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.

Credit rules, ok?

Equities may be the poster child for this year’s market recovery, but corporate bonds have been the runaway outperformer.

As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery — even “junk” bonds.

This year’s performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.

from Raw Japan:

Investing as charity

While Japan took few direct hits in the global credit crisis, the aftershocks have been immense, and long-lasting. The United States and Europe may now be showing some signs of recovery, but the world's second-largest economy is still straggling behind and gasping for air.

Predictably, equity markets reflect Japan's wheezy struggle. The Nikkei 225 is the worst performer among the benchmark indexes of the G7 nations, up just 10 percent so far this year. (The best performer, by the way, is Toronto at nearly 27 percent. The Dow has posted a respectable 17 percent return.)MARKETS-JAPAN-STOCKS

Some discrepancy between Japan and other advanced industrialised nations is to be expected. Tokyo's top companies are largely exporters reliant on the United States, where consumer spending has been whiplashed by the recession. A resurgent yen, which drives up the price of Japanese goods overseas, hasn't helped either.

from MacroScope:

G20 dilemmas amongst the golf balls

Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls "imbalance- and bubble-building".

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to "sequence" the great unwinding.

Booking profits

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

Investors break commodities link with equities

Investors smelling profits in commodities are using the sector as an early cycle play, alongside equities, because a lack of production capacity means higher prices sooner rather than later. 

Historically, prices of natural resources lag equities, which typically front run the economic cycle by between 18 to 24 months. The change is also partly due to the tumbling dollar, a major driver in recent weeks.

The natural resources sector is also one of the last to price in economic expansion. But not this time.

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.

Great earnings, pity about the whispers

It says a lot about the way investors are thinking at the moment that very good earnings from Goldman Sachs were greeted with a mini-stock selloff and a bounce for the dollar. But it is not that people are glum and selling even on good news — more a case of them being so ebullient that anything which is not outlandish is a disappointment.

The top-of-the-pile investment bank was supposed to report quarterly earnings of $4.24 a share.  Instead, it stormed in with $5.25 a share, a good 23 percent higher and an increase of 190 percent over the year earlier figure.

But on the wilder fringes of the market, speculation had been doing the rounds that the earnings-per-share figure would be around $6. It wasn’t, so Wall Street futures tanked, the dollar went positive and world stocks pared gains.

from Summit Notebook:

Tax evaders on the run

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Investors cutting back on equity buying

This month’s Reuters global asset allocation survey shows that investors have cut back on buying equities after an almost non-stop rally since March.

According to a survey of 49 leading investors in the United States, Britain, continental Europe and Japan, investors now hold an average of 54.9 percent of their portfolios in equities.

This is the lowest level since February and below the long-term average of 59.3 percent.