Summit Notebook

Exclusive outtakes from industry leaders

from Global Investing:

BRIC: Brilliant/Ridiculous Investment Concept

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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.

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

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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.

Emerging Europe – what’s next?

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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

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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.

Move over, Nouriel Roubini

Mikhail Alexeyev, a veteran of Soviet and Russian banking who now heads Russian operations for Italian bank UniCredit, said he saw the 2008 financial crisis coming when he was still a student at a Soviet state institute of finance.  “I knew it would happen back in 1981, when I was studying political economics. In capitalism you get crises. Marx and Lenin teach us that.”

Loose lips sink stocks

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    The president of Renaissance Capital — Russia’s largest home grown investment bank, a fiercely competitive institution which has now survived two crises — is not interested in publicly assessing the competitive landscape in Moscow’s financial sector.     Russia’s stock market was all but shut down in a single day by rumours of distress among brokers, sparked by the selloff of stocks held on margin or as collateral on repurchase agreements.     Operating often on whispers, brokers foreign and domestic slammed shut limits on each other, causing trade on the stock market to seize up.     The first victim — brokerage KIT Finance — was announced by evening and became the first financial instituation to receive a state bailout.      “The crisis has shown that rumours and gossiping about competitors is a very dangerous thing,” Renaissance Capital President Aganbegyan told the Reuters Russian Investment Summit almost a year later.

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

   An episodic courtship between Russia, the world’s second largest oil exporter and its sometime rivals in the OPEC group of oil exporting nations, went cold at the beginning of this year when Russia failed to make good on hints that it might cut output in line with OPEC, dominated by Saudi Arabia and other desert states of the Middle East.     Prices for oil, the economic lifeblood of Russia and OPEC countries alike, had fallen below $40, OPEC argued, and supply cuts had to be made to boost prices and finance investment into the oil industry.     Alexander Medvedev, deputy chief executive of Russian energy giant Gazprom, told this year’s Reuters Russia Investment Summit that Russia had an excuse for avoiding the multimillion barrel cuts imposed by OPEC: the Siberian chill .    “It is a very simple explanation for this: We are not in a desert where it’s easily to regulate, we are in an extreme situation in Siberia where reserves could be damaged if you up and down your production levels.”     If Russia shuts down Siberian wells, its industry members argue, they could seize up forever as they go cold.     And Russia hardly left OPEC hanging, Medvedev argued: The financial crisis took its toll even on Russia’s cash rich oil companies: “Actually the supply was substantially lower in the first half of the year.”       Medvedev also said he was still struggling to understand where from the rival Nabucco pipeline will get its gas to rival Gazprom on European markets.      “Even at the (Nabucco) signing ceremony I looked at the photos and tried to find any gas supplier and with all my attempts I could not find any. And it looked strange.”

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

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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.

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