-Kully Samra is branch director at Charles Schwab, UK. The opinions expressed are his own.-

The economic crisis that has prevailed over the global markets in the last 12 months has undoubtedly rattled investors worldwide, but rather than leaving their heads in the sand, seasoned investors have continued to search for opportunities amidst the instability.

One such opportunity that seems to have been overlooked by UK investors is that of overseas share ownership.

Whilst I have no doubt that there are viable investment opportunities in other markets, I do believe that the U.S. market provides a whole wealth of opportunities for the UK investor, especially those looking to diversify their portfolios. 

Whilst this belief stems from our experience of the U.S. markets it was recently supported by the findings of our latest survey which looked at the investing habits of active UK retail investors; specifically in relation to their views on overseas investments.

Our independent survey of more than 1400 British-based active retail investors found that 44 percent believed that the U.S. economy and financial markets would recover sooner than those of the UK, with only 28 percent believing that the UK will recover ahead of the U.S. 

We also found that investors expect the U.S. to lead recovery more generally, with 39 percent of respondents believing the U.S. will take more than 12 months to come out of recession, compared to 50 percent for the UK.

We agree with this assessment of recovery and believe that with the Dow and S&P posting their best quarterly results in Q3 since 1998, the U.S. economy is showing some signs of improvement and recovery is starting to get underway.  We are not however unrealistic and expect a few bumps along the way. 

It would not be surprising to see occasional selling surges in the market, though we believe that the dips are likely entice investors who are still on the sidelines back into the market.  This should help to keep any pullback relatively limited.  We also believe that the third quarter will post positive GDP growth that will continue into the fourth quarter.  With growth returning both in the U.S. and around the world, we remain optimistic on the near-term future of the market.

The Land of (Missed) Opportunity

Despite this positive assessment of the opportunities that the U.S. market holds for investors, the sentiment of missed opportunity that I discussed previously is echoed in our survey.  Only 17 percent of respondents who believed that the U.S. would be the first to recover actually invest in U.S. stocks. 

This naturally poses the question of why this is.  Our research shows that the main reason investors do not automatically turn towards the U.S. market, despite their belief in a quicker recovery than the UK, is not because UK investors prefer to invest in British companies (only 15 percent of respondents stated this reason) or because they perceive any barriers to entry (a small 2 percent of respondents cited this factor), but because they do not feel they know enough about the U.S. market (41 percent).

In terms of investment behaviour, the U.S. stock market is largely unexplored and under penetrated by UK investors, especially given our survey participants’ expectations of a speedier recovery in the U.S.  In addition, Dollar weakness should make U.S. companies relatively more attractive to foreign purchases.

Amidst the turmoil prevalent in the global financial markets in the last 12 months, a diversified portfolio is ever-more crucial, and the U.S. is one area where investors could definitely benefit from increasing their exposure.

- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

The Brendan Wood International's panel of 2500 institutional investors suffered through last year's markets believing value would somehow prevail. Those value investing "diehards" indeed died hard.

Conversely, those who correctly read the status of shareholder confidence and acted on it were spared. In short, shareholders that had lost confidence in the system abandoned their value criteria and sold good companies along with lesser ones.

As a result, “value” investors were left holding a bag full of stocks with hidden value. Sadly, the value remained undercover while the price of these stocks plummeted. Many portfolios catapulted through risk tolerance levels and took their investors’ savings along with them. Capital preservation was sacrificed in favor of the mantra “the market always comes back.”

But as advocates of Shareholder Confidence, we ask why take that ride and lose the most important strengths an investor has, namely, capital and a willingness to assume reasonable risk?

If half your life savings or more was lost, what capital or willingness to assume further risk would you have? Shareholder confidence trumps hidden value. If value in a company is credible to those holding the stock, the price will at least remain stable, if not indeed rise.

Should this not be the case, one may be stuck owning the most costly secret in town. This may be so because value investing relies on shareholder confidence coming to the forefront.

ON THE CONTRARY!

A majority of investors classify themselves as contrarians. Surprisingly, they agree with one another about 70 percent of the time. This raises two obvious questions. What is the benefit of contrarianism? Why is it considered a quality? If the majority of investors disagree with you (or you with them), the future of a portfolio relies upon them changing their minds. How much success can an investor expect via changing other people's minds? Are contrarians delusional about being contrarians? It appears so. Like it or not, the success of contrarians depends on consensus, that is, other contrarians agreeing with them. BWI may have thus uncovered the "quiet contrarian majority".

SHAREHOLDER CONFIDENCE AND THE CURRENT MARKET

Prior to the 2008 downturn, the number of companies at the top of the Shareholder Confidence Index approached 33 percent. Since the dramatic weakening of markets, that number has been running at 17-18 percent. With no change in the recent quarter, investors remain wary and are not yet ready to assert top levels of confidence (i.e. buying behavior) except in the Top 18 percent.

If investors were to follow the example of Brendan Wood International’s panel, they would only be buying the best of the best.

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Before the credit crunch, we had what I called a Prozac market. Investors on both sides of the Atlantic seemed to be in denial, as irrational as the people who end up in the bankruptcy court because for years they have kept on smiling while the bills piled up unopened.

Last Fall, reality caught up in the shape of the worst banking crisis in history, and we have now had to mortgage our earnings for decades to come in order to bail out the banks. Not surprisingly, by mid-March this year, the Dow had fallen by well over 50 percent from its peak level at the start of October 2007, and the FTSE by nearly as much. In the last three months, however, the FTSE has risen by 20 percent and the Dow by nearly 30 percent. What has happened to justify the recovery?

The best that can be said is that there have been signs that the economic situation is deteriorating more slowly than in the second half of last year.

For example, the fall in house prices may be slowing. But in both UK and the U.S., they remain a long way above their long run levels by most yardsticks. Moreover, in the early 1990s, after the last British house price bubble popped, it took almost a decade for prices to recover, against a background of far higher inflation and a much more robust economy than today – and of course without an accompanying banking collapse.

Insofar as the construction industry is concerned, any increase in demand from the residential sector is likely to be overshadowed by continuing weakness in commercial real estate and, in the UK particularly, brutal cuts in public sector capital expenditure.

For the foreseeable future, the UK and U.S. governments, households and much of the corporate sector will be forced by record levels of debt to rein in their spending. Long term bond yields are already above 4 percent. Insuring against the risk of default costs 39 basis points for U.S. government debt, 80 points for UK gilts, and 300 or 400 points for a number of major multinationals, which clearly indicates that some financial markets have few illusions about the future.

Pricing equities usually involves a comparison of historic dividend yields with long term interest rates. Unfortunately, in crisis conditions, past levels of earnings (and hence of dividends) are no guide to the future. As government and consumers begin to repay their debts, they will both have to cut spending, or at least prevent it growing at anything like the rate seen in the last few years.

Ideally, the slack would be taken up by export demand. But with world trade in the doldrums, it is hard to imagine the UK and U.S. can export their way out of recession.

I can only visualise two possible exits from this impasse. Either the future involves years of Japan-style deflation, high unemployment and stagnant output. More likely, Anglo-Saxon electorates will opt for monetary expansion, inflation and devaluation, implying a de facto default – which is exactly the outcome being priced by the CDS insurance premia mentioned earlier.

Neither scenario is attractive for equity markets. Add to all this the danger of another round in the banking crisis (possibly involving the European banks), thinly-veiled threats from China to dump their dollars, long term problems which have not gone away, like global warming, pensions and health care......if the market was on Prozac last time, it must be on Ecstasy now.

So what should investors do? My own choice would be a mix of two components:

1. Corporate debt and/or equity of low-leverage companies in “safe” industries: pharmaceuticals and healthcare, food processors, utilities, etc.

2. Conventional and index-linked gilts in pounds, dollars and euros.

Of course, if you think governments are going to default on their debts, rather than inflate them away over the next decade or two, you need to buy gold......and a gun might be useful too.

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

China has talked about plans to allow foreign companies to float on its domestic stock markets for at least a decade, but that’s all there has been: talk.

Now would be a good time to convert some of that talk into action. Beijing has been struggling with its own investment strategies: the state gets feeble returns on the U.S. Treasury bonds it owns, and its equity stakes in foreign financial firms are well under water.

So why not diversify by allowing 1.3 billion Chinese citizens have a go rather than a few bureaucrats working for China’s sovereign fund? The many might even do better than the few. And it would give Chinese savers a chance to buy global blue chips at credit-crunch prices.

The idea of opening up China’s equity markets to foreigners may seem fanciful, but it dovetails with another big national objective. China wants to build Shanghai into a global financial centre by 2020, but that requires a deeper and internationalised equity market. Only when that is in place will foreign money descend on Shanghai, together with an army of bankers, lawyers and accountants.

The market capitalisation of Shanghai is now the world’s fourth largest, but it is dominated by state-owned firms with only a handful of foreign joint ventures and a few private companies.

The market is off-limits even to many of China’s own best and biggest companies, such as the world’s largest telecom operator China Mobile and China’s top offshore oil and gas producer CNOOC.

They are listed in the offshore market of Hong Kong and despite their expressed interest to return to the mainland, continue to fail to win the green light from Beijing.

Indeed there is no other country which relies more heavily on offshore financing than China. One fifth of the foreign companies listed on Nasdaq are from China, the largest percentage in the world. By pushing its top companies to list abroad, China has gained foreign capital at the expense of the development of its equity market.

Meanwhile back in Shanghai too much money is chasing too few good listed companies. The same companies are often valued at a premium in the mainland versus in Hong Kong.

Chinese investors need more and better investment opportunities. China needs to realise the competition of the 21st Century is not just about amassing capital, but also about building companies that can create wealth.

WHO COMES FIRST?

In the past decade, most of the barriers to open equity markets have been removed. China completed a share reform programme that allowed formerly untradeable state-owned shares to trade, and China’s accounting rules are now similar to global standards.

A big block remains in the shape of China’s capital controls, which prevent firms from repatriating profits, but the State Administration of Foreign Exchange recently said it will consider relaxing the controls once foreign companies are allowed to list.

When China first talked about introducing foreign listed companies a decade ago, Unilever, whose Lux soap 20 years ago was as coveted in China as Louis Vuitton bags are now, was expected to be the first.

Although that seems unlikely now, multinational manufacturers are still expected to be interested in the hope that a China listing can raise their profile in what is seen as potentially their biggest market.

Instead, first in line will probably be foreign banks keen to raise money in China to fund their local operations. As things stand, their yuan deposit base is too small due to their limited branch network.

HSBC is said by British officials to be in discussions to be the first foreign company to go public in China. The bank, with a Shanghai branch office that opened some 150 years ago, has gained a lot of goodwill for promising not to sell its strategic investment in Bank of Communications while other foreign banks rushed to the exits.

A full listing of foreign companies will offer an upside for China Inc. in that domestic firms with global ambitions will be able to bid for firms using their own shares and Chinese shareholders will have a say on global deals.

In addition, by allowing the Chinese to buy a piece of the world’s blue chips on their home soil, the change will assist in the country’s ambitions to make the yuan an international currency while keeping a certain amount of capital controls.

China’s leaders have made clear they see the credit crisis creating opportunities to flex their financial muscles. Here’s one opportunity they shouldn’t let pass them by.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –