INVESTING - The cost of bad news.
The business section of the newspaper has made for pleasant reading the past few years, thanks to consistently growing, well-managed economies and stock markets that keep going up.
The front page is a different matter, and some investment advisers are worried that the bad news will spill over and spoil the good thing.
We are living in a world with “low macroeconomic volatility but high geopolitical volatility,” said David Rosenberg, a Merrill Lynch economist. “Over the past decade core inflation volatility and real rates have returned to levels last seen in the 1950”, he said in a note to the bank’s clients. Profit margins expand in such a climate, and stock prices rise as investors bet that the placid conditions will persist.
But Rosenberg suggested that the environment of “low volatility, low risk premia” is threatened in a way that it was not, half a century ago. He rattled off headlines from one edition of The New York Times: the conflict in Iraq, bird flu in Turkey, Iran’s nuclear program, attacks on oil facilities in Nigeria and Saudi Arabia and on and on. “What do investors pay for in terms of a much more uncertain geopolitical backdrop?” he asked.
In the note, Rosenberg offered no answer to his own question, but in an e-mail exchange later he suggested that whatever investors are paying to take account of political risk, it is not enough.
People focus on “where the second decimal place is going to be on first-quarter GDP growth and whether the Fed is done at 5 percent or 5.25 percent,” he said.
It is “very rare,” he said, “to see investors turn a blind eye when faced with so much uncertainty. But if they start to price political risk, which markets will feel it first and most?”
Global investment managers say that emerging markets actually may be least affected. The long history of strife in those markets, they say, compels investors to ignore the progress and depress valuations in anticipation of further difficulties, which acts as a shock absorber.
“You’re talking to someone who has gone through the Mexico crises, the Brazil crises and the Turley crises,” said Francis Claro, the world-weary co-manager of the Evergreen Global Opportunities Fund. “Politics has always been an investment consideration within emerging markets.”
One reason that emerging markets have done so well and attracted so much foreign investment is that the political instability priced in in many countries, including Brazil, Mexico, Russia and much of Asia, has not materialized.
These arguments do not persuade Rosenberg that emerging markets are immune; the crises that Claro mentioned were, after all, crises. But Claro and others nevertheless make a persuasive case that investors may face greater risk in the developed world because stability is supposed to be the norm and any threat to it is less likely to be factored into stock prices.
The consolidation of European economic and monetary union is driving some politically inspired economic imprudence in Europe, Claro said: “You have the many governments that have in a sense surrendered monetary policies” to the European Central Bank, he said, “but they are still very active on the fiscal front.”
Hyperactive in the case of Italy, one of the markets where Jerome Booth, research director at Ashmore Group, believes political tribulation is not priced in. The country’s finances have worsened in recent years and appear particularly fragile in advance of the election next month in which Prime Minister Silvio Berlusconi is hoping to keep Romano Prodi from taking his job.
“Should Berlusconi win, or should Prodi win and then see his government fall apart six months later when he fails to address the fiscal crises, the country is likely to be downgraded,” Booth said. Italy may suffer the supreme embarrassment of being judged less creditworthy than some emerging markets. “ The possibility of Mexico and maybe Russia trading through Italy is very real,” he said.
Booth also finds danger in Japan, where he thinks the political will to execute economic reforms has long been lacking. With national debt equal to 150 percent of annual output, “what happens if interest rates go to 4 percent?” he asked.
“The reality is that there’s risk everywhere, in every country,” Booth said. “We’re now in a world where you’ve got two types of countries: emerging markets, where political risk is priced in, and a whole bunch where it isn’t priced in at all.”
This article was written by Conrad de Aenlle and published in the Saturday-Sunday, March 25-26, 2006 addition of International Herald Tribune.
Property in Observatory, Cape Town, South Africa on http://www.hotpropertyincapetown.com
The front page is a different matter, and some investment advisers are worried that the bad news will spill over and spoil the good thing.
We are living in a world with “low macroeconomic volatility but high geopolitical volatility,” said David Rosenberg, a Merrill Lynch economist. “Over the past decade core inflation volatility and real rates have returned to levels last seen in the 1950”, he said in a note to the bank’s clients. Profit margins expand in such a climate, and stock prices rise as investors bet that the placid conditions will persist.
But Rosenberg suggested that the environment of “low volatility, low risk premia” is threatened in a way that it was not, half a century ago. He rattled off headlines from one edition of The New York Times: the conflict in Iraq, bird flu in Turkey, Iran’s nuclear program, attacks on oil facilities in Nigeria and Saudi Arabia and on and on. “What do investors pay for in terms of a much more uncertain geopolitical backdrop?” he asked.
In the note, Rosenberg offered no answer to his own question, but in an e-mail exchange later he suggested that whatever investors are paying to take account of political risk, it is not enough.
People focus on “where the second decimal place is going to be on first-quarter GDP growth and whether the Fed is done at 5 percent or 5.25 percent,” he said.
It is “very rare,” he said, “to see investors turn a blind eye when faced with so much uncertainty. But if they start to price political risk, which markets will feel it first and most?”
Global investment managers say that emerging markets actually may be least affected. The long history of strife in those markets, they say, compels investors to ignore the progress and depress valuations in anticipation of further difficulties, which acts as a shock absorber.
“You’re talking to someone who has gone through the Mexico crises, the Brazil crises and the Turley crises,” said Francis Claro, the world-weary co-manager of the Evergreen Global Opportunities Fund. “Politics has always been an investment consideration within emerging markets.”
One reason that emerging markets have done so well and attracted so much foreign investment is that the political instability priced in in many countries, including Brazil, Mexico, Russia and much of Asia, has not materialized.
These arguments do not persuade Rosenberg that emerging markets are immune; the crises that Claro mentioned were, after all, crises. But Claro and others nevertheless make a persuasive case that investors may face greater risk in the developed world because stability is supposed to be the norm and any threat to it is less likely to be factored into stock prices.
The consolidation of European economic and monetary union is driving some politically inspired economic imprudence in Europe, Claro said: “You have the many governments that have in a sense surrendered monetary policies” to the European Central Bank, he said, “but they are still very active on the fiscal front.”
Hyperactive in the case of Italy, one of the markets where Jerome Booth, research director at Ashmore Group, believes political tribulation is not priced in. The country’s finances have worsened in recent years and appear particularly fragile in advance of the election next month in which Prime Minister Silvio Berlusconi is hoping to keep Romano Prodi from taking his job.
“Should Berlusconi win, or should Prodi win and then see his government fall apart six months later when he fails to address the fiscal crises, the country is likely to be downgraded,” Booth said. Italy may suffer the supreme embarrassment of being judged less creditworthy than some emerging markets. “ The possibility of Mexico and maybe Russia trading through Italy is very real,” he said.
Booth also finds danger in Japan, where he thinks the political will to execute economic reforms has long been lacking. With national debt equal to 150 percent of annual output, “what happens if interest rates go to 4 percent?” he asked.
“The reality is that there’s risk everywhere, in every country,” Booth said. “We’re now in a world where you’ve got two types of countries: emerging markets, where political risk is priced in, and a whole bunch where it isn’t priced in at all.”
This article was written by Conrad de Aenlle and published in the Saturday-Sunday, March 25-26, 2006 addition of International Herald Tribune.
Property in Observatory, Cape Town, South Africa on http://www.hotpropertyincapetown.com
posted by Werner Property Agents at 12:52 pm
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