Beyond building BRICS
A world of opportunity
Metamorphosis of risk
September 2011
Chris Hart
Chief Strategist
Ave E CW DSAI
Contrasting paths of BRICS/EM
and
.
the Developed World
.
Spending the problem. Consumption vs Production
Source: INet
Fundamental problem: governments have grown too big
Source: INet
The systemic Ponzi – dynamics
At the 11th hour, as government compensates
Systemic collapse
Credit worthy capacity
Debt
Systemic instability
Debt needed to sustain the
system
BCA: the debt super cycle
Time
From 2010: The debt trap: more debt no solution
Source: INet
From 2010: Projected debt burdens: US and UK servicing
requirements in a worse position than Greece in 2040.
The Argentine disease
The EM contrast: yield, growth, solvency
Government
Spending
Interest Rates
2007
EM Crisis
Bubble
Resolution
Sovereign
Debt
Difference in economic performance very stark
Crisis and risk
Market response and the changes
.
Financial Markets and safe-havens:
…swinging between risk and reward
Source: INet
Debt Distressed Italian Financial Markets – no swing but
general exodus.
Repeated in … Greece, Ireland, Portugal & Spain!!
Risk and the USD.
Source: INet
Euro: convergence and divergence trade.
Source: INet
French Spreads over German Bunds.
…..France as well!!!!???
Source: INet
EUR vs USD – Range Trading
Source: INet
A chart for the generation: USD vs Swiss franc.
Source: INet
EUR vs CHF – huge move over the past year.
Source: INet
S&P: Bearish?
Source: INet
S&P: Long Term Outlook Turning Bearish as well
Source: INet
JSE: Bearish!
Source: INet
JSE: better long term outlook, but bearish s/t. Contrast
with S&P very stark!
Source: INet
The rand. Very Volatile. Really????
Source: INet
SA Bonds: yield and solvency!!
Source: INet
The EM opportunity: changing nature of risk
Growth
Yield
Investment
Opportunities
Differentiation
Solvency
BRICS and EM becoming safe-havens
Relative risk diminishing
A Soft Patch….
….or Double Dip?
Slowdown aggravates debt distress
.
Quantitative Easing.
…1, 2 and maybe 3?? Otherwise better described as printing money
Record budget deficits also added to the mix
…and deficit spending
As far as the eye can see. Anyone for tea??
Source: INet
Record budget deficits also destabilizes
OECD Lead indicator: no recovery; pointing to stagnant
2nd half at best.
Source: INet
Risk metamorphosis
Historic experience problematic
.
Governments - becoming the investor’s enemy
…but are friends when emerging from the restructure
RisingTax
Burden
Hostile
Regulation
Protectionism
Blame
game
Labour
Instability
Concentration
Bankruptcy
US; UK; Japan;
PIIGS
Brazil; Zambia;
Turkey, Thailand
Investment
Incentives
Pragmatic
regulation
Low Labour
Costs
Challenge to asset management doctrine and foundation
Does ‘risk free’ rate become redundant?
“Defensive”
“aggressive/growth”
Equity
R
e
t
u
r
n
Property
Bonds
Cash
Risk
Inflation adjusted and the model falls apart
Does ‘risk free’ rate become redundant?
“Expensive”
“Cheap”
Property
R
e
t
u
r
n
Risk
Bonds
Cash
Submarine assets
Equity
Risk hierarchy.
Gold
Cash
Bonds
Source: INet
Gold – a safe haven
Source: INet
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
Thank You
Chris Hart
Chief Strategist
Twitter: chrishartza
Ave E CW DSAI
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