Tuesday, 20 March 2012

Changing the rules to suit themselves .....again.

Very few equity investment-models, if any, are consistently accurate. Large derivative-based hedge books attest to that fact.

Why then do investors rely so heavily on research when ALL research is, in one form or another, subjectively predictive? So why bother? If the rules of the game stayed constant, then that would be a different ball-game altogether. Research would be more substantive. Investment reality, however, is a very different animal and the devil's always in the fine-print. Turn the pretty glossy document over and you'll notice in nondescript terms one important caveat. Paraphrased most claim:  'blah blah bulldust ...more blah and loads more bulldust. This research report is based on our interpretation of current circumstances only..ceteris paribus (all things being equal)... blah blah bulldust'; disclaimer, disclaimer. 

Therefore, equity research interprets and forecasts a company's / sector's prospects based on current variables only, of which regulatory stability is just one of many and the most ephemeral. Take Africa for example. (..or Australia or South America or China or whatever...). Some of the world's largest mining houses have significant investments in Africa. Most of those investments generate significant ROI and constitute a large proportion of the miner's earnings. Those investments only yield significant returns, assuming the investing miner has done its homework, if the regulatory conditions remain constant. It's when the rules are changed, either in a regime overhaul or a significant change in policy, that forecast returns become nothing more than blah-blah-bulldust! 

So when Zimbabwe, on a whim, demands the transfer of 51% of a miner's listed equity or South Africa talks of a 51% super-tax on profits, it doesn't matter much what Bloomberg's- Best (No.1 rated analyst) predicted prior to the change in rules, now does it? 

Thursday, 15 March 2012

The media's talking heads; a hard-landing and the US dollar

Economists define a hard landing as the resultant economic recession a country endures from overtly aggressive macroeconomic policy, usually against inflation. Fairly straightforward then. Get to hell out of the market...Right? Wrong.

So what is a recession really? It's defined, inter alia, to be.. a fall in GDP growth, a rise in unemployment and a drop in household income; exactly the scenario China finds itself in today. JP Morgan concludes, rather gravely, that China is, de facto, in a hard landing..... 'It's not a debate, it's a fact', JPM tell us. Predictably Bloomberg cites the notable credentials of the JPM analyst holding resolutely firm in his conclusions. It's obviously, an unequivocal confirmation of the prognosis. China is, undeniably, in a hard landing. For the bulls invested in the global equity markets the empirical evidence justifies, perhaps, the rising gnaw of panic in your pockets.. 

Herein lies the investment rub. Read in micro isolation, JPM's 'hard landing' theory, would collapse commodities... Asian and 'primary-resource' equity markets would tumble, cash holdings would rise and the US $, would soar into the stratosphere. Don't forget the US $ is still the globe's most liquid currency and all that cash must find a home... 

Investors who operate within a microcosm usually find themselves out of context in, what has become, a global economic macrocosm. Don't forget, a decline in GDP growth from 10% to a forecast growth of 7.5% meets the definition of recession... Steel and cement sales would be commensurately lower too. If the US GDP is forecast at 2.2% this year, rising from 1.7% last time round then China's 7.5% is not too bad...