9 November 2011

Video: Key Takeaways from the Fourth Annual CFA Institute European Investment Conference

In an interview following the conclusion of the fourth annual CFA Institute European Investment Conference in Paris, Nitin Mehta, CFA, Managing Director, CFA Institute, EMEA, discusses the main themes covered by leading speakers at the conference, provides details on their analysis and insights into the present crisis, and highlights the key takeaways.

Mehta also discusses important findings from a CFA Institute survey of members in Europe on the eurozone crisis, highlighting that 70% of members believe a failure of the euro would be a failure for Europe — and that two-thirds of respondents think that a breakup of the eurozone is not very likely.

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7 November 2011

“Miracle of Africa” Stands in Sharp Contrast to Europe and U.S.

Clifford D. Mpare, CFA, Frontline Capital Investors

Africa is growing economically and is rich in commodities. The continent has favorable demographics and consumers with rising purchasing power. And even as its financial sector is developing, inefficiencies in Africa’s financial markets offer investors opportunities for alpha.

That, in summary, is the case for investing in Africa, according to Clifford D. Mpare, CFA, Executive Chairman and CEO of Frontline Capital Advisors Limited, an investment advisory and consulting firm based in Ghana. Mpare outlined the bullish case for Africa last week before more than 200 investment professionals who attended the fourth annual CFA Institute European Investment Conference in Paris.

Using data from the International Monetary Fund and The Economist magazine, Mpare showed that of the world’s ten fastest-growing economies from 2001 to 2010, six — Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda — were African. Not only is Africa still growing at a fast pace, he added, but the average growth rate is also higher than that of Asia, and is forecast to remain so.

Ghana’s economy, Mpare explained, is likely to grow at 17.5% in 2011, the highest GDP growth rate in the world. Meanwhile Nigeria, the most populous country in Africa, had a debt-to-GDP ratio of just 18% in 2010, compared to 100% for Greece. This “miracle of Africa,” as Mpare called it, stands in sharp contrast to Europe and the United States, which are both struggling to recover from the ongoing financial crisis.

Mpare, who returned to Africa after working in the U.S. financial sector for many years, identified Africa’s natural resources — particularly commodities — as a significant driver of the continent’s economic growth. He suggested that commodity price forecasts often show an upward trend, and Africa has a significant share of the world’s reserves, from oil and gas to platinum and even diamonds. Mpare argued that this time the upward trend in commodity prices is not cyclical but rather secular, thanks to demands from growing economies like China, and that Africa stands to gain from this trend.

Sustained economic growth supported by commodities is increasing the purchasing power of consumers in Africa, and is both feeding and fuelling further growth, Mpare said. For instance, he noted that “mobile phone penetration was over 50% in 2010, having grown from 1% in 1998.” Africa’s demographics also favor growth as the continent is young — even younger than Asia — and its economic growth will create demands in other sectors, such as education and health care, Mpare contended.

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How to Allocate Capital in an Uncertain World

William De Vijlder, Chief Investment Officer of strategy and partners at BNP Paribas Investment PartnersWilliam De Vijlder, chief investment officer of strategy and partners at BNP Paribas Investment Partners, opened his address on 3 November at the fourth annual CFA Institute European Investment Conference by focusing on the increasing uncertainty of the future of the eurozone. Indeed, what looked like an agreed deal between European leaders last week to stabilize the eurozone’s finances was plunged into turmoil following the Greek Prime Minister’s surprise announcement to hold a referendum on the bailout, a decision that has since been revoked. Against this unprecedented economic backdrop, De Vijlder tackled how asset managers can best allocate the money entrusted to them by their clients — and how they can best fulfill their fiduciary duty to these clients.

De Vijlider asserted that the good thing with bad news is that you knows it is bad — and therefore, as an asset manager or investor, you can act on it. The problem with uncertainty, however, is that by definition you do not know the outcome, and of course this leads to a loss of confidence in the accuracy of the information available and your capacity to predict the course of future events.

Still, De Vijlider did not shy away from making predictions. He argued that markets are likely to witness increased volatility; that investors will display more fearful investing behavior; that there will be increased demand for safe assets; and ultimately, that there is an increased likelihood of economic recession.

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4 November 2011

The Lesson from Japan: Western Policymakers Must Apply Sustained Fiscal Stimulus

Richard Koo, Nomura Research InstituteIn one of the concluding sessions at the fourth annual CFA Institute European Investment Conference in Paris, Richard Koo, Chief Economist at Nomura Research Institute, challenged the widely held consensus view of fiscal consolidation and austerity as being the best pathway to economic recovery. Koo argued instead that sustained fiscal stimulus is the only economic policy that can forestall the protracted and potentially irreversible economic malaise in western economies — and he called on policymakers to learn from the Japanese experience.

Koo observed that balance sheet deleveraging is today a common feature across several major western economies, as this is the only way that firms can avoid potential bankruptcy following the bursting of asset price bubbles. However, the net effect of deleveraging is the creation of dormant financial capital and shrinking aggregate income, and these effects cannot be offset by monetary policy measures. Koo’s belief that fiscal stimulus is required to minimize the scale of GDP shrinkage whenever deleveraging is occurring is primarily based upon Japan’s experience over the last two decades, but he also drew on key macroeconomic data from the United States, the UK, the eurozone, and China. Koo emphasized that as policymakers in western economies grapple with seemingly unprecedented economic times, they ought to apply their analytical “binoculars” and learn from the Japanese experience.

While many observers might consider Japanese policymakers poor economic crisis managers, there have been plenty of parallels in macroeconomic data trends during the current crisis (e.g. anemic economic growth despite reduced interest rates). In Koo’s opinion, Japan can boast of having undertaken the “best economic policy in history” through its largely sustained expansionary fiscal policy, which injected a cumulative stimulus of 460 trillion yen during the 1990 to 2005 period and forestalled a potential precipitous shrinkage in GDP. In his view, the only mistake made by Japanese policymakers was when they failed to stay the course and abandoned fiscal stimulus in the 1997 to 2001 period following the “green shoots” of economic recovery that had begun to emerge in 1996.

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3 November 2011

Is the United States the Rising Phoenix of the Financial Crisis?

Following almost two days’ worth of bearish sentiment about Western economies at the fourth annual CFA Institute European Investment Conference in Paris, at least one speaker is taking a decidedly contrarian position. Charles Dumas, Chief Economist of Lombard Street Research, said that in 2013 the place to invest will be the United States, not China. His thesis represents a provocative twist on the prevailing paradigm: that China is the growth engine of the future and the United States is poised for a decade of stagnation.

Although Dumas’ views on future economic growth are anything but mainstream, he agrees with many economists who believe that the credit crisis was caused by a massive global imbalance triggered by Western economies spending too much and Asian economies (namely China) saving the balance. This massive current account imbalance helped create easy credit, asset bubbles, and ultimately a global financial crisis.

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Bank for International Settlements’ Cecchetti Lays Out Case for Basel III, Calls for Greater Investor Vigilance

Fourth Annual CFA Institute European Investment ConferenceAs G20 leaders met in Cannes to address Europe’s monetary and economic crisis, in Paris Stephen Cecchetti was calling for greater investor vigilance and tighter regulation of the shadow banking sector. Speaking at the fourth annual CFA Institute European Investment Conference, the Head of the Monetary and Economic Department at the Basel-based Bank for International Settlements defended new Basel III rules that tighten capital and liquidity requirements for banks against criticisms from bankers that the rules are curbing lending and holding back economic recovery.

Cecchetti began his talk by highlighting the imperfections of large banks. “While the financial pile-up had many causes, we must not overlook the critical role played by a number of very large global banks with insufficient capital, inadequate liquidity, and poor risk management practices,” Cecchetti said. “We are rewriting the rules of the road to prevent such an accident from recurring.”

On the subject of the much-maligned activities of financial regulators, Cecchetti told Conference delegates that “we know that the quality of regulation and supervision mattered, since the banking systems of some countries proved to be more resilient to the crisis than others.” A new framework for regulating and supervising systemically important financial institutions is now being developed by the Financial Stability Board and the Basel Committee on Banking Supervision. The new framework, Cecchetti explained, comprises three complementary components: greater loss absorbency, more intense supervision, and stronger resolution.

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Shining a Light on Europe’s “Dark Pools”

Jasper Jorritsma, Marcus Hooper and Frédéric RomandIn recent years, there have been few more topical yet mythicized subjects in institutional finance than high-frequency trading and dark pools. In a session at the fourth annual CFA Institute European Investment Conference in Paris, three experts — Marcus Hooper, CEO of Pipeline Financial Group; Frédéric Romand, Head of Trading at Generali Investments; and Jasper Jorritsma from the European Commission — attempted to de-mystify these subjects by cutting through the complexity of today’s equity market structure.

The backdrop for these structural changes in European equity markets is of course the Markets in Financial Instruments Directive, known by its acronym as MiFID, which was implemented in 2007 but amended only two weeks ago after a year-long review process.

To tackle this timely subject, the panel discussion began with a debate on the new “Organised Trading Facility” (OTF) trading venue classification under MiFID. Jorritsma explained that the Commission had created the OTF category as a means to ensure that all systematized trading is captured under the MiFID framework, an objective that stems from the G20 mandate to ensure that as much trading as possible takes place on regulated electronic marketplaces. But according to Jorritsma, broker crossing systems — the “dark pools” of liquidity run by banks – would not be able to combine the crossing of client orders with bilateral execution against the broker’s own account under the OTF framework.

Generali Investments’ Romand noted that, practically speaking, dark pools have been around for more than 20 years in one form or another. Today’s electronic incarnations are just more technologically efficient ways for buy-side investors to get large block trades executed. There is a legitimate question about how much business is, or should be, executed in dark pools without having a detrimental effect on the price discovery function conducted on the “lit” exchanges — but without better data, it is impossible to tell what this limit is.

Among the panelists there was unanimous agreement on the need for a consolidated tape in Europe to give investors the transparency required to evaluate investment decisions and assess best execution. According to both Romand and Pipeline Financial Group’s Hooper, a consolidated tape is absolutely crucial from the buy side’s perspective. Jorritsma explained that the Commission has opted for a commercially driven approach to developing the consolidated tape under MiFID II. Romand also indicated that post-trade transparency — the public reporting of executed trades — would be very beneficial for other asset classes such as fixed-income and derivatives (another area MiFID II seeks to rectify).

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Global Trade Imbalances Are a Major Source of Instability, Says Economist Roger Bootle

Roger Bootle, Capital Economics Ltd.At the fourth annual CFA Institute European Investment Conference, Roger Bootle, managing director of Capital Economics, provided a wide-ranging examination of the macroeconomic and institutional factors that contributed to the credit crisis of 2007-2009 and that underpin the ongoing sovereign debt crisis. He also contended that the financial services sector is simply too big relative to its contribution to society.

Bootle pointed to international trade imbalances as a major source of instability. These imbalances contributed to excess leverage at various levels of the global financial system, he said, and inevitably resulted in a liquidity glut that has constrained the effectiveness of monetary policy options within western economies.

“Like so much else, the financial crisis was made in China,” said Bootle, referring to the country’s massive trade surplus and foreign exchange reserves.

The economist also critiqued the pervasive and now disputable intellectual dogma of efficient markets, which has led to unrestrained and deregulated capital markets. He argued that the advantages of the supposed propensity of free markets to self correct is outweighed by the significant negative externalities that financial institutions impose on society. Bootle made a strong case for shrinking the financial sector, one premised on the observation that finance is today focused on “distributive” versus “creative” activities; that compensation within the industry is excessive; and that finance tends to divert societies’ brightest talents from other career pursuits.

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Münchau: European Financial Stability Facility Has Only Propagated the Eurozone Crisis

Wolfgang Münchau, associate editor of the Financial TimesWolfgang Münchau might have been accused a few months ago of being unduly pessimistic about the future of the eurozone in his regular Financial Times columns and Eurointelligence articles. But as he himself confesses now, the successive months have shown him to in fact have been overly optimistic in his earlier diagnoses of the still-unfolding crisis. In a lucid and lively session entitled “The Way Forward for the Eurozone” at the fourth annual CFA Institute European Investment Conference in Paris yesterday, Münchau highlighted the impending disasters that will come if the necessary political will is not forthcoming — and experience to date has not been promising to say the least.

While Münchau does not foresee the total demise of the eurozone, there will certainly be significant changes (including the potential exit of Greece from the eurozone), and ultimate survival in any fashion will be achieved only with great difficulty, he contended.

As Münchau pointed out, the eurozone in aggregate is in relatively good shape. Its overall debt-to-GDP ratio is a manageable 80%. The euro currency itself enjoys relative stability, supported by sound monetary policies of larger member states. And the eurozone includes some of the world’s most advanced and competitive economies. If it were actually a single state, there would be no perceptible crisis.

Münchau emphasized that problems have clearly arisen from the large internal imbalances between large and small nations within the single market, the prime example being Greece versus Germany. Sovereign bonds issued by many nations within the zone have been shown to be anything but risk free — with the possible exception of German bunds — and the much-needed rescue packages that have been proposed are constrained by the requisite size and even legality.

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2 November 2011

In a World of Messy Multilateralism, Investors Must Embrace “Macro Diligence”

Nadar Mousavizadeh, CEO of Oxford Analytica“We are in a political risk environment unlike any we’ve seen in the last 25 years,” declared Oxford Analytica CEO Nader Mousavizadeh in his speech today at the fourth annual CFA Institute European Investment Conference in Paris.

Mousavizadeh, who joined the London-based global analysis and strategic advisory firm after serving as special assistant to UN Secretary General Kofi Annan, went on to explain that we are in the midst of a fundamental crisis of confidence, with citizens around the world lacking faith both in markets and in the ability of political leaders to follow through on promises.

Greece provides an excellent example of the strained relationship between many states and their peoples, Oxford Analytica’s CEO noted. The surprise call for a referendum on austerity measures by Greek Prime Minister George Papandreou may be seen as a political risk for the embattled politician, but it in fact may be necessary to establish his political legitimacy.

Will the Greeks vote for austerity measures for themselves? While the outcome is uncertain, either way Papandreou will have given control back to the Greek people, Mousavizadeh asserted, adding:  “The euro has been 99% an elite proposition.”

By the numbers, Greece is small — less than 2% of eurozone GDP — but it marks a politically powerful chapter in the story of the common currency: If the Europeans cannot deal with Greece, Mousavizadeh asked, how can they deal with the other countries that are sure to encounter risks of their own?

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