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Japanese crisis good for European economies, strategists say

Will the Japanese crisis help or hurt European economies?

The answer hinges on how it affects nominal growth in European countries’ gross domestic product, 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.

Higher capital expenditures

In Europe, as in the U.S., companies have been hoarding cash. It’s likely these firms will open their capital expenditure spigots wider, according to Bowers. Why? Because the crisis presents an opportunity to gain market share at Japanese companies’ expense, Bowers said.

Ian Harnett, ASR’s managing director for European strategy, said this opening should appeal to Germany, which competes directly with Japan in areas such as heavy machinery.

Another plus for European economies is that Japan’s plight makes central banks less likely to raise interest rates for fear of sparking a return to recession.

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!

New publishing opportunity for investment professionals

Investment professionals, mark April 1 in your calendar if you’re interested in expanding your professional publications.

April 1 is the deadline for submissions for potential publication in the September 2011 issue of the New York Society of Security Analysts’ new online peer-reviewed journal.

The society says it is “particularly interested in articles on financial regulation and risk management.”

The journal is aimed at practicing investment professionals. Here’s how it describes its goals.

  • Educate investment professionals on theory and practice in securities analysis
  • Offer a forum for the latest in thought leadership in the investment industry
  • Promote discussion among various groups in the industry: professionals, regulators, private investors, company boards of directors and CEOs, students, etc.
  • Supplement the programs and professional development curriculum offered by NYSSA
  • Serve as a career development resource for readers

Start writing today!

How do you spell it? “Out-performance” vs. “outperformance”

The Firefox browser’s spellchecker keeps tagging “outperformance” as a typo. I feel very annoyed when this happens because I believe it’s wrong.

The case for “outperformance”

Here’s the evidence in favor of marrying “out” and “performance” so they’re one word:

  1. “Generally do not hyphenate when using a prefix with a word that starts with a consonant,” says The Associated Press Stylebook. Note: I’m using the 2007 version of the AP Stylebook.
  2. Words into Type agrees, saying “The modern tendency is to eliminate the hyphen between a prefix and a root unless the root is a proper noun or adjective, such as un-American.”
  3. Google brings up about 1.2 million examples for “+fund +outperformance” vs.fewer than 700,000 for “+fund +out-performance.”

The case for “out-performance” with a hyphen

I mustered one piece of  evidence in favor of hyphenating “out-performance.” Google yields more than 931 million search results for “out-performance” vs. only 1.01 million for “outperformance.” It’s strange that the first four results use the spelling “outperformance,”as you see in the screen shot on the left.

Results of my spelling poll

When I polled my newsletter and blog readers about the proper spelling, “outperformance” won in a landslide, with 92% of the vote. Here are the results:

  • Outperformance: 92%
  • Out-performance: 0
  • Out performance: 8%
Note: I updated this piece on December 1, 2013, to share the results of my poll, instead of directing readers to a poll that’s no longer active. This post originated as a request for readers to respond to a poll.

Guest post: “Client fears and financial advisor services”

Fear prompts financial advisors’ clients to make bad decisions, as Meir Statman explains in his guest post below. He’s a renowned scholar in the area of behavioral finance, so I’m delighted to receive his guest contribution and a free copy of his new book, What Investors Really Want, thanks to my friends at McGraw-Hill.

Client fears and financial advisor services

By Meir Statman

Many financial advisors encountered clients who were urged by fear to cash all their stocks in late 2008 and early 2009. Today, some advisors encounter clients who are urged by fear to replace stocks and bonds with gold.

Clients are often urged by cognitive errors and emotions to act in ways that damage their long term financial health. In that, clients are like patients who are urged by cravings to smoke or eat more than is prudent. Financial advisors are financial physicians. Good financial advisors listen carefully, empathize with clients fears, diagnose, educate, prescribe solutions, and follow up. Physicians do their work with the tools of science. So do financial advisors who teach clients the science of financial markets and the science of human behavior.

We know from the science of human behavior that we are less willing to take risk when we are frightened than when we are calm. In one experiment, a group of students were offered money to stand before the class the following week and tell a joke. A flat joke can be embarrassing, so it is not surprising that some students who agreed to tell a joke withdrew in fear when the time came to stand and tell a joke. But students who were frightened were more likely to withdraw than students who were not. Half the students in the experiment were shown a fear-inducing film clip from The Shining, Stanley Kubrick’s classic horror film, before deciding whether to tell a joke or withdraw. It turned out that a greater proportion of them withdrew.

Fear misleads us to avoid risk even when it is wise to take risk. Here is an investment game: I’ll toss a coin right before your eyes. If it comes out heads, I’ll pay you $1.50. If it comes out tails, you’ll pay me $1.

We’ll play 20 rounds of this game. Before each round you can choose to participate or sit it out. Ready? Suppose that you have lost three dollars in the first three rounds because all three tosses came out tails. Do you choose to participate in the fourth round or do you choose to sit out?

Three losses in a row would arouse fear in normal investors. Many choose to sit out the fourth round. But there is no good reason to be afraid because the game is stacked in favor of those who play all 20 rounds. In each round we have a 50/50 chance to lose $1 or gain $1.50. Our maximum loss is $20 while our maximum gain is $30. And even if we lose, a $20 loss is hardly catastrophic. Yet brain-damaged players were more reasoned at the game than normal players. Undeterred by fear, brain-damaged players played more rounds of the game than normal players and won more money.

There is a lesson here for advisors and clients.  Fear grips us when we watch our portfolios day by day and see so many losing days.  Fear grips us even more strongly when we watch losses in our portfolios over many months or even years, as happened in 2008 and early 2009.  Fear urges us to sell our stocks and invest the money in gold or put it under a mattress.  The fear of clients is normal, and financial advisors can counter it by teaching clients the science of human behavior.

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, and Visiting Professor at Tilburg University in the Netherlands and the author of What Investors Really Want (McGraw-Hill). His research on behavioral finance has been supported by the National Science Foundation, CFA Institute, and Investment Management Consultants Association (IMCA) and has been published in the Journal of Finance, Financial Analysts Journal, Journal of Portfolio Management, and many other publications. A recipient of two IMCA Journal Awards, the Moskowitz Prize for Best Paper on Socially Responsible Investing, and three Graham and Dodd Awards, Statman consults with many investment companies and presents his work to academics and professionals in the U.S. and abroad. Visit his blog http://whatinvestorswant.wordpress.com/

Poll: Is the SEC’s plain language requirement for Form ADV Part 2 a good idea?

SEC-registered advisors must rewrite Part 2 of their Form ADV using plain language. The requirement takes effect in 2011.

You won’t be surprised to learn that I favor plain language, but I’m curious to know what you think of the new requirement.

Please answer the poll in the right-hand column of my blog, asking  “What do you think of the plain language requirement for Form ADV Part 2?”

  • Bad idea
  • Okay, but will cost too much time and money
  • Good idea, but I’m not sure if it’ll be implemented effectively
  • Great idea, I’m looking forward to it
  • None of the above (please leave a comment)

By the way, the SEC’s plain English handbook is a great resource for your Form ADV rewrite, as Deborah Bosley and Libby Dubick point out in “Lemonade from legislative lemons: New ‘plain language’ rules for Form ADV give advisors a chance to stand out.” Investment News (Oct. 4, 2010, registration required).

Bubble? — Emerging markets scrutinized by CFA Institute conference

Is now a good time to invest in emerging markets?

The answer depended on which speakers or attendees I listened to at the CFA Institute’s “Investing in Emerging Markets” conference held in Boston on October 19.

The overall mood was cautiously optimistic for the long-term. “We’re not in a bubble yet,” said George Hoguet of State Street Global Advisors, who also mentioned some concerns about emerging markets.

At least one speaker said some emerging markets are already in a bubble and several attendees told me they’re waiting for a pullback before they put money into emerging markets.

It’s not only emerging market stocks that worry investment professionals. While some investors are eager to pick up an extra six percent (600 basis points) or so by investing in emerging market debt, Grantham, Mayo, Van Otterloo & Company’s Tina Vandersteel suggested that emerging market bonds may not be as safe as you think. This is especially true of external debt, which has a 32% probability of default vs. only 2% for local debt, although spreads of about 3% (300 basis points) provide a cushion for defaults, she said.

What about you? Are you ready to invest in emerging markets today?

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.

Guest post: “Investment analysts and social media”

Pat Allen of RockTheBoatMarketing is one of my “go to” people when I’m looking for information on how asset managers use social media. If you’re interested in tracking this topic, follow Pat’s Twitter feed at RockTheBoatMKTG and check out her Twitter list of investment managers. If your interests focus more on financial advisors, then Pat’s AdvisorTweets Twitter account is for you.

In her guest post below, Pat suggests that investment analysts and portfolio managers need to learn how to do research using social media or risk missing–or being late to obtain–information that influences the prices of securities.

Investment analysts and social media

By Pat Allen

Institutional analysts and investors rely most on information that comes directly from companies.

This was a finding in a survey conducted last year by the Brunswick Group that I remember reading and finding unremarkable.  And yet it’s increasingly obvious that corporate information can be relied upon for a company’s plans and intentions—but how an organization moves forward will be influenced by a marketplace reacting in real-time.

To be sure, that complicates things and not just for corporations pursuing business agendas but also for analysts and investors trying to assess companies’ prospects.

Social media is messy. There are zillions of media and networking sites and blogs, lots of noise and plenty of false signals. Still, we think it’s a faulty investment decision that’s made today without consideration for what consumers and influencers are saying.

Gap’s October 4 introduction of a new logo is a recent case in point.

In an October 7 essay on the Huffington Post, Gap North America president Marka Hansen explained that the company’s product selection and retail presence was evolving.

“The natural step for us on this journey is to see how our logo–one that we’ve had for more than 20 years–should evolve. Our brand and our clothes are changing and rethinking our logo is part of aligning with that,” wrote Hansen.

“The natural step for us on this journey is to see how our logo–one that we’ve had for more than 20 years–should evolve. Our brand and our clothes are changing and rethinking our logo is part of aligning with that,” wrote Hansen.

Not so long ago a company executive might have mentioned a new logo on a conference call. If the company’s marketing was believed to be stale and a growth inhibitor, a rebranding plan might have bolstered investor confidence–if only temporarily–prior to the market’s reaction to the change.

In thinking about this post, I flashed back to Peter Lynch’s One Up on Wall Street: How to Use What You Already Know to Make Money in the Market. I was pretty green when I read that book but even then I was skeptical about Lynch’s thesis. Listen to what shoppers said at one store in one mall and invest based on that? I had my doubts and there was something about it that I found condescending. Surely that’s not how professional investors did it?Institutional analysts and investors rely most on information that comes directly from companies.

But Lynch’s recommended approach foreshadowed what is today called online listening. The difference today is that the vast majority of social media sites are architected to serve as databases—easy for interested parties to query, filter and subscribe to for efficient listening and ongoing temperature-checking.
Company information, primary market research, real time subscription information services, analyst research, the business media—all are inputs that ranked higher than “new media” in the 2009 Brunswick research into what influences analysts’ decisions or recommendations. New media, defined as blogs, message boards and social networking sites, were consulted by just 4% of respondents.

The next time such research is conducted we’d expect the monitoring of new media to soar as professional investors learn more about social influence.

Pat Allen is a Chicago-based digital marketing strategy consultant whose Rock The Boat Marketing firm helps investment companies think through what they do on the Web. Pat also operates AdvisorTweets.com, a site that aggregates the tweets of U.S.‐based financial advisors.