beyond building brics a world of opportunity september 2011 chris hart chief strategist ave e cw...
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Beyond building BRICSA world of opportunity
September 2011
Chris Hart
Chief Strategist
Ave E CW DSAI
Metamorphosis of risk
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Contrasting paths of BRICS/EM and
the Developed World.
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Spending the problem. Consumption vs Production
Source: INet
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Fundamental problem: governments have grown too big
Source: INet
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The systemic Ponzi – dynamicsAt the 11th hour, as government compensates
Systemic collapse
Time
Debt needed to sustain the systemBCA: the debt super cycle
Systemic instability
Credit worthy capacity
Deb
t
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From 2010: The debt trap: more debt no solution
Source: INet
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From 2010: Projected debt burdens: US and UK servicing requirements in a worse position than Greece in 2040.
The Argentine disease
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The EM contrast: yield, growth, solvency
2007EM Crisis
Interest Rates GovernmentSpending
SovereignDebt
BubbleResolution
Difference in economic performance very stark
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Crisis and riskMarket response and the changes
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Financial Markets and safe-havens:…swinging between risk and reward
Source: INet
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Debt Distressed Italian Financial Markets – no swing but general exodus.
Repeated in … Greece, Ireland, Portugal & Spain!!
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Risk and the USD.
Source: INet
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Euro: convergence and divergence trade.
Source: INet
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French Spreads over German Bunds. …..France as well!!!!???
Source: INet
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EUR vs USD – Range Trading
Source: INet
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A chart for the generation: USD vs Swiss franc.
Source: INet
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EUR vs CHF – huge move over the past year.
Source: INet
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S&P: Bearish?
Source: INet
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S&P: Long Term Outlook Turning Bearish as well
Source: INet
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JSE: Bearish!
Source: INet
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JSE: better long term outlook, but bearish s/t. Contrast with S&P very stark!
Source: INet
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The rand. Very Volatile. Really????
Source: INet
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SA Bonds: yield and solvency!!
Source: INet
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The EM opportunity: changing nature of risk
InvestmentOpportunities
Growth Yield
SolvencyDifferentiation
BRICS and EM becoming safe-havensRelative risk diminishing
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A Soft Patch….….or Double Dip?
Slowdown aggravates debt distress
.
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Quantitative Easing.
…1, 2 and maybe 3?? Otherwise better described as printing money
Record budget deficits also added to the mix
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…and deficit spending
Source: INet
As far as the eye can see. Anyone for tea??
Record budget deficits also destabilizes
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OECD Lead indicator: no recovery; pointing to stagnant 2nd half at best.
Source: INet
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Risk metamorphosisHistoric experience problematic
.
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Governments - becoming the investor’s enemy…but are friends when emerging from the restructure
RisingTaxBurden
Investment Incentives
Pragmaticregulation
LabourInstability
HostileRegulation
Low LabourCosts
Bankruptcy
Blamegame
US; UK; Japan; PIIGS
Brazil; Zambia; Turkey, Thailand
Protectionism Concentration
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Challenge to asset management doctrine and foundationDoes ‘risk free’ rate become redundant?
Cash
Risk
Return
Bonds
Equity
Property
“aggressive/growth”“Defensive”
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Inflation adjusted and the model falls apartDoes ‘risk free’ rate become redundant?
Cash
Risk
Return
Bonds
Equity
Property
Submarine assets
“Cheap”“Expensive”
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Risk hierarchy.
Source: INet
Gold
Cash
Bonds
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Gold – a safe haven
Source: INet
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Conclusion
• EM investors get growth, yield and solvency
• Market response to risk is changing fundamentally
• Conventional Investment Wisdom needs a rethink to deal with systemic risk
Twitter: chrishartza
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Thank You
Chris Hart
Chief Strategist
Ave E CW DSAI
Twitter: chrishartza
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