Clearing a path by BT Financial Group

April 20, 2009 - PRLog -- Despite the downward trend of share markets, the US, Europe and Australia all recorded strong rallies in late March - offering investors a hint of optimism. Robert Swift, Head of Multi Strategies at BT Investment Management, spoke to Better Investor about the recent performance of markets, his view on investing and the likelihood of a recovery.    

Market review      

Take a look back at the last six months and it isn't a pretty picture. The whole 'deleveraging process' - or investors and companies selling shares and other assets to pay off debt - has taken its toll in the real economy. Data from all parts of the world shows downward pressure on incomes, profits and economic growth. That's a difficult recipe for risk assets, like shares. Not surprisingly, the major share markets have fallen across the board.      However, we can now start to see what the new world will really look like. We are, for example, seeing some telling differences on returns. Asia and the emerging markets have done a lot better than Europe, which is the region under most financial pressure. Year to date, European markets are down around 12%, the Asian markets are barely down at all and the US is somewhere in between. That's about right given the policy responses taken in the various regions and the state they were in when the crisis began.      

What now for Asia, US, Europe and Australia?      

In terms of a recovery, Asia (excluding Japan) is the best placed region. They've got big current account surpluses and government surpluses while personal tax and personal debt is low. In short, Asia has a more resilient economy, more cashed-up consumers and stronger corporate balance sheets. So they have more levers to pull.      

The US is a different story. It has been over-consuming and under-saving for years, but its national debt is not that excessive. It has the firepower to throw money at the economy without going too much into debt.  Europe's in a much darker place. One of their big problems is that the Euro currency means they have a uniform monetary policy that's really too tight for some countries. Countries like Portugal, Italy, Greece and Spain will find it hard to introduce the market reforms they need to make their economies competitive at existing exchange rates - so something will have to crack. It may be the Euro.      

The UK isn't in the Eurozone - that's a safety valve because it has let its currency fall dramatically. Unfortunately (and I say this as a Pom) it doesn't have a lot of other levers to pull - its got horrible levels of personal debt and massive government debt. It's also no longer a cheap place for foreigners to do business. If you want to manufacture in Europe now you’ll go to the Czech Republic or Poland.  Australia will struggle to avoid recession but in terms of economic strength it's still up there with Asia. The economy will slow, but the government is cashed up and a couple of years of low or flat growth will not do that much damage.      

Bubbles built and lessons learned      

The biggest lesson is the dangers of excessive debt. The roots of this crisis began with the tech wreck back in 2001. The US Federal Reserve didn't want to endure a nasty recession and so kept interest rates too low for too long.      

There were a whole lot of other poor regulatory decisions about derivatives, about accounting practices and also poor supervision by regulators like the US Securities and Exchange Commission and the UK's Financial Services Authority. All this led companies and individuals into some crazy practices, such as British building societies that lent 120% of the value on rental properties.  That's how big bubbles are built - eventually people stop thinking about the risks they are taking.  For those of us in the industry the surprise was the speed of the contagion. It all started with a failed hedge fund trade between Merrill Lynch and Lehman Brothers 15 months ago. Then suddenly the world's in a spin. As a fund manager you're thinking - 'Hold on, I don’t hold any Merrill or AIG or Lehmann's. I’m in good companies that won't default.'      

But when the whole world is loaded with debt and people desperately need to pay off their loans, shares - especially quality shares - become their ATM. When everything else froze you could still sell shares quickly. So even good businesses in strong industries - like technology and pharmaceuticals - got slammed.  If there is a silver lining, it’s that we know a lot more about the benefits and costs of financial globalisation. Much of the long boom we enjoyed was driven by globalisation - by more competition, technology transfer, lower costs. But the size of the financial crisis and the speed with which it spread is a globalisation problem.    

I think we may now get a better balance between East and West. We'll start to see the US save more, consume less and invest in domestic infrastructure. Meanwhile, Asia must make the transition from an export focus towards domestic consumption. It will be hard for them to forgo a business model that's worked for them for 40 years but the crisis will push them in that direction. And that will be good for the global economy.
     
Have we hit the bottom?  

It's hard to say if we've reached the low point, but the great debt bubble has certainly deflated. It's taken about a year for markets to get to oversold levels - which is where I think they are now. Unfortunately you can have the world's smartest valuation tools telling you that markets are good value but it doesn't mean markets won't fall further. That's because the 'animal spirits' - people's emotions - have taken over.  There's an old but valuable cliché that says, 'In the short-term markets are a voting machine, but in the long-term they're a weighing machine.' In the short run, buyers and sellers drive the market. In the long run, the market reflects the real value of dividends and the growth in those dividends.      

Investing short-term means asking, 'How are people going to vote?' And you never really know the answer.  As long-term investors, what we do know is the catalysts for improvement are there. The world economy is rebalancing. The US savings rate is going up so the US current account deficit is going down to zero. That's a good thing. US house prices have stopped falling, which is important because they underpin so much US debt. So that's another good thing. Meanwhile China is boosting its domestic economy - a further positive. The drivers of recovery are there.      

The opportunities    

At the moment we are very positive on investment grade credit (income securities issued by quality companies). There are some very attractive returns in prospect there.  Our models are saying there is value in shares. Companies are making smaller profits but compared to low cash and government bond rates equities look OK. Within equities I'd be saying 'go East'. Shares in Asia (ex Japan) looks best, then the US, then UK, then Europe.      

Remember you can still get a good return in equities. A performance of 7-10% a year is still a good return, especially if inflation is low. For anyone with a time horizon of 5 years or more I’d say: 'Don’t own cash'. It's an expensive asset class because returns are low and taxes high.    

For more information relating to this press release, visit http://www.bt.com.au/insights or call 1800 813 886 for BT Investment Management advice.

# # #

Robert Swift Head of Multi Strategies at BT Investment Management Robert is responsible for BT Investment Management's diversified and sustainability funds and for all their alternative investments. He has more than 25 years experience in investment markets, including as founding partner for Oxhead Capital Management, a global equity hedge fund management company. He has also held senior investment management roles for companies based in London, the United States and Sydney.