Has The Dust Settled in the Global Equity Markets Yet? October 28, 2008
During recent conversations with a number of our clients that include Family offices, Pension Funds, hedge funds and Trust groups I have come to sense a type of post-traumatic stress syndrome in which the battering they have taken from the markets coupled with pending redemptions from distressed investors has left them dazed and a bit shell shocked. The common refrain is that “When the dust settles we can get back into the market”.
As such it may come as a shock to the general public that the Dust has in fact begun to settle! Global valuations are at record lows, consumer confidence is in the crapper and the powers that be are now telling us that we are in a recession. For those of you that were unaware we have been in a recession since June. So why has the dust begun to settle? As I am fond of saying “perception drives reality” and perception vis-à-vis the markets and the economy is about to begin a fundamental shift. That shift will begin next week on Wednesday November 5th to be exact and will gain momentum through December and January.
Can a new US administration shift global perception? You bet! Since there is very little confidence globally in the current administration and why should there be? After all of their debacles (and there were quite a few) the latest episode was to force through a panic driven $700 billion bailout bill that was ostensibly to be used for the purchase of bad paper. That strategy made a 180 degree turn several weeks later and the new strategy is to invest directly in banks, hardly the kind of stuff to build confidence!
So are we expecting miracles from the Obama administration, the answer is no! We are simply expecting reasoned thinking and long term strategic planning based on the input and consultation of seasoned professionals! That’s not a lot to ask for but it has been clearly lacking for the past eight years! So what to expect going forward? Well remember that the emerging giants of India and China will have economic growth in 2009 of 8% and 9% respectively and that both will begin easing monetary policy at an increasing pace (they already have started down that path). Brazil the other emerging giant has a strong consumer driven economy and while the energy sector will take a hit we expect strong economic growth from that modern miracle as well! OK so next week (remember November 5th) perception begins to shift! What does that mean for you? We are forecasting the following:
- A Rally in US equities during November-December that will expand into a global rally during the same period
- Tangible policy decisions from the Obama administration during the first 100 days that will equate to a gradual economic upturn in the US and a much faster acceleration in the economies of the emerging giants!
- Bad news for oil as one of those policy decisions will be energy independence which will add supply to an oversupplied market. That is particularly bad news for Iran and Venezuela!
What has our batting record looked like to date? In March we predicted the following:
- A dramatic correction in oil during Q4
- A dollar rally in Q4
- A $500 billion Mortgage bailout in Q4
- A rally in US equities in Q4 (Remember November 5th)
That being said if you are still waiting for the dust to settle you may want to take another look around as it already has and valuations will never look better!
10.23.08 The Conrad Group Quoted in Business Week
Investing: The Pro’s Crisis Playbook
Obama and the Big Emerging Markets (BEM’s) October 23, 2008
As we are predicting an Obama win in the upcoming election it might be prudent to begin thinking about how the new administration will impact the Big Emerging Market countries of China, India, Brazil and Russia? First it might be valuable to take a look at the past eight years of the Bush administration to judge their impact on these important markets. From a grading perspective we would be inclined to assign the Bush administration with a D minus as their interaction with these markets ranged from benign neglect to arrogant bluster with very little in-between. The one bright spot during these past eight years and the reason that we have not assigned the Bush administration a failing grade was the US-India Nuclear trade deal which brought India into the league of civilian nuclear energy producers. The ramifications of this deal cannot and should not be understated as it will give India unfettered access to cheap/clean energy which will help to drive India’s economic engine. The deal will also create billions of dollars in cross-border trade between the United States and India!
So noting the dismal track record of the past eight years how will the Obama administration be different? We sum it up it in two words Proactive Engagement! It is quite evident that Barack Obama and his advisors understand the critical role that the BEM’s will play going forward in fueling global economic growth and innovation. As importantly they understand that without the cooperation and collaboration of these emerging giants it will be impossible to make progress on critical issues such as climate change and world trade.
These are some of the highlights that we expect from Obama’s Proactive Engagement;
- Energy Independence; We expect the Obama administration to move quickly to form an energy importers group that will include India and China. This group will share technology, strategy and human resources with the stated goal of achieving energy independence in a 10 year period. We expect that this initiative will further fuel the growth and profitability of renewable energy companies specifically in the areas of solar and wind. Among the beneficiaries will be solar energy companies like Moser Baer a leading Indian photovoltaic company.
- Climate Change; We believe that within the first 100 days in office the Obama administration will lead the effort to forge a new climate change treaty that will involve all of the BEM’s. However the Obama administration will recognize the fact that the United States and the other mature markets are much better positioned to make dramatic reductions in greenhouse gasses than the BEM’s. This fact will lead to a well structured global carbon cap and trade program and a dramatic increase in the development of new clean energy technologies. This will create significant trade opportunities as the BEM’s move to acquire technology that will limit their carbon footprint. The winner will of course be the planet but expect environmental service companies to have dramatic increases in growth and profitability as a result of this global initiative. Two such players include India’s Triveni Engineering and Brazil’s SABESP.
- Global Trade; We expect that the Obama administration will focus on forging a new global trade agreement that focuses on environmental regulation, financial regulation, labor laws and IP and Patent protection as opposed to trade at any cost. China has already moved to strengthen labor and environmental laws and as such we expect that the new proposals will be well received. Developing new global financial regulatory systems will be critical to the health and stability of the global economy going forward. Recent events have both exposed the dangers of unregulated financial instruments and the concurrent linkages of the global financial system. We expect that any future trade agreement will not be a “Race to the bottom” in which free trade and corporate profitability trump standards of living but rather a much more reasoned approach in which the long-term consequences are fully weighed and vetted.
A Tale of Two Cities, October 14, 2008
While we expect a rally in US and ultimately global equities during the November-December timeframe our longer term forecast for the US equity markets and other mature economies are a mixed bag at best.
As noted earlier we are predicting an Obama win with very significant margins in the November election. The implications for the US economy will be significant as the Obama administration and a friendly congress will move aggressively to create jobs, stabilize the housing market and move towards energy independence. We believe that tangible long-term results can be created by massive investments in infrastructure to include high-speed rail and renewable energy and that this type of economic stimulus makes sense.
However it is a stark reality that housing, residential construction and the financial sector will continue to languish. Tighter albeit responsible lending standards coupled with a significant erosion in personal wealth which resulted from depreciating housing prices will force a shift from consumption to a more balanced savings based society. The net result is that the US economy will be a mixed bag with continued growth in export driven sectors like pharmaceuticals, aerospace, technology, renewable energy and environmental services, with continued weakness in consumer driven sectors to include housing, high-end retail and automobiles. We do not expect a significant change in this picture through 2009 as we have major problems to fix. Our prognostications for Europe are not much different as they share many of the ailments that we suffer from!
Oil will be the big story for 2009 as we expect continued downward pressure on oil prices throughout this period. There are several reasons for this forecast first; we believe that the Obama administration will adapt an aggressive energy independence strategy that will focus on renewable energy and will include a new consumption tax on gasoline. The revenues from this new tax will be used to pay for infrastructure investments. Second; new production is now coming online primarily from Iraq and this new production will increase global supply by 2.5 million barrels a day going forward. Finally while we expect OPEC to reduce output after their November meeting we believe that human nature will come into play. Specifically if you are used to a certain standard of living you will attempt to maintain that standard of living at all costs! In the case of OPEC this means cheating on a large scale as member States attempt to offset lower oil prices with increased production! Remember that Venezuela’s budget is upside down if oil falls below $75.00 per barrel! As you might imagine we are bearish on oil related companies like Exxon which may feel the added wrath of a US congress looking for additional revenues! This brings us to a tale of two cities or should we say two markets?
While we expect a mixed performance in mature markets in 2009 our forecast for the emerging giants of India and China is much more bullish. Lower oil prices have dramatically reduced inflation in both markets allowing an easing of monetary policy and other pro-growth initiatives. Additionally India and China both have significant foreign currency reserves and high personal savings rates. Growing consumption rates in both countries fostered by strong economic growth in 2009 will equate to significant returns in their respective equity markets in 2009. We are expecting a significant and sustained inflow of foreign direct and indirect investment into both markets in 2009 which will further boost equities! Our outlook for Russia is less optimistic as we believe that the Russian economy is still too dependent on oil related revenues. However certain sectors of the Russian economy will outperform the market in 2009 creating significant returns in related equities. Areas of interest include; Distribution & Logistics, Media & Entertainment, Financial Services and Luxury retail. We end our tale with Brazil an economy that has truly come into its own over the past ten years. We expect the Brazilian economy to achieve strong growth in 2009 bolstered by strong exports from Asia and rapidly growing domestic consumption. We believe that Brazilian equities will register above average returns in 2009 with a number of sectors driving this performance. Areas of interest include; Environmental Services, Distribution & Logistics, Private Education, Infrastructure and Financial Services.
Fear and Loathing on Main Street, October 9th 2008
In our 2008 global forecast we predicted a 500 billion dollar mortgage bailout by the US government and a dramatic correction in crude oil to $78-$82 in the fourth quarter. However the actions of the US treasury and Federal Reserve over the past several weeks have amazed even the most cynical pundits in our group. Let’s take a step back and reflect on the current situation and as importantly the actions that brought us to this current predicament?
The US housing collapse was the direct result of excess liquidity, greed and poor oversight that fostered the creation of a housing bubble that was exasperated by highly leveraged borrowers and creditors! When the music stopped banks were left holding the bag as housing prices rapidly depreciated and home owners bailed from houses they could have never afforded in the first place. Banks now find themselves undercapitalized and more importantly having been “once burned, twice shy” unwilling to extend credit to all but the most credit worthy of customers!
So how are the US treasury and the Federal Reserve dealing with the problem? You guessed it they are creating excess liquidity by pumping billions into the banking system, recapitalizing teetering institutions and reducing interest rates! Under normal circumstances this would set the stage for yet another bubble but in this case banks having been Once Burned are not going to be opening the lending trough anytime soon and you can bet that new lending regulations are coming down the pipeline as well.
So what does all of this mean for the US and global markets? First and foremost we suffer from a herd mentality and if someone say that the sky is falling we first run for cover and then ask questions later. The fact of the matter is that the sky is not falling! Oil induced inflation which concurrently drives food based inflation is rapidly waning. Inflation is the bane to the emerging giants of India and China and very real inflation fears had forced the central banks of both economies to raise interest rates cooling economic growth. That fear is now rapidly passing and as a result monetary policy will ease fueling greater growth in those economies. Additionally India and the US have just consummated a nuclear trade agreement which will give India access to advanced sources of energy and create billions of dollars in exports for the US.
Remember India and China and other key emerging markets are at the beginning of a very long growth trajectory that will create unprecedented consumption in those markets as well as an accelerating level of innovation. And what about the US economy isn’t it in a free fall? Hardly, leaving the financial sector and housing market aside the US economy is relatively strong with solid export growth and positive earnings from a number of companies to include IBM. But remember that perception drives economic reality! So what are we forecasting for the fourth Quarter?
o The Dow will bottom out at 8400 (remember chicken little)
o Obama will win the US election by 5 points
o Crude oil will fall to $78 dollars
o Gold will fall below $800 by December
o A rally in US equities will begin in November
o That rally will become global soon after lifting Chinese and Indian equities
o Significant vulture capital will begin to flow into the US housing sector by the end of December
o And for 2009? Our 2009 global forecast will be available on December 28th don’t miss it?
10.1.08 The Conrad Group Quoted in Toronto’s Globe and Mail
Article in Totonto’s Globe and Mail: New Directions for China’s Economic Growth
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