New  Perspectives emerging in 2011

With the game-changers in global markets in 2010,  financial institutions are changing their perspectives in 2011.

UBS is taking the lead to set  up a team to understand the needs of  UHNW  (ultra high net worth) clients in the Asia Pacific region.

With emerging markets in this region, there are now ultra high net worth individuals  who have businesses across the region or globally.   They travel frequently and have a good understanding of investment opportunities.  They usually have family members across the globe, and are very sophisticated .  They require a different level of advice and expertise only available at global integrated banks.

These  UHNW clients fall into three tiers:

1.       Investment

2.       Business

3.       Family needs.

UBS  has this team under Amy Lo,  its Regional Head for UHNW clients.  The team will be specially trained and supported by dedicated UHNW competency teams which leverage expertise across Wealth Management, Investment Bank and Global Asset Management businesses.

She explains that to be competitive, UBS must have a model capable of the following:

1.       Accommodating the local regulatory environment

2.       A broad geographical footprint in key markets

3.       A robust approach to managing risk without sacrificing agility

4.       Access to a  deep pool of talent

5.       A broad product offering

6.       A strong and trusted brand name

She has the vision to translate building a sustainable and high-quality wealth management business which creates value for its clients.

MY  TAKE

With memories of LTCM and the rogue trader of Barings debacles still fresh in our mind, I rate risk and money management top criteria in any investment strategy.

In yesterday’s blog, I mentioned a fractured world or globe.  What does it all mean?  It means we have to tread carefully this year.

According to Dr Andreas Hofert, Global Head of Wealth Management Research, UBS, in his talk last night at the Ritz-Carlton, he summed up that no investment should be considered ‘safe’ as inflation and currency weakness for indebted nations loom.

Investors have to reorient  their perception of  ‘safe’ fixed income investments.  When the facts change, investment strategies should also change.  As traders, this is what we believe and do too: when the market changes direction, we need to reorient our strategies.  We must use intuition not ‘into wishing‘ , as most novice traders tend to do.

What else should we do? This is the question posed.

2010 was a year of reasonable returns for most investors but the investment environment in 2011  will be shaped by difficult political choices, a choice of three options or ‘trilemmas’ where only two can have favourable outcomes at the same time and where one will have to give.

If political uncertainties exist, some economic certainties remain, as the gap between weaker and stronger economies and their divergent growth paths becomes more evident in 2011.

The US, long the engine of world economic growth, is in the camp of the weak economies, while China and its South-east Asian neighbours are in the camp of  the strong economies, including commodity exporters, Canada, Australia and Brazil.  UK, France and the Mediterranean countries are struggling while Germany, Switzerland, the Benelux countries and Scandinavia are pulling ahead.

Following from this, we see the selection of fixed income and currency investments preferred in stronger economies whereas equity exposure continues to be directed to the world’s stronger growth regions.

Investments into so-called assets like equities, commodities and real estate  could be looked into.  The European debt crises is not over yet and financial markets are dividing debt in the region into safe and unsafe. European peripherals like  Portugal and Greece have small economies and therefore have limited  impact on  the global economy. But the big economies like the US, France, Japan and the UK are worrying. At the other end of the scale, Switzerland, Sweden, Germany and several emerging economies look well prepared for the challenge ahead for 2011.

Stay tuned for more soon.

Two speakers  of UBS flew in : Andreas Hofert  from Switzerland and Yonghao Pu from HK.  They both paint a cautionary tale for 2011 for both developed and emerging markets.

Mr Pu was very humourous  in  his presentation:  digging at Singapore eg: Singapore wants mainland Chinese money     to be spent in Singapore, in luxury goods and especially at the casinos.  The Chinese with money love Singapore for its good infra-structure and clean air but HK  has more ‘life’  and this poses a dilemma where to invest in a second home!

Another dig was at the world accusing the US, Western countries , Tokyo of printing more money; but no finger was pointed at China which was also printing money like the others.

The best joke was about China prohibiting married couples  from buying a second property on loan ;  the smart ones ‘pretend to be divorced’ to circumvent this rule and to buy a second property on loan!  The audience was in stitches.

Now to the serious notes.

Views By Andres Hofert:

Deflationists camp stress points to the lingering credit crunch from stressed financial sectors, the conspicuous slack in economic activity due to rising unemployment.

The inflationists camp stresses the impact on prices of surging government debt and overactive money-printing.

Both scenarios present opportunities and risks, and it is vital to understand which asset classes tend to outperform under each condition.

One can say that an investment that is positive in an inflationary environment is negative during deflation.

Those who expect inflation are best to stay with consumer-discretionary and capital-goods stocks, inflation-linked bonds and the euro.

Those expecting deflation will benefit from healthcare, energy and insurance stocks, nominal government bonds, the dollar and the yen.

Gold should prove resilient either way, given its status as an alternative currency.

Against this backdrop, global investors should diversify, as not all markets and regions experience the same level of inflation.

Investors in the West may want to invest in emerging markets in Asia, which reflects inflationary trend.

Views by Yonghao Pu:

Both East and West can take advantage of this investment opportunity. Those who believe in deflation have sheltered in government bonds, while those in the inflation camp are venturing into risky assets eg stocks, gold and real estate.

He believes the more accurate scenario in the world is now in a ‘coflation’ period; developed markets suffer deflation and inflation, while emerging markets experience inflation.

Investment opportunities exist across the board with a clear bias towards emerging markets.

Real estate is most likely to perform best as it is the least affected by global factors. Favourable local conditions have a positive effect on property prices, and with low interest rates, investors in emerging markets are likely to channel funds from deposits to property.

Result: virtuous circle of rising asset prices reinforcing local inflation, and high inflation expectations spurring buying activity.

Emerging market stocks should also strive such as department stores and automakers and luxury goods companies.

Fixed-rate credits, will prove attractive amid falling government bond yields.

Growing emerging market demand does not translate to higher commodity prices eg crude oil. Some agricultural commodities have good prospects, eg gold, with its safe-haven status.

Selective currencies eg from China resists appreciation while that of India is more tolerant.

Caveat:

If inflation rises in emerging markets as deflation ends in the developed world, aggressive monetary tightening in both economic regions will follow.

This will lead to high borrowing costs and end the liquidity-driven asset-price inflation in emerging markets.

The Fed will probably raise rates when it sees an end to deflation.

This is the key development to watch out for.

IDKIT aka Ana

Chinese New Year 2011 – Year of the Rabbit (or Hare) 辛卯

The date for Chinese New Year 2011 – February 3rd.  This is also known as Spring Festival or CNY 2011.

• The Chinese Calendar
• The Year Of The Rabbit
• Chinese New Year Masks
• Lantern festival held in London, England
• Chinese New Year Jokes
• Great Wall of China

The Chinese Calendar

Unlike western calendars, the Chinese calendar has names that are repeated every 60 years.  Within the ‘Stem-Branch’ system is shorter cycle of 12 years denoted by animals and 2011 is the year of the Rabbit.  Actually, this is the Xīn-măo 辛卯 year.  Xīn (Metal) is the eighth of the ten celestial stems and Mao (Rabbit) is the fourth of the twelve terrestrial branches and marks the year of the Rabbit or Hare.

Rat Ox Tiger Rabbit Dragon Snake Horse Sheep Monkey Rooster Dog  Pig
2008 2009 2010 2011 2012 2013 2014  2015  2016   2017  2018 2007

Calculating ‘When is the Chinese New Year in 2011′

The fact that the date of Chinese New Year (CNY) varies within about a month is a clue that it’s linked to the new moon.  A rough, and almost infallible guide is that the date of the Chinese New Year falls on the second new moon after the winter solstice.  The winter solstice always falls on December 21st, the next new moon is January 4th, and the second new moon is on February 3rd 2011.

Will and Guy admit that the precise rules for determining ‘When is the Chinese New Year’, are far more complex.  For example, one problem with any lunar calendar system is that some years there are 13 new moons.  The Chinese deal with this be slotting in an extra intercalary month.

It dawned on me on this trip to HK that all these few years that I stayed at the Conrad Hotel, I did not realize I was entitled to breakfast and Internet on the house as a special guest!  Unless this is a new complimentary throw-in as a special guest.

I don’t remember ever asking the hotel what is or are complimentary for me.  On this trip, all I know is I heard clearly that I was entitled to breakfast and free Internet as a special guest.

Well, what do you know?  You don’t ask, they don’t tell!

On the flight to HK on SIA, I was on the latest A380-800 plane and was not too familiar with the movie channels.  So I decided to ask the air hostess, who addressed me: Lady Wong, and she promised to return soon to help me get to :  Wallstreet:  Money never sleeps.  Meanwhile, I decided to play around with the channels, and managed to find Wallstreet, instead of waiting for the hostess to tell me how to locate it.  My love of tinkering with electronic gadgets.

On the flight back from HK yesterday, it was an older plane, B777-300ER, and being more familiar with this plane, I went straight into the channel for : The Social Network, based on Facebook and Mark Zuckerberg with his continuous legal battles especially with the twins: Cameron Winklevoss, Tyler Winklevoss, among others.

Mark’s woes:

http://valleywag.gawker.com/tech/facebook/a-brief-history-of-mark-zuckerbergs-legal-woes-280901.php

My conclusions on looking back:

So, it is not just: Don’t ask, don’t tell, but don’t sue, don’t get!!

Merry Christmas, Ana, and every blessing to you and yours!

Love,Janice

A Christmas Wish

By William Michaelian

What do I want for Christmas?
Nothing to buy, nothing to sell.
Family gatherings. Laughter. Music.
Multitudes of happy children, warm and fed.
An end to the current war, and to all wars.
Water in the well, food on the table.
Companionship for the lonely.
Solitude for those in search of calm.
Understanding for the prisoner.
Compassion for those who judge.
Strength for the belittled.
Comfort for the torn.

I want what everyone wants,
But believes can never happen.
Truth instead of lies.
Generosity instead of greed.
Knowledge instead of fear.
Modesty instead of arrogance.
An open heart, an open mind.
To follow Life where it leads,
With gratitude for hard times
And what they teach,
And, when good times come,
To pass them on for others to enjoy.

But if these things are too much to ask,
If I am silly or have somehow missed the point,
There is still one thing I would like to see.
A giant teddy bear for the wide-eyed world.

Is the party over?  Read on

FT on emerging markets 2

FT on emerging markets

A Year  end View from Bob Eisenbeis
December 18, 2010

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com.  He may be reached at Bob.Eisenbeis@cumber.com.

It is year-end and time to look ahead to where the economy is going.  The path has already been largely charted for the coming year.   Congress has passed an extension of the Bush tax cuts and also extended unemployment benefits. The budget cost of this de facto tax-stimulus package is estimated at $800 billion, not because of increased spending but because of its implications for reduced tax revenues.  At the same time, Congress also kicked the budget decision on funding of the government down the road until February or so, when the new Congress is in place.   The implications here are mixed in terms of sector impacts.

Finally, the Fed has reaffirmed its commitment to increase its Treasury holdings by $600 billion.  QE2 is Chairman Bernanke’s bet that the credit channel will work.  He and Columbia colleague Mark Gertler wrote about it several years ago.  Bernanke hopes it will come through and be the policy conduit for increasing economic growth where other channels have failed.  The bet – and it is a very big bet – is that at some point banks will stop hoarding excess reserves and begin lending.  After which businesses will finally begin hiring.

There are a lot of if’s here, especially since small businesses, according to the National Federation of Independent Business (NFIB), are cautious about their hiring and expansion plans.  Additionally, the claims of politicians notwithstanding, small business access to credit is not regarded by NFIB respondents as a major impediment to expansion, and loan demand is low because demand is low.

Small business job creation is the key to overall job growth, not that of large businesses.  Historically, large businesses are not engines of job creation, and they  are not likely to be swayed by photo ops and one-on-ones with the President to expand employment.  Small business employment decisions are being impacted by lack of demand and uncertainty.  Uncertainty about regulation.  Uncertainty about taxes.  Uncertainty about healthcare costs, which now seems on its way to the Supreme Court, just to name a few.

Due to policy lags it will be well into 2011 before we have concrete evidence as to how the fiscal and monetary policies will play out and what the impacts are on job creation.  In the meantime, the real economy continues gradually to improve.  Consumers are finally beginning to spend, consumer sentiment is slowly  improving, new claims for unemployment insurance are somewhat improved, recent surveys of manufacturing have surged, and the trade deficit is improving marginally.  All of this is consistent with an economic scenario of modest growth and job creation.

The most recent surveys of economists suggest they have upped their real GDP projections for 2011 to about 4%.  This is probably too optimistic and is somewhat higher than the FOMC’s central-tendency projections of from 3% to 3.6% for real growth next year.  Unemployment is also projected by the FOMC to improve by about half a percentage point.  Note that the FOMC’s projection takes into account the expected impact of the additional $600 billion of quantitative easing.

What does all this mean for job-creation prospects?  Here are some facts.  According to the Employment Survey, job losses peaked at 8.363 million jobs in December of 2009.  This is six months after the official end of the recession.  Since then the real economy has grown a little more than 2% on a year-over-year basis and has added a net of about 951 thousand jobs as of November 2010.  This job growth is consistent with, but somewhat on the low side, of what one might expect for our economy, based upon history.  Our estimates are that a US economy that grows at 2% per year will create, on average, about 1.2 million jobs.  For all of 2010, the low-side estimate is about 1 million.  Note that we still have a month yet to go, since the data in hand  only go through November.

If the economy were to grow next year at the FOMC’s expected rate of from 3% to 3.6%, then we could look for about 2 to 2.5 million more jobs to be created.  This translates to about 200 thousand jobs per month, plus or minus about 35K.  Because of recent productivity growth and structural shifts in our economy, the lower estimate is probably more likely than the more optimistic scenarios.  This would not be enough to bring the unemployment rate down significantly, since the labor force is expected to grow about 180K per month next year.

This rather sobering job-creation prospect has significant implications for politics and economic policy.  Politicians and policy makers will be obsessed with jobs, and more so the closer we get to election season.  The Iowa caucuses are scheduled for February 2012, but the jockeying will begin next summer.  By then perceptions of how well politicians have responded to the need for jobs will be entrenched in voters’ minds.  For this coming election, jobs equate to votes, either for hopefuls to get into office or for incumbents to stay there.

Now, I have already suggested that the economic and job outcomes are essentially already baked into the cake.  This means that what will actually count is what politicians say, how partisan the environment is,  how the parties react in terms of  getting  the US’s fiscal house in order, and how all of this plays with voters.  The present administration’s fate may already be decided, in the sense there is little that can be done to affect significantly the job outcomes.  Instead, a second term will depend upon how angry the public remains and how it reacts to what the new Congress does.

What does all this mean for financial markets and investment strategies?  It means that uncertainty will be the dominant theme.  As economists, we tend to believe that financial markets are efficient, that asset prices reflect all available information, and that risks are appropriately priced.  Presently, however, financial markets appear to be dysfunctional.  Pricing anomalies abound across markets.  This is true in the fixed-income space and for municipal bonds in particular.  Is this evidence for us to conclude that markets are no longer working, that people are irrational, or what?

I prefer to think that what we are presently seeing is not irrationality but rather the logical manifestations of uncertainty.  The noted economist Frank Knight taught us the difference between risk and uncertainty.  Risk means that we know or have reasonably reliable estimates of the probabilities of returns and events occurring, and therefore can make reasoned judgments on how to price those risks.

Uncertainty is when we don’t know or do not have estimates of the probability distributions characterizing risk.  Under uncertainty conditions, many investors don’t know how to evaluate their exposures and make what appear to be irrational pricing decisions.  Many others simply throw up their hands and exit the marketplace.  Such events create opportunities for the savvy investor and bargains if one does one’s homework and can distinguish risk from uncertainty.

As long as the political, fiscal, and monetary policy uncertainties persist, we think market anomalies will persist.  The failure to extend the Build America Bonds introduces great uncertainty, for example, into the municipal bond space; and that, combined with concern about the fiscal situation of many municipalities, has caused many uninformed investors either to leave the market or to demand untypically high interest rates for what are actually sound credits.  For informed investors, however, such behavior creates opportunities.

Understanding the inherent quality of assets and the ability of obligors to pay is critical to separating risk from uncertainty when devising investment strategies.  That is how to capitalize on asset mispricing, preserve capital, lock in returns, and hedge risks.  Other commentaries from Cumberland’s portfolio managers will discuss how we approach such a marketplace.

Bob Eisenbeis, Chief Monetary Economist, email: bob.eisenbeis@cumber.com