Summit Notebook

from Global Investing:

BRIC: Brilliant/Ridiculous Investment Concept

BRIC is Brazil, Russia, India, China -- the acronym coined by Goldman Sachs banker Jim O'Neill 10 years back to describe the world's biggest, fastest-growing and most important emerging markets.  But according to Albert Edwards, Societe Generale's uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets' underperformance in 2011 and 2010, might be inclined to agree -- stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.

For years, money has chased BRIC investments, tempted by the countries' fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent  since 1993 but the compounded  return on equity investments was minus 3.3 percent.

But economic growth -- the BRIC holy grail -- is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year's 7.5 percent. Indian growth is  at the weakest in over two years. In Russia, rising discontent with the Kremlin -- reflected in post-election protests -- carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world,  is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012.  "Yet investors persist in the BRIC superior growth fantasy...If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe," he writes.

Thomson Reuters data earlier this year appeared to show some disenchantment with the BRIC concept. After rising 1600-fold between 2003 and 2007, assets in BRIC funds had shrunk to $28 billion by August 2011, almost a quarter below 2007 peaks, a bigger fall in percentage terms than most other fund categories.

What of O'Neill, the man behind the moniker? He talks increasingly of Growth Markets, a broader grouping that also includes other promising emerging countries such as Turkey and Mexico. But at a Reuters investment summit this week O'Neill noted that the main reason for BRIC stocks' underperformance has been a massive monetary policy tightening exercise in all four countries, prompted by rising inflation.  With that at an end and valuations cheaper than they have been for a long time, he expects the BRIC markets, especiallly China, to do better next year despite slower growth. Time will tell.

from Global Investing:

Time up for emerging markets?

Well, not in the long-run, no. You would be hard pressed to find an economist, investor or even politician who does not reckon the global shift in growth to Asia and Latin America is going to be the story of the coming decade, century etc.

But in the shorter term, strange things are happening. MSCI's benchmark emerging market stock index is barely in the black for the year. Even more surprising is that it is underperforming its developed market counterpart.

Many  economists and investment strategists are still beating the drum for emerging markets and a Reuters European Funds Summit in Luxembourg this week heard numerous cases of retail investors beginning to move into the sector, joining their institutional brethren.

The problem is that all this demand can transform itself into too much money chasing too few assets.  LGT Capital Management insists that we are not there yet, but used the "bubble" word during a meeting with Reuters reporters at the summit.

Again, no one is moving away from the story of emerging markets as a long-term growth theme -- indeed demand for emerging debt is holding up well. But the doubling of the MSCI stock index during last year's rally, plus general volatility and global economic  uncertainty, might mean the sheen is off for a bit.

Wealth Management: What does the future hold?

Even the rich aren’t as well-off as they were a year ago but that’s not stopping the wealth management industry from focusing on what the future of private banking will look like after the economic downturn has passed. Click below to view my latest story:

Debt collecting gets…er, sexy?

Bank employees working in call centers and reminding clients of their overdue loans used to be as far to the bottom of the banking food chain as you could be. Not any more.

Raiffeisen International, the second-biggest lender in eastern Europe, has ramped up staff in its collections and risk management departments.

Active in 17 countries between the Czech Republic and Kazakhstan, it is exposed to a region that is among the hardest hit by the global financial crisis. Rampant loan growth of the last few years has turned into an equally rapid rise of bad debt.

“We substantially increased resources in our call centres, started new ones,“ Martin Gruell, Raiffeisen’s CFO, said ahead of the Reuters Central European Investment Summit in Vienna. “There are 40 percent more employees working in Collections than before the crisis.”

As it is struggling with the rising tide of non-performing loans – they more than doubled in the first half of the year – it has also shifted part of its pool for bonuses to those who are working on saving as much as possible of loans that have become overdue.

“Employees have targets and are getting bonuses depending on how much they are able to collect,” he said. Do they come at someone else’s expense? “Obviously, if there is not such a high demand on our salespeople, bonuses will be lower there.”

And Raiffeisen is feeling that its competitors are doing the same.

Stop lumping us together! say Central Europeans

An invitation to the Reuters Central European Investment Summit may sound perfectly acceptable to many policy makers and executives but not to Czech central banker Mojmir Hampl. It’s not that he objected to visiting our Vienna office and being interviewed by a crew of editors — Hampl was ready and willing to do that. He just questioned the very idea of lumping together all the different countries in a very diverse region.

“I’m a bit disappointed that the key topic is how the Central and Eastern European region will develop,” Hampl told us, reviving a complaint often heard around the region. It’s a serious issue, one that has bothered many policy makers in central European countries, who grew frustrated at the height of the financial crisis that investors were not differentiating between those with sound fundamentals such as the Czech Republic and Poland and those on decidedly shakier ground.

“We’ve spent some time explaining the differences,” Hampl said, making little effort to disguise his irritation with the rest of the world’s tendency to think about central Europe as a homogeneous region. “If you look at the GDP per capita in PPP (purchasing price parity) terms…between the United States and Panama it’s not as huge as the GDP difference in PPP terms between Ukraine and Slovenia.”

Ludwik Sobolewski, head of the Warsaw Stock Exchange, struck a similar chord. ”In the second half of 2008 the Polish economy and stock exchange were treated very much as all other markets in our region…  We suffered a lot from this negative assessment of the region triggered by some countries we all remember… Ukraine, Hungary, the three Baltic states.”

Emerging Europe – what’s next?

Reuters Central European Investment Summit, September 28-30, 2009

The former Communist countries of central Europe have been the last to be hit by the global economic crisis, but th e hit they took was among the hardest. Only big neighbour Russia’s deep plunge into recession is rivaling the sharp fall from record economic growth that’s in store this year for the economies between the former Soviet Union and Western Europe.

Global risk aversion and deleveraging exposed the weaknesses that the countries had been able to gloss over during the boom years – which in retrospect appeared to have been, in some countries, a colossal binge bankrolled by cheap foreign credit extended by Western European banks that had to come to an end when funding dried up.

Expect action in Japanese M&A

After falling off a cliff at the start of this year as the global financial crisis gripped, mergers and acquisitions by Japanese companies overseas are likely to pick up again in the second half of this year, according to boutique Japanese M&A advisory firm Recof Corp.

There won’t be a flood of deals, Recof President Hikari Imai says, but the ones there are, are likely to be chunky as Japanese companies expand their frontiers beyond domestic markets where growth prospects are limited.

Geographically the focus is likely to be Asia — China, India in particular and possibly the Philippines or Australia. And the types of companies looking abroad will broaden as well, Imai told the Reuters Japan Investment Summit.

Recof expects Japanese power utilities, paper, food and beverage and retailing firms to look abroad at markets where they can put their advanced technology and inventory control systems to use.

The sort of companies that up till now have been focused on their home base. Driving all of this will be expectations of lack of growth in Japan’s own markets as it climbs slowly out of recession and its population ages — and saturation domestically.

So Imai reckons yen strength and the big drop in stock markets everywhere mean it may be an opportune moment for companies with overseas ambitions.

AUDIO – A new emerging market for real estate

Remember the good old days where — if you lived in the United States anyway — people would talk about “emerging markets”?

We’d nod our heads knowingly, wishing these poor folks the best as they tried to accumulate the swell things we had bought for ourselves. We knew that residents of Mumbai or Caracas or somewhere would never attain the great things we had in such abundance here in the good old USA (Hummers; his and hers monogrammed dishtowels; zero down, 110% mortgages on houses we couldn’t afford … that kind of stuff), but we still wished them well.

So, here we are in 2009 and at this year’s Reuters Global Real Estate Summit we find that the new emerging market is … well, it’s right down the block.

According to our guest Tom Shapiro, president of GoldenTree InSite Partners private equity investment firm, the new emerging market in the real estate world is the United States.

Shapiro, in a lively discussion, spoke glowingly about his firm’s recent new business in Brazil and about other opportunities he was seeing outside the United States. But, while he said his firm had not made any investment in the U.S. in about two years, he was starting to look for opportunities and see some enthusiasm for deals to get done.

Shapiro said it was still to early to decide what inning the real estate meltdown was in, but he was starting to see some interest from the sidelines about what the “next big thing” would be — and with cities like New York, San Francisco and Boston as potential growth engines, he was a little hopeful.

Optimism this week has been pretty thin in the real estate world, so we need to take it where we can get it.

Paper makers bet on sector despite clouds ahead

Despite the dark cloud hanging over the forestry sector, most industry leaders said they still see the paper business as a good investment.

Overcapacity has kept a lid on paper prices for years, while increasing costs of wood and energy have eaten into the paper makers’ already low margins.

But when asked where they would invest 50,000 euros ($74,330) in stocks other than their own, the participants at the Reuters Paper Summit said the forestries is where they would put their money.

“The good companies will come out of the storm stronger than they were ever before,” said Jouko Karvinen, chief executive of the world’s top paper and board maker Stora Enso.

Karvinen said there has been a silver lining to the “perfect storm” of bad news.

“There may be a good thing with this storm; maybe we will finally get our act together and make decisions that need to be made and start making some real money one day,” he said.

The rapidly growing demand for paper products in China and Latin America’s wealth of fibre were a key argument, the executives said.