With more than enough work to keep me occupied in Jakarta
my trips to Bali are usually restricted to four or five days
twice a month. At Idul Fitri time in October, however, I planned
a 10 day stay to mix business with a bit of R&R. But this
plan was scuppered by an invitation to attend a Think Tank
investment conference in New York in which a number of top
US fund managers would be participating.
In view of recent turbulence in the US and UK housing markets,
the volatile stock markets, the fall in the US Dollar, global
climate change and the prospect of a US election next year
it was an opportunity not to be missed. Since what was said
may be of interest to those readers who have investments outside
Bali or who simply like to follow the world markets here is
my report on it.
The objective of the Think Tank was to bring together a wide
range of expertise to provide insights into key markets and
identify new opportunities to make money in difficult market
conditions.
Prospects for global property markets
Barry Oxford, from Colonial First State saw a much greater
acceptance of property as an asset class (as a collective
investment as opposed to whole ownership of property). To
date, less than 10% of the property market globally has been
securitized or packaged into collective investment vehicles,
unlike the case of companies which are universally accessible
to individual investors, large and small via mutual funds
etc.
A reasonable expectation from a property fund would be 5%
yield (from rentals) plus capital growth of 5% to 10% per
annum. Right now the fund he managed was underweight residential
(not surprising considering the depressed market) but overweight
in offices and hotels, both of which segments were continuing
to boom in the US. He saw the best opportunities for property
in Brazil, Mexico and Asia.
The potential of agriculture
Christopher Wyke, Product Manager with Schroders Investment
Managers focussed on the potential of agriculture as one of
the most important commodities in coming years. The speaker
ventured to suggest this could be year 1 of a 20 year bull
market in agriculture and food prices. Why? Here are some
of the reasons:
- yield increases through improved farming methods are flattening
- arable land is shrinking
- demand is outstripping supply
- meat consumption is rising fast in developing countries
- milk consumption in China has doubled in the past five years
- corn is in demand for the production of biofuels
- corn and wheat stocks are at their lowest levels for 25
years
- climate change will push up prices
All in all a pretty strong case!
Value investing
A couple of speakers described their companies’ approach
to value investing. One company’s philosophy was to
obtain classic value by buying good businesses when prices
were low. Now was not a good time for residential property
in the US. Since 1970 prices had trended up by just 1% per
annum in real terms. Prices were now however about 15% above
the trend, which perhaps gives a hint as to how far they are
likely to fall.
Another speaker, Chairman of Brandes Investment Partners,
a firm with US$125 billion under management, believed that
a security’s price and its intrinsic value were often
detached from each other. The key was to identify those anomalies
and take advantage of market price irrationality. His aim
was to always buy with a ‘margin of safety’ of
30%. He quoted from Warren Buffett’s 1997 letter to
shareholders: Smile when you read ‘Investors lose as
markets fall’ and edit it in your mind to read ‘Disinvestors
lose as markets fall, but investors gain.’
Market review and outlook
Tom Joy, Chief Investment Officer for RMB Asset Management,
provided an overview of the markets. Energy and commodity
related sectors remained strong. He saw some major shifts
in active management. In 2006 the majority of managers underperformed
the index but in 2007 to date active managers are way ahead.
His company’s view was that markets would become more
volatile but that in the medium term they should weather the
credit sell-off. He saw slower growth but no recession. He
was cautious on equities in the short term due to the reduced
availability and increased cost of credit. There was clear
evidence of distress in the housing market.
The speaker said that investors usually underestimate the
frequency and depth of equity market dips. The average duration
of a bear market (a fall of 20% or more) is 285 days whilst
the recovery time is only 135 days. As predicting the turn
is very difficult the importance of staying in the market
cannot be over-emphasised!
The link between Asia and commodities
The speaker confirmed the views of other speakers when he
favoured Asia, including Japan (at the expense of the US and
UK), together with commodities, particularly agricultural
commodities. China is massively consuming the world’s
resources. In the US, car ownership is 50 out of 100 people;
in China it is only 2 out of 100. Not too difficult to see
where the growth is going to be!
US economy – bad news and good news
Stuart Schweitzer, Managing Director of JP Morgan Asset Management,
suggested the US had gone from credit binge to credit hangover.
By reducing interest rates the Fed had done the right thing
but it was too early to let our guard down. His company’s
view was that the slowdown ‘had legs’ and things
could feel bad for a while. He added that alternative assets
were an important part of the strategy in times of downside.
The good news was that what is happening, after weathering
a possible recession, was setting the pattern for a period
of growth. The key issue would be financial discipline including
the control of inflation.
Overall assessment
Other speakers covered topics including currency outlook,
distressed debt, behavioural finance, private equity, Latin
American markets and more. Space does not allow me to go into
greater depth but a more comprehensive report is available
to those who are interested.
New York is much more hectic than Bali so it was good to get
back and spend at least a couple of the planned 10 days break
in a more relaxed environment.
Colin Bloodworth is a senior adviser with Financial Partners.
The opinions expressed are his own. If you have any questions
regarding personal finance you may contact him at 021-520
8099 or colin.bloodworth@financial-partners.biz
