Plenty of profit-taking in the markets in the last few days ahead of big economic releases this week (Australia already increasing rates again, FOMC release on Wednesday) and having been on the road with our Global Strategist plenty of reflection from around the region to decipher,
As lovely as Doha is, it’s never the most exciting place in the world. I don’t think the Qataris would mind this description as they consciously avoid the attractions Dubai often craves, preferring to remain selective in their events and maintain top-notch organisation and execution of entertainment promotions, like Abu Dhabi. The Tribeca film festival held in Doha last week saw stars the likes of Ben Kingsley and Martin Scorsese grace the often placid streets of the village-like city. As the rich and famous were strolling around outside, inside the buildings housing the Qatari investment community we wondered what types of returns these stars’ vast earning-power were enjoying for the year, slightly jealous of their supposed recession-proof movie industry. The amounts they were being paid to be in Doha for several days was surely providing some help to whatever gains had been achieved.
Trade don’t analyse…
We all know markets can act quite independently of surrounding macro economic factors, but what if really surrounding macro economic factors have decided to act independently of markets? This conundrum appears to be confusing more than its fair share of normally hard-headed investors. A sense of “who knows what will happen” prevails across a number of normally smug investment managers across the region (and beyond), concerned that there is too much unpredictability within the stimulus framework that we all now live within. The big questions are when will the stimulus efforts come to an end (or have to end when the spending simply becomes too much to handle - the US is close to surpassing 100% of national debt/GDP for the first time, and it’s mostly held by foreigners unlike Japan’s 230% ratio which is not that dangerous when you remember it’s all held by Japanese – basically they owe themselves a lot of money), and sprinkled with even more uncertainty is what happens to markets and the underlying economy when the end does arrive. This uncertainty means the next diversion in policy will be the setting of interest rates, leaving open the possibility of the “last war” being fought on this ground in a bid to insulate.
Traders are getting it right at the moment, understanding the benefit of increasing earnings expectations and earnings gains at absolute levels (from incredibly low floors) leading to share-price gains. It’s the traders that have been making money since markets started their strong-run back in March – rises of 50% across the developed majors. The fundamental analysts are the ones having trouble coming-to-terms with what is happening around us, preferring to focus on lagging indicators (such as unemployment numbers and lingering on the bottom-line) and running the risk of being over-taken in the traders’ brand-new (bear-market rally financed) Ferraris – in red of course.
Calling 20,000
Let’s get controversial for a moment and stick our necks out with a number – if it was suggested that within the next 18 months the Dow Jones would test the 20,000 level how would you react? Well after picking yourself up off the floor and re-reading what was just written – yep, it said 20,000, that’s T-w-e-n-t-y T-h-o-u-s-a-n-d – and overcoming the initial instinct to either laugh or cry out of disbelief, taking into account the short-sharp rallies before a relapse into recession as in the past depression of the 30s, the possibility is not all that far-fetched. It boils down to whether you believe top-line growth is enough to create a strong buy conviction. It further boils down to how long you can convince the investing community that relative versus absolute is the correct way to consider strength of earnings. Hitting a short/medium term high is a possibility. The larger concern is the pain investors will feel if they get burnt again just when they think the coast is clear. It’s that human emotion of dealing with a nasty rejection once more – if you have a bad experience in a relationship, it takes you longer (and takes much more effort of confidence for most) to get back out there into the game, but you do venture out once more. The real slug-in-the-gut is when it happens again. The next time you are going to expose yourself to such disappointment increases exponentially in length – markets may remain depressed for a while if we experience a short-term high.
Merging the Emerging…
A couple of things are clear across the board. The huge levels of liquidity flowing out of central banks (but not into the hands of mortgage consumers - so far) has had no choice but to find its way into some decent returning assets and investment instruments – essentially creating the start of what may eventually turn out to be a bunch of small “bubbles” - if not carefully monitored. However, with global confidence and the general economic situation still quite unstable, the low floor from which these investments have risen will ensure it will be a while before the blowing of any bubble. The first obvious beneficiary has been emerging markets (more below). Corporate spreads (amongst quality names) have also narrowed with large inflows and the commodity play/treasury rise/US$ safe haven has been working since the start of the crisis back in 2008. The strength of emerging markets (all providing incredible looking returns this year so far, Peru +118%, Brazil +114%, Russian +110%, Indonesia +103%, Argentina +80%, China +80% to name but a few) was touted some time before the bear-market rally. Memories of the “death of the BRICs” have been laid to rest, and some of the more vocal pundits declaring the (still not totally proven) theory of “decoupling” as a pathetically optimistic hope, left slightly red-faced. Reading back on some commentaries (here especially) it was strongly favoured that the Asia economies would be the first to pull the investment community out of its rut, and whilst the exporting Asian economies still rely heavily on US and European consumers, the rise of the domestic Chinese buyer (all that talk of 1bn consumers never sounds boring) and increasing Asian wealth in general making for an appealing story.
Would central banks, having finally learnt from past experiences - not to mention some increased public scrutiny - start leaning harder and faster against asset bubbles at the slightest indication of one? This is a much larger debate than what markets will do over the next 12mths, leaning into territory dealing with capitalist versus market-controlled policies. Preventing those smart enough to understand there is a new opportunity from profiting off those apparently not smart enough (who inevitably pay over the odds (a la tech bubble for example) is detrimental to “creative destruction”. Where there might be a great argument for preventing such over-peddling of toxic and extremely risky assets such as CDOs, how can you stifle entrepreneurial creativity by removing from the outset the incentive of huge profit generation on the back of a smart idea? Most out there believe there will be a new “new thing”. As with past downturns, the previous boom drivers always lag in the next boom. Look at tech from 2002-2007 – didn’t do very much after their time in the limelight in the late 90s. Property was the major contributor in 2002-2007, but with the pain so fresh in the memory you can safely bet something else (emerging markets most likely) will enjoy the next 15mins of investor adoration.
The strong get to play…
How to play on this? Well, how about taking advantage of the excess liquidity pushing emerging markets higher and the low rates of interest in the US for starters? Borrow from the world’s strongest capitalist market and invest in those emerging into a stronger-looking mix of capitalism and authoritarian control. Or how about tapping into the corporate debt market where rates are attractive (for all the trouble across the US, the corporates are still regarded as well-run and people are willing to lend at rates of around 7-8%) and tapping into the same emerging markets as above through an acquisition of an international firm with a large footprint across the same. As we suggested many times in the past, those with cash, and those with easier access to cash will come out on the back of this period of recession as the strongest players going forwards. Western names with large exposure to the stronger emerging markets are a great attraction right now (like Volkswagen and even luxury goods makers like Louis Vuitton selling like hot-cakes in China and Hong Kong). The top players in each industry have generated large amounts of cash and their quality will allow them to tap yield hungry investors when most needed. Survival of the fittest as the strongest excel. Expect a good deal of consolidation across the healthcare, tech and financial industries (financials will be the last and possibly call the bottom of the market) with the big players buying out the struggling mid-level players starved of cash and with no offer of credit (a bit like Abu Dhabi having fun with Dubai’s assets) - Easy pickings.
So we have mixed anticipations out there amongst the investment community in the Gulf. Some of the more trading orientated have had a great year. The movie-stars enjoying Qatar and Abu Dhabi in the last few days were are also likely having a good time. The only concern is always the unbalancing unknown – as many economies are uncertain how to handle unprecedented circumstances such as the removal of incredible amounts of fiscal/monetary stimulus and the level of tightening that will follow as the inflationary backlash takes hold.
Additionally, not everything beneficial for one is beneficial for all. The 1bn new consumers in China we all love talking about did not prove so attractive for Gillette – their Mach product range (razors and creams) did not prove so useful in a country where hair growth is not a great, uhmm, concern and hence shaving not so necessary. If even a box-office ticket heros like Nicholas Cage can suffer a significant loss at the hands of “unsound financial advice” then happy, double-digit returning financial investors this year have even more to smile about across their bearded faces.
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