to “tap on the brakes” to slow China’s economic growth. Looking at the history leading up to the rate hikes, Straszheim said that China implemented a big stimulus following the 2008-2009 economic meltdown. This led to China overheating later in 2009 and into 2010. Although attempts to slow the economy to engineer an economic “soft landing” were  having an effect, inflation was at 3.5% and rising too quickly. Food, which makes up more than 30% of China’s consumer price index, could potentially boost the country’s inflation to 5% as a result of weather issues, said Straszheim. Also, the economy is still strong and the housing market is booming. Hence, the rate hikes.

“I don’t think this is the beginning of the end,” said Straszheim. “I don’t think this is the beginning of another major tightening cycle,” although more rate hikes may follow.

China is heading for a “soft landing” and is likely to experience 3%-4% inflation and 8% growth in 2011, added Straszheim.

Slower growth is coming

China’s fastest economic growth is behind it, said Straszheim, for the following reasons:

  1. Demographics. China’s “one child” policy will hurt it. The average growth of China’s labor force had been 12 million per decade. Growth will fall to four million for this decade and then shrink by two million in the next decade, said Straszheim.
  2. Technology. The technology gap between China and the rest of the world has narrowed dramatically.It can still make gains, but they won’t be as big.
  3. China’s key export markets. The U.S., Europe, and Japan will grow more slowly than in previous decades.
  4. Scale effects. The economy has grown a lot. It’s harder to grow quickly off a big base.

Straszheim’s predictions for China’s economic growth are

  • 2010-2014: 8%
  • 2015-2019: 7%
  • 2020-2024: 6%
  • 2025-2029: 5%

Chinese challenges: Housing shortage, bank loan problem, yuan vs. dollar

China faces some challenges:

  • China needs almost twice as many housing units as are being built.
  • Its banks hold many nonperforming loans.
  • There is tension between China and the U.S. over exchange rates. What goes unnoticed in the U.S. is that the Chinese currency has fallen vs. most key currencies other than the dollar. The main risks to his forecast are in the areas of trade and currency, he said.

Despite the challenges, Straszheim expects China will grow faster than much of the rest of the world for a long time to come.

Should the Morningstar style box go 3-D? Quality counts, says Atlanta Capital

Investment professionals and financial advisors are familiar with the Morningstar style box, which categorizes stock funds by market capitalization and style. A recent CFA Magazine article made me wonder if Morningstar should turn the style box into a style cube by adding a third dimension: quality.

Stock quality may overwhelm size and style

Quality counts for just as much as size and style.

That’s according to Brian Smith, director of institutional services and principal at Atlanta Capital Management, in “3-D Investing” in the Sept.-Oct. issue of CFA Magazine. The CFA Magazine article is based on a longer white paper, “The Third Dimension: An Investor’s Guide to Understanding the Impact of ‘Quality’ on Portfolio Performance.” To access the original white paper, click on “Publications” across the top of the Atlanta Capital website.

“…our research indicates that ignoring quality and investing solely by capitalization and style dimensions is unwise. In fact, the performance of high- and low-quality stocks can have a significant influence on an investor’s risk and return characteristics, in many cases overwhelming the influence of either size or style,” writes Smith in his CFA Magazine article.

I wondered if there might be something other than quality at work.  Could one style be more associated with quality than another?

Smith notes in the white paper that certain value and growth styles are sometimes associated with high- or low-quality stocks. “Conservative growth” and “relative value” tend toward high-quality vs. low-quality for “absolute value” and “aggressive growth,” he says. Smith refers to this as a “hidden quality bias.”

Smith compared returns by quality, size, and style using Russell indexes and custom benchmarks based on the Standard and Poor’s Earnings and Dividend rankings. Looking at 2009 returns, he found that “Clearly, each size, style, and quality index responded differently to the same economic stimuli….”

In other words, the correlations among the quality, size, and style indexes were weak.

The “quality cycle” in the stock market

Smith suggests that a “quality cycle” exists because fluctuations in the performance of high- and low-quality stocks are associated with the economic and stock market cycle. Low-quality stocks briefly outperform high-quality stocks at both ends of a market cycle. This is probably because they’re more sensitive to the economy, the availability of credit, and investor speculation. High-quality stocks win the rest of the time.

Smith concludes,”If history is a guide, high-quality stock should post stronger relative returns in 2010 and 2011….”

Do you agree? You’ll probably want to read more of the CFA Magazine article or Atlanta Capital white paper before you decide.