Investment Opinions September 2013

Oh Dear, is there a world outside Washington DC?

Balancing the budget is like going to heaven. Everybody wants to do it, but nobody wants to do what you have to do to get there. – Phil Gramm Economist and Politician, Chairman of the US senate banking committee, in a television interview 1990

The leading 20 economic nations of the world, as well as a few hangers on from elsewhere assembled in St Petersburg a week or so ago for the annual G20 meeting.
G20 meetings are usually fairly useless affairs with one party attempting to get some form of ratification on an issue, while the other members seem happy to chat amongst themselves. The one in St Petersburg was governed by the situation in Syria. Pressures on oil and gold prices will depend on how aggressive the rhetoric between the US, Russia and China becomes over the prospects of intervention.

In the USA, the Government will reach their borrowing limit and begin to shut down non-essential services on 1st October. The Republican party, not bothering to hide their ferocious distaste for President Obama, are trying to hold the Democratic led government to ransom by demanding a 12 month moratorium on health spending for poor people, a measure which was passed in 2010 and is part of president Obama’s election promises. The effect on the US equity markets will probably be negligible; American companies are still showing high profit levels and the equity prices of those paying dividends based on profitability will continue to increase and be thoroughly sound investments. In the meantime Congress as currently constituted will merely display its irrelevance before the next mid-term election. It depends on how long the shut-down lasts.

The Republicans in Congress have not learned their lesson from the ‘fiscal cliff’ crisis at the end of 2012 and their rabid willingness to see the United States drop off the cliff can only be described as suicidal.

It is perhaps no wonder that in recent polls the Republicans scored lower than 10% in the Gallup approval ratings, lower that the potential approval for a communist regime to control the US, lower indeed than the popularity ratings for odious insects such as head lice and cockroaches.

The policy objections have nothing to do with what is good for the country; far more whatever is being put forward is by definition being opposed. The tea party wing of the republicans never actually looked like having a winning strategy to anyone but themselves. There are worrying signs that the fiscal cliff, the borrowing limit set by congress for the US government will bite hard by late October or early November.

The threatened tapering or reduction in the monthly 85 Billion US dollar bond purchases did not materialize. Dr. Bernanke suggested that an improvement in the unemployment statistics would allow such a move, but worse than expected figures for new house purchases showed the true weakness of the economy and put the end of the program on hold.

In the world at large much has happened, but little that will have a dramatic effect on the investment markets.

1. The Angela Merkel led union won the general election in Germany with an increased share of the total vote. This was 5 votes short of giving the union a working majority, so a coalition partner will have to be found, resulting in inevitable policy compromises as a price for being allowed to rule. The effect on investors is negligible, as most parties will in the end wish to follow the path of stability and no-one at present wants a coalition with the ‘Linke’ or former communists.
2. In the Emerging markets, especially China, the situation is unsteady. China, on the face of it, has a slowing growth rate, down from 8.0% to 7.5%. This disguises the fact that the Chinese economy is changing from one based on investment in infrastructure to one which is actually much healthier and is based on rising consumer demand. India has the same corruption based problems as before and Indonesia has burst its speculative bubble. This can be financed as long as there is cheap liquidity released by the United States’ Federal Reserve looking for a profitable home but this won’t last forever.
3. Other Asian countries including Indonesia and even Turkey are looking worryingly weak at present, with large trade deficits. If US tapering were indeed to bite, these countries could only refinance themselves at a very much higher cost, resulting in sharply falling economic prospects and the risk of having their bonds shunned by investors.
4. The use of chemical weapons against civilians in Syria and the response from the west has resulted in investors becoming more risk averse in their investments in the emerging markets as a whole. It is unclear which faction in Syria actually used chemical weapons. The government side has several strongmen only nominally under the control of President Assad. He can therefore deny having used these weapons, while forgetting to mention that others in his camp could easily have used them. T seems unlikely that the US will need to attack Syria by itself (which must be a relief for president Obama). The line in the sand has been replaced by vague threats and mutterings, with American dignity having been preserved.

Once again investors are taking fright. It is uncomfortable, but when one isn’t sure what to do next and can see no alternative anyway, it seems a reasonable choice to simply freeze with fear.

Japan seems to be emerging from 25 years of wasted time due to political dithering. From a once proud economic powerhouse, the country which is now and at last under the control of Mr. Abe and a firm and courageous government, is trying to leave low growth and deflation behind. There is so much potential in Japan, yet the first shoots of green do not make a spring and investors would do well to wait and see. There are few prizes for being first in this particular field.

In Europe it’s clear that, at a time when capital is once again fleeing emerging markets and negative sentiment has the upper hand; many investors see this as a fitting opportunity to review their allocation to emerging markets and to Asia in particular.

However, as a European investor, I believe that, in line with the management of many of the most successful European companies, investors should use market corrections to review current investments and make sure that they are invested in the best growth opportunities in the Asian economies. The longer and deeper the correction, the more attractive opportunities and good value will open up in many markets. At this point in time, the challenges may have grown but Asia has the ability to offer good longer-term returns as the “taper tantrums” subside and the direction of policy globally becomes clearer later this year.

Blackmail seems to be in vogue at present. The former Prime Minister of Italy, Silvio Berlusconi, is trying to avoid the consequences of having been convicted of tax fraud and as a convicted criminal being thrown out of the Italian senate. At first he threatened the existing government with being toppled if they did not somehow allow him to keep his seat. (After all as we have already seen, Mr. Berlusconi is convinced the rules applying to mere mortals do not apply to him).

European economies seem to be beginning an unsteady and unequal recovery. Unequal because the northern states such as Germany are performing strongly, the olive oil countries are much weaker, though Greece for instance has recently reported much stronger tourist inflows this summer.


Assuming investors want to see a profit; they must avoid emotional speculation and stick to investing with those fund managers who have shown they can manage risk.

Equities have strong potential; bonds can be mixed into a portfolio, but only if they provide an efficient mixture of risk and return.

Every market has potential, but it takes an expert to find the gold where other people see only mud.