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.

Would the last person to leave the smelter please turn out the lights?

For UC RUSAL, one simple act is crucial to reducing costs. Bonuses for managers at the world’s largest aluminium company depend on the company’s 75,000 workers heeding the message. “We have to introduce a new culture: if you leave the office, turn off the lights,” Artyom Volynets, UC RUSAL’s deputy chief executive for strategy, said at Reuters Global Mining and Steel Summit on Monday. “We have 16 smelters, each with their own headquarters and offices. We employ 75,000 people. If each one of them is switching off the lights at the end of their shift, that would help tremendously.” UC RUSAL embarked on a major drive to slash production costs last year as part of an ultimately successful attempt to secure Russia’s largest ever private sector debt restructuring. Easy access to Siberian hydroelectric power, compared with relatively high-cost coal used to power smelters in other parts of the world, affords UC RUSAL a distinct cost advantage when making aluminium used in transport, construction and packaging. In the first half of 2009, it cost UC RUSAL an average $1,400 to produce a tonne of aluminium. The metal is now selling at above $2,200 a tonne. UC RUSAL has cut costs by sourcing cheaper raw materials of better quality and improving throughput rates at its smelters in Siberia, which account for about 80 percent of its total output. But cheap power in Siberia had also led to complacency. “Our smelters are located in probably the only remaining major energy-long region in the world. Therefore, if you buy power at 2 cents per kilowatt, you don’t really care how much you spend,” Volynets said. “For my colleagues on the operational side of the business, their key performance indicators are 100 percent tied to cost improvements,” he said. “They will not be compensated if these improvements are not implemented.” (Writing by Robin Paxton in Moscow)

Toyota will not freeze out Iceland, bets on Russia bounce

The world’s biggest carmaker, Toyota, will not follow the road of McDonald’s and abandon Iceland even though it is selling ‘very few’ cars there at the moment and its distributor has been seized by the banks as its owner went belly-up, Toyota Motor Europe President and CEO Tadashi Arashima told the Reuters Auto Summit in Paris on Tuesday. “We have a big market share there, of 25 percent, and it is good for our after-sales,” Arashima said. The banks are trying to sell the distributor but Toyota does not plan to take ownership like it does in its key European markets of Germany, France, Italy, Spain and the United Kingdom, and some Scandinavian countries.  

Arashima said he believes the Russian market will recover sooner than many think, after the west European markets but well before the rest of East Europe — in 2011 or 2012.

In West Europe he does not see signs yet of a return of consumer confidence leading people to buy more expensive items such as cars and the showrooms remain quiet.

Europe traditionally had a low priority for Toyota, which mainly focused on the big U.S. market, and Arashima still has problems convincing  headquarters in Toyota City that Europeans like diesel engines which are far from popular in Japan and the States.

It now produces cars in Britain and France and makes some 60 to 70 percent of its sales locally.

But the Lexus luxury brand is not really taking off in Europe as it competes with German rivals that have diesel, and has rather big engines that Europeans have started to dislike.

In the U.S. however, big is still beautiful. “Even though Americans drive slowly they still love big engines,” Arashima said.

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.

Of bees, bribes and bureaucrats

Russian banking and aviation magnate Alexander Lebedev, owner of London’s Evening Standard, estimates that Russian bureaucrats have pocketed $500 billion in bribes in the past four years and corruption and red tape make Russia one of the worst places to invest on earth.

On the scale of bureaucratic outrages, Lebedev hit a personal low when the authorities asked him to produce a 100 page report on bee poo. They claimed to be concerned about the excrement produced in the hives at one of his farms.

“The conditions for entrepreneurship in Russia are simply horrible,” Lebedev told the Reuters Russia Investment Summit.

Lebedev has plenty of suggestions how to cure the disease. One of them would be to fire at least half the bureaucrats. “They are wealthy people. Let them go to Saint-Tropez,” he said.

One could wonder how billionaire Lebedev gets away with criticism of the Kremlin while his peers who had dared to challenge authorities had to flee to London or are serving prison terms in Siberia, like the oil magnate Mikhail Khodorkovsky.

Lebedev, a former KGB agent like Prime Minister Vladimir Putin, says Putin is open to criticism and these are mainly mid-level bureaucrats who are causing trouble. “Putin is a hostage to the tradition of a corrupt country,” says Lebedev.

But he says Khodorkovsky must be freed and often repeats “God Forbid” when mentioning other fallen oligarchs.

Move over, Nouriel Roubini

Loose lips sink stocks

Moscow: The least worst place for your money

   Russian investment bank Renaissance Capital was a big backer of Moscow’s ambition to become a major emerging-markets financial centre, a bridge between European and Asian capital, a rival to Dubai.

    It not only trumpeted the idea, but was one of the first big local firms to take out offices in a sleek glass skyscraper by the Moscow River, surrounded by foundation pits and towers of naked steel girders that were to become Moscow’s Canary Wharf.

Note to OPEC: Siberia not Saudi

AUDIO – For Nordson — “Get ‘em right, or get ‘em out”

Throughout the current recession, many of the companies’ executives at this week’s Reuters Manufacturing and Transportation Summit have found an opportunity to review, pare back and possibly add on to their existing business mixes.

Such is the case for Edward Campbell, chief executive of Nordson Corp, which has a uniquely diversified set of businesses under its umbrella and is looking at what makes sense for them going forward.

Campbell makes the clear point that if something isn’t working for Nordson long term, the company has a responsibility to really consider whether that is a business they should be in.

Nordson makes a wide range of precision dispensing, testing and inspection, surface preparation and curing products. Its products can be found in everything from appliances to autos to bookbinding to furniture. It operates in three segments: adhesive dispensing systems, advanced technology systems and industrial coating and automotive systems.

Campbell said all of its businesses were subject to review, but did mention a couple that might be pared back in the attached audio clip.

Campbell was one of the featured speakers for the third day of the annual Manufacturing and Transportation Summit, which continues through Thursday in our Chicago offices. The Summit program is in its fifth year, and in 2009 will include top-level executives from  industries and sectors including everything from Infrastructure; to Mining; to Investing in India, China, Japan and Russia; to Food and Beverages.