Global Investing

from MacroScope:

The end of capitalism

Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

from The Great Debate UK:

Is a bubble burbling in financial markets?

JaneFoley.JPG-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

Global FTSE 100 shrugs off parochial UK GDP data

Britain’s FTSE 100 seems to be almost impervious to any bad data that can be thrown at it. GDP data shocked the market showing the UK unexpectedly contracted in the third quarter.

Sterling tumbled more than a cent against the greenbackand gilts jumped while the FTSEurofirst 300 pan-European equity index trimmed gains considerably.

But Britain’s FTSE shrugged it off, hugging its 1 percent gains in the face of data which shows the UK economy is still ailing badly.

Hung, drawn and (second) quartered

By any standard the second quarter of 2009 was remarkable. Here are some numbers to chew over as the third quarter gets under way:   

— World stocks as measured by the MSCI All-Country World Index had their best quarter since the benchmark was first compiled in 1988.

    — The world index gained 21.2 percent for the second quarter. Its nearest “competitor” was the fourth quarter of 1998 when it rose 20.66 percent.

Zeitgeist check

Some more bits and bobs to capture the current mood among investors:

– MSCI’s all-country world stock index has recaptured all of its 2009 losses and is now working on recouping last year’s. It is up 6 percent for this year.

– Fund researchers EPFR Global notes investors are moving at pace out of cash into emerging market equity and bond funds. In the week to May 6 a net $3.6 billion moved into various emerging stock funds. Money market (cash) funds saw outflows of $1.6 billion.

State Street says there has been a “sea change” in investor behaviour. In April cross-border flows that it tracks suggested the most risk-seeking investment regime since May 2008.  “Institutions are buying emerging markets aggressively, adding to entrenched positions in Latin America and diversifying into emerging Asia,” it says.

Big Five

Five things to think about this week:

VALUATIONS
- The MSCI world stocks index has rebounded 37 percent since March, the VIX fear gauge has hit its lowest level since September 2008, and positive earnings surprises in Europe are marginally outstripping negative ones. But there are serious questions over the equity market’s ability to sustain its rise.

MACRO SIGNALS
- Trade data from the U.S., Canada and the UK, all out in this week, will be combed for signs of any recovery in global commerce. Also due are flash GDP data from the euro zone, industry output for the U.S., France, Italy, the euro zone and the UK, and Japan machinery orders.  
  
QUANTITATIVE EASING
- The ECB has finally shown willingness to deploy unconventional easing measures but it’s hard to judge the success of such steps. Narrowing credit spreads, stock markets’ bounce and gains in emerging market assets all show efforts to restore confidence in the financial system are having an effect. But if getting and keeping bond yields down is the yardstick for success, it’s unfortunate that 10-year UK and U.S. government bond yields are back up to levels seen before the announcement of quantitative easing in those countries. And diminishing returns on further balance sheet expansion raise questions over how much more money central banks can print before inflation fears start to preoccupy policymakers and markets.
  
COMMODITIES
- Confusion over the reasons for the commodities rally has reduced the usefulness of commodities prices as indicators of the industrial outlook. An apparent economic recovery in China has helped to boost the CRB commodities index by 21 percent from February’s lows. But how much does the rise reflect a change in supply/demand for commodities, and how much is it simply due to idle money flooding back to unstable markets? Similarly, why has spot gold remained strong above $900 as jitters over the financial system decrease? Gold could be reflecting expectations that recovering economies will boost physical demand for the metal, but it may also be responding to fears of currency debasement after central banks’ radical monetary easing.

EMERGING MARKETS 
- Rising commodity prices and an easing dollar have offered a perfect environment to re-enter emerging markets. The coming week’s  EBRD meeting will focus attention on central and eastern Europe and how it is coping with a nasty period of refinancing (albeit less dire than the IMF initially estimated).

Market pressure will build diamonds

The financial deluge will bare real gems for investors flush with cash, but watch out for the rubbish, the super-rich have been told at a Geneva conference. The first round of quarterly results has brought some pleasant surprises, but investors should be cautious and cherry pick if they want to hit the jackpot, was the mantra.
“This is a once in a lifetime opportunity. But you have to pick the winners. You have to separate the diamonds from the tatt,” said Giles Worthington, head of European equities at investment fund M&G Investments.
This is more easily said than done, as many companies looking rock-bottom cheap may appear so just because they are on the verge of bankruptcy. And the bottom of the current downward cycle is not yet in sight.

 ”It’s not just because we had a year of correction that the next year will be positive,” said Ariel Sergio Goekmen, an economist and a director at Credit Suisse’s head office who looks after wealthy families’ investments. “The recession could be deeper than one expects. We have not yet seen the darkest side of the night.”
One tip is to keep an eye on companies with a solid balance sheet and wait for just a few more companies to go bust.
“We need more blood on the carpet. Once we see more bankruptcies, then we know we are close to the bottom.”

(Reuters photo: Sukree Sukplan)

from MacroScope:

Springing back to life

The steady stream of less-bad-than-expected economic data has evidently been working as a builder of optimism. Confidence in improved economies and financlal market conditions is growing.

One of the biggest surprises has been Germany's ZEW economic sentiment survey -- which polls analysts and economists in Europe's largest economy. Not only did the index jump this month, it entered positive territory for the first time since July 2007. That was before the credit crisis hit.

U.S. financial services firm State Street also reports that the mood among institutional investors in North America, Europe and Asia is at a nine month high. The main point about this survey is that it is extraplolated from the actual buying and selling patterns within $12 trillion that State Street holds for investors as a custodian.

Bear market rally/Bull market beginning?

Another month and another Reuters asset allocation poll. This time saw investors in United States, Europe and Japan lifting their equity holdings and cutting back slightly on bonds.  Fits with what has been happening on global financial markets, where MSCI’s main world stock index is heading for its best month in at least six years.

So the big question is what happens now. Is this a bear market bounce that will soon dissipate?  Or is it the start of something bullish that will last?

Sliding over troubles

Bond yields are on the rocks, prices are hitting the steepest slopes and credit derivatives are at an impasse. So what better way to spend the time than to join 200 bond traders for a skiing weekend in Switzerland?

Throwing caution, and the global financial crisis, to the winds, the International Capital Market Association, the self-regulatory organisation for capital markets, is holding its annual ski weekend in the Swiss resort of Villars, “set on a sunny plateau above the Rhone Valley, with superb views over the
Vaudois Alps”.

The association has been running ski events for members for over 30 years. “A packed programme of outdoor activities and entertainment starts with the welcome drinks and dinner on Friday evening … and gets into full swing with racing on Saturday.”