Friday, 31 May 2013


In the halcyon summer of 1929 John J. Raskob, a senior financier at General Motors, granted an interview to Ladies Home Journal. The roaring twenties' financial zeitgeist is engagingly reflected in this quote from the article, entitled modestly, Everybody Ought to be Rich:
Suppose a man marries at the age of twenty-three and begins a regular savings of fifteen dollars a month -- and almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends and rights to accumulate, he will at the end of twenty years have at least eighty thousand dollars and an income from investments of around four hundred dollars a month. He will be rich. And because anyone can do that I am firm in my belief than anyone not only can be rich but ought to be rich.
The genius of hindsight is a delicious tool. Mr. Raskob probably had no idea what sort of rate of return his hypothetical young man was actually earning. It should be remembered in this era of spreadsheets and $20 handheld financial calculators that the computation of an internal rate of return is a formidable task using only pencil and paper. In fact, our young man was quite an investment genius -- turning 15 dollars per month into $80,000 over 20 years requires an annualized rate of return of about 26 percent! Perhaps in 1929 a 26% annualized rate of return did not seem unreasonable. It was not until the aftermath of the 1929-32 market catastrophe that the long term return of common stocks was estimated with any accuracy. In 1996 most serious investors are aware that one cannot expect more than about 10%-12% long term.
This interview, and the investment scheme he was promoting, is remembered to this day as an absurd example of the infectious mood underlying the pre-1929 stock bubble. For those of you who haven't noticed, we are in the midst of a similar market bubble. Most standard valuation measures currently exceed 1929 levels. The 1996 version of "Everybody Ought to be Rich" is the mantra expounded on The Motley Fool; "Every penny you haven't invested in stocks will hurt you in the long run."
And yet, in the long run Mr. Raskob was not far off the mark. Let's imagine that Mr. Raskob's hypothetical young man began investing 15 dollars per month in common stocks on January 1, 1926. He continues doing so until he dies at age 91 on December 31, 1994. Using market return data supplied by Ibbotson Associates, calculations show he would have accumulated $2,462,295. Had he invested in small stocks, he would have $11,730,165. Obviously, this calculation contains a number of unrealistic assumptions: that the principal and dividends were never spent, taxes were not paid, and stocks were bought free of commissions. Perhaps our estimates are off by a factor of 2 or 3; still, the long term results are impressive.
An optimist might cite this as an example of the "magic of compound interest." Too much is made of this phenomenon. A more realisitc observer would note that our industrious saver died an old man without enjoying his fortune -- had he consumed even a few percent of his assets each year his estate would have been vastly smaller. (Over a 69 year period each percentage point of return lost to spending cuts your accumulated total in half. Spend 3% of you assets each year and you have less than $300,000 instead of over $2 milllion.) Me, I'd rather be 25 with a bit of change than old and comfortably well off.
So let's modify Raskob's edict: Everybody cannot be rich, but at least you can leave a lot of money to your grandkids.

Wednesday, 29 May 2013

Trust: Easy to Break, Hard to Repair -By Jason Zweig

In this interview, the renowned short-seller Jim Chanos points out that the average investor is right not to trust the integrity of the financial markets. (Someone showed a nice touch by posting it on April Fool’s Day.)
In the interview, Chanos makes three important points.

First, in recent years financial fraud has rarely been detected and exposed by the people the public might reasonably expect to do so: accountants, regulators and law-enforcement authorities, whom Chanos calls “the normal guardians of the marketplace.” Instead, frauds more often have been rooted out by whistleblowers, short-sellers and journalists.

Second, prosecutions of financial crimes are essential in the minds of investors, but are discretionary in the eyes of government officials. The Bush administration cracked down on accounting fraud at Enron, Tyco and WorldCom, sending senior executives of all three companies to prison. Chanos says the Obama administration has taken the view that some banks, even those that might have been culpable in the financial crisis, can be so large that prosecuting them could destabilize the financial system – the so-called too big to jail rationale.

Third, individual investors will never trust the market until these issues are addressed.

The 2008-09 financial crisis, like the crash of 1929, could have been a perfect pretext to transform the way business was done on Wall Street. Unfortunately, despite the famous words of former White House chief of staff Rahm Emanuel—”You never want a serious crisis to go to waste“—the opportunity has been squandered, at least in my view.

You can summarize the outcome of the financial crisis in one sentence: Good things happened to bad people, and bad things happened to good people. Some people who contributed to the crisis kept hundreds of millions of dollars apiece in compensation and will spend the rest of their lives in luxury. The victims of the crisis—borrowers, taxpayers and investors—have spent the ensuing years trying to regain some of what they lost.

As I wrote in early 2010, this kind of outcome violates a basic psychological need. Humans can’t live normal lives without believing in what psychologists have christened “positive illusions.” Among them are overconfidence, the belief that we know more than we do; the illusion of control, the sense that we have more power over what happens around us than we do; and unrealistic optimism, the tendency to think positive things are more likely to happen to us than to other people.

If we honestly accepted how little we know, how little we can control and how little advantage we have over other people, we wouldn’t be able to get out of bed in the morning. As the Nobel Prize-winning psychologist Daniel Kahneman has said, “The combination of optimism and overconfidence is one of the main forces that keep capitalism alive.”

Another positive illusion is known as “belief in a just world.” Although we all know full well that it isn’t true, humans need to believe that we generally get what we deserve, with good things happening to good people and bad things happening to bad ones. The fact that it’s an illusion is beside the point. As psychologists Melvin Lerner and Dale Miller wrote in 1978, if we all believed that the world is as unjust as it actually is, society would grind to a halt or devolve into Hobbesian chaos:
Without such a belief [in a just world] it would be difficult for the individual to commit himself to the pursuit of long-range goals or even to the socially regulated behavior of day-to-day life. Since the belief that the world is just serves such an important adaptive function for the individual, people are very reluctant to give up this belief, and they can be greatly troubled if they encounter evidence that suggests that the world is not really just or orderly after all.

A study published in 2009 concluded that when people don’t believe the world is just, they become significantly less willing to wait for a financial gain. After all, if you can’t be sure that you usually will get what you deserve, why would you ever trust a counterparty to honor its contracts or promises?

Think for a moment, in this light, about the contrast between the last two great booms and busts.
In 1999, many investors turned into speculators, day-trading absurdly overpriced Internet stocks against the advice of traditional investing experts. Many of those speculators knew they were violating the rules of common sense but gambled that they could get out before the bubble burst. When it did, they had no reason to blame “the system.” They had gotten exactly what they deserved, and they knew it; bad investing habits had produced terrible investing outcomes. They had no one to blame but themselves.

Now fast forward to 2007. Many investors had learned to diversify, to buy and hold, to minimize their gambling and  think long-term. And they still went on to lose half their money—even though they had done exactly what the wisest investing pundits had long recommended.

This time, good investors got terrible investing results. Meanwhile, many traders and managers at the pinnacle of Wall Street kept much of their gains, even as billions of taxpayers’ dollars went to bail out their firms. Of course, many Wall Street executives lost billions of dollars in stock-related gains, and thousands of them lost their jobs.

If ever there was an ideal example of an “unjust world” in the eyes of some people, Wall Street of the past few years is it.

What, then, would it take to restore trust and to revive belief in a just world? Chanos didn’t say, but I think there are three possibilities.

* The first, and least likely at this point, is a ritual humbling.

In the wake of the 1929 crash, Ferdinand Pecora, who led the investigative Pecora Commission in the U.S. Senate, humiliated one banking titan after another with revelations of self-dealing and other shady behavior. Richard Whitney, president of the New York Stock Exchange, ended up being thrown into the slammer at Sing Sing for embezzlement. The outrage and revulsion that followed the post-Crash investigations led to the series of reforms that overhauled Wall Street’s practices in the 1930s.

More than a half-century later, federal prosecutor Rudolph Giuliani went after insider trading with similar zeal, even having some alleged perpetrators hauled off the trading floor in handcuffs. Some of the cases fell apart, but the public’s sense of a level playing field was restored.

However, as Michael Perino, author of a riveting biography of Pecora, The Hellhound of Wall Street, told me in a conversation last year, “It’s only when things get really bad that [the U.S. can] overcome the normal political forces that are at play and we can achieve significant reforms. At this point, it might take another crisis to do something.”

* Second, Wall Street could apologize.  According to the psychologist Dale Miller, a good apology must:
·         be sincere,
·         take responsibility and blame for what happened,
·         show remorse and an acknowledgement that the rules of normal behavior are in place for good reason and shouldn’t have been broken,
·         include a pledge not to violate people’s trust again,
·         express unhappiness about what went wrong and a willingness to do something to try to make it right.
Anyone with a husband, a wife or a significant other knows all that, of course. So far, many financial titans have sounded largely unabashed and oblivious to the public perception that their firms weren’t paragons of virtue.

As the Epicurean Dealmaker has often pointed out, investment bankers are intensely competitive people who care about their fees. But as spouses know, the effort to make a sincere apology, even when you don’t entirely mean it, can help you understand the anger someone else is feeling.
This long after the crisis, however, there’s little chance of getting good apologies out of Wall Street’s kingpins.

* Finally comes the only possibility that seems even remotely feasible at this point: forgetfulness.
Time is the novocaine of markets: After a long enough period passes without further severe losses, memories blur pain fades. As I wrote earlier this month, investors have collective “memory banks,” in which shared experiences shape their perceptions. Those between the ages of 18 and 25 are especially sensitive to recent returns, since that’s all they hold in their memory banks.

An investor who retired in 2007—and one who turned 18 that year—will have a very different view than a younger investor who first got into the market in mid-2009 and has seen U.S. stocks rise more than 150% in four years. As time passes and the financial crisis shrinks in the rear-view mirror, the stock market will seem “safer” and people will trust Wall Street again.
That brings us to the last point. Investors need to be able to trust that they will be treated fairly. But they never should trust too much. Once investors start believing that Wall Street is a friendly place where everybody knows your name and no one is out to get you, we’ll have another 1929 or 1999 on our hands.

Saturday, 25 May 2013

Wall Street's Wisest Man Getting rich off stocks is simple, says Charles Ellis. Here's how

By Jason Zweig; Charles Ellis
June 1, 2001

 What if, whenever the stock market went insane, you could get a painless vaccine that would keep you calm and steady? And imagine that this medicine could make you rich if you took it regularly.
I just got a strong dose of this wonder drug myself--by having breakfast with Charles D. Ellis. The medicine he administers is called wise advice. And thanks to the booster shot he gave me, I've never felt more optimistic as an investor--despite the carnage in the market over the past year.
Ellis, 63, has four decades of investment experience. In the 1960s, he helped manage the Rockefeller family's fortune and punctured "go-go" stocks as an analyst at Donaldson Lufkin & Jenrette. Later, he founded Wall Street's top consulting firm, Greenwich Associates, which provides financial advice to everyone from Goldman Sachs to Fidelity and T. Rowe Price, and he currently oversees the $10 billion endowment fund at Yale University. Ellis has also written trailblazing articles and books, including "The Loser's Game" (a 1975 article that spurred Vanguard's founder, Jack Bogle, to introduce the first index fund for individual investors) and Investment Policy, a classic book reissued in 1998 as Winning the Loser's Game. (Disclosure: I helped edit the revised version but took no fee.) His new book, Wall Street People, paints an array of intriguing portraits of some of the great investors of the past century.
So on a drizzly day this April, I sat down for breakfast with Ellis at the Yale Club in Manhattan. Fueled by several cups of black coffee and his own boundless mental energy, Ellis held forth for what seemed like a brisk hour and a half. Only after I stepped back into the rain did I realize that we'd talked for nearly five hours. Here's some of what we touched on.
Q. You've often said that long-term investors should root for stocks to go down, not up. Why?
A. If you're buying something, wouldn't you rather pay less for it than more? When stocks get cheaper, how can that not be good news for a long-term investor? There are very few times when you should be bold, and history shows that those times are precisely when it seems you should be most afraid. It's absolutely cockamamie crazy to sell stocks after they drop. Instead, you should say, "Today there's a first-rate bargain and I'm buying."
Q. That's easier said than done.
A. Ben Graham and Warren Buffett have talked about a charming, seductive manic-depressive gentleman named Mr. Market. Every day he shows up on your doorstep offering to do business with you. When he's manic, he'll offer to buy your stocks or sell you his for absurdly inflated prices. When he's depressed, his prices go ridiculously low. The mistake most people make is answering the door just because Mr. Market knocks. You don't have to let him in. Why should you buy just because he's excited? Why should you sell just because he's down in the dumps? A long-term investor shouldn't care about market prices.
Q. So what should investors care about?
A. Back in 1963, I was in a training program at Wertheim & Co., and one day the firm's senior partner, J.K. Klingenstein, was our guest speaker. As he was about to leave, one of the trainees blurted out, "Mr. Klingenstein, you're rich. How can we become rich like you?" Everyone else was mortified, and J.K. was clearly not amused. But then his face softened, and you could see that he was taking the question very seriously and trying to sum up everything he'd learned in a lifetime on Wall Street. The room was silent as a tomb, and finally Mr. Klingenstein said firmly, "Don't lose." Then he stood up and left. I've never forgotten that moment. That's what investors should really care about: Don't lose. Don't make mistakes. They cost too much. Most of the destruction of investment value occurs in small, private, anguishing experiences that are never discussed and never recorded, because people were doing things they never should have done.
Q. You don't mean we should stay out of the stock market because we might lose money?
A. That's not what losing means. In investing, losing means taking decisive action at the worst possible times--being driven by your emotions precisely when you need to be the most rational.
Trying too hard to win eventually means losing. To win the Indianapolis 500, you first have to finish the Indianapolis 500--that's five hundred laps around and around that oval. If you try too hard on just one lap, you won't live to finish. And just think about the Forbes 400 [the magazine's list of America's richest people]. The turnover on that list is incredible. So many fortunes have been snuffed out by the temptation to try harder.
In a rapidly rising market, the faster you trade, the better you'll do--and that makes you forget that those whom the gods would destroy, they first make confident. The more you know, the higher the odds that you'll make a serious mistake. That's why it's not the beginners who tend to die at skydiving and why most car accidents happen within a few miles of home. There's a saying in the British Royal Air Force that investors need to remember: "There are old pilots, and there are bold pilots, but there are no old, bold pilots."
Q. So why do so many of us insist on trying so hard, not least to beat the market?
A. Because we're human beings. Even in our advanced society, there's a curious belief in magic. It's a virulent form of the triumph of hope over experience.
Q. As a consultant, you've urged managers of endowments and pension funds to create--and then live by--a formal "investment policy." What's that--and should all of us have one?
A. It's a written statement of what you believe as an investor and what you can hold on to even when everyone you know is either excited or scared to death of the market. Go to a continuous-process factory sometime--a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you've found something wrong.
Investing is a continous process too; it isn't supposed to be interesting. It's a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses--everyone, to the last man, woman and child. So, the purpose of an investment policy is simply to ensure that your continuous process never breaks down.
Visualize yourself looking back when you're 80 years old, reviewing whether you invested your money wisely. Ask, "What is it I can trust myself to do in good times and in bad?" Then write it down on one side of a single sheet of paper--when you'll put money in, how you'll manage it, when and why you'll take it out. The best plan, for most of us, is to commit to buying some index funds and do nothing else. Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you're guaranteed to be wrong.
Q. Why index funds?
A. Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, "I don't want to play against those guys!" Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared--the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either.
But I don't have to play against them. Instead, I can hire them--by buying an index fund. Then they all work for me for free, because stock prices express the best judgment of all the investors out there. Most of the time, those prices are approximately right, so most of the time you'll be wrong if you second-guess them. Factor in fees and trading costs--not to mention taxes--and you have to do about 20% better than average before your costs just to match the index after your costs. Stock picking is a loser's game, but Wall Street loves creating the perception that you can win at it.
Q. For investors who refuse to index, how do you suggest picking a fund?
A. If you're not prepared to stay married, then you shouldn't get married. And if you're going to opt for an actively managed fund, pick one in which you'd be comfortable doubling your investment whenever the manager has a dreadful two or three years. If not, you're making a mistake. Because he will have a dreadful two or three years. I guarantee it. Every good manager does.
Q. And what should an investor look for in the fund manager?
A. You want an organization designed to help exceptionally talented investors gather information and use it rationally so that their best research comes through. Only novel "soft-shelled" ideas produce extraordinary returns, because the obvious ideas are already reflected in a stock's price. So you need a fund company that is systematically organized around low turnover and long time horizons, and that has a collegial atmosphere.
Q. Are you thinking of the Capital Group, which runs the American Funds?
A. No one else has been so consistently excellent for so long.
Q. You've said that there are three ways to succeed as an investor. What are they?
A. You can succeed intellectually, physically or emotionally. The intellectual way is how we would all like to succeed: being so smart that we understand things more clearly and see farther ahead than every other investor. The pre-eminent example, obviously, is Warren Buffett. But people like him are very, very, very rare.
The physical way to succeed is simply to work harder, to start at dawn and grind away till midnight and carry home a heavy briefcase full of research and keep working right on through the weekend too. This way is the most popular on Wall Street, where nearly everyone seems to try it. And for some of them, this way works--well, I can't say I've met many people for whom it actually works, but they must think it does, or they wouldn't keep trying so hard.
The third way to succeed as an investor is difficult emotionally. When that seductive fellow Mr. Market comes around, you have to pay absolutely no attention to him, no matter what happens. You have to control your emotions, and most of the time that means the best thing to do is nothing. If you can't control your emotions, being in the market is like walking into a heated area wearing a backpack full of explosives.
I'm not smart enough to succeed the intellectual way, and I can't work hard enough to succeed the physical way. But the emotionally difficult way takes very little time and makes no intellectual or physical demands on you at all. Statistically, judging by how the public invests, most people don't like the emotionally difficult path. Then again, more and more people are trying it; the amount of money in index funds has been rising year after year. The emotional path is the only reliable way that I know of to succeed.
Q. When will this bear market end?
A. As Rhett said to Scarlett, "Frankly, I don't give a damn." You'd have to be self-deluding, maybe certifiably nuts, to try answering that. And the answer doesn't matter anyway. If you ran a commercial tree farm, would you ask for up-to-the-minute bulletins on how the forest was growing today? How many people are investing for success this year, this month, this week, this day? Most people's true time horizons are much longer than they think--50 years, even more. They should be investing for success over a lifetime--or more than one lifetime, because part of what they're investing will go to their kids after they're gone.

Monday, 20 May 2013

S&P warns India could face junk status

India faces at least "a one-in-three" chance of losing its prized sovereign grade rating, global ratings agency Standard and Poor's has warned, in another blow to the scandal-tainted Congress government.

The announcement late Friday comes after finance ministry officials have been arguing for a ratings upgrade, saying the government has been taking strong steps to curb India's financial deficit and promote investment.

India's BBB-minus investment rating is already the lowest among its BRICS peers Brazil, Russia, China and South Africa, and cutting it to "junk status" would push up the country's hefty borrowing costs as it would signal higher risk.

"There is at least a one-in-three chance that we will lower the ratings in the next 12 months, " S&P said late Friday, adding that "risks to India's growth from stalled reforms in parliament still tilt the credit risks to the downside,"

The warning from S&P, which cut its outlook on India's BBB-minus rating to negative from stable last year, came after parliament was forced to adjourn early this month amid opposition uproar over corruption scandals.

The shutdown stalled the economic reform drive by Singh's minority government, which has been hobbled by a string of graft controversies with two cabinet ministers entangled in scandals quitting late last week.

The government has opened up the retail and aviation sectors to wider foreign investment and partly freed fuel prices. But it has been striving to pass other bills to open the the insurance and pension sectors to more overseas investment and streamline industrial land acquisition to spur economic growth.

The agency said it may also cut India's ratings if it concludes that Asia's third-largest economy will not revert to higher seven to eight percent growth levels notched up earlier in this decade.

India's growth right was bumping along at 5.0 percent for the last financial year to March 2013, the lowest level in a decade, but the government expects it to pick up to six percent this year and is targeting seven percent in 2014.

Also despite government efforts to cut red tape in implementing long-delayed infrastructure and power projects, its "success in raising investment growth remains uncertain," credit analyst Takahira Ogawa said.

Thursday, 16 May 2013

Warren Buffett (1962) talks about a brief stock market drop

Warren Buffett was interviewed by KMTV, Omaha in early June of 1962. A University of Nebraska at Omaha School of Communication documentary team discovered the film clip in the Nebraska State Historical Society archives in March of 2013. The clip likely never aired on local television, according to an independent analysis by retired videographers and producers. It is a long clip for broadcast news, it showed no signs of editing, and its condition is extremely good. The film clip was used in the new documentary, "Mt. Buffett the Teacher" (2013), which describes Warren Buffett's University of Omaha teaching of investing from 1951 through 1962. This is the earliest known visual recording of the financial icon, yet nobody seemed to know it existed.

Gold demand slides to three-year low

Gold investment nearly halved in the first quarter as a brighter view of the US economy prompted investors in the West to favour other assets like stocks over bullion, the World Gold Council said on Thursday.

Overall gold demand fell 13 percent to a three-year low of 963 tonnes in the last quarter as rising jewellery demand and strong appetite for coins and bars failed to offset a sharp drop in investment, chiefly in Exchange-Traded Funds.

These investment vehicles, which issue securities backed by physical metal, have proved a popular way to gain exposure to the gold price since the start of the financial crisis, but saw record outflows in the first quarter.

Record Chinese demand for jewellery, coins and bars, contributing to an extra 60 tonnes of jewellery demand and 35 tonnes of bar and coin offtake worldwide still fell well short of counter-balancing a 195-tonne drop in investment. The fall in financial flows into the metal included a 177-tonne outflow from ETFs.

The WGC's managing director for investment, Marcus Grubb, said he expected investment levels to stabilise over the year as a whole, and for rising interest in physical gold to lead to more stable demand in the full year.

"What you've seen is a near-term readjustment to more positive views on the US since December," he said. "You're unlikely to see the same level of selling in the rest of the year unless you get a rampant and sustainable recovery in the US, which I don't think is on the cards.

"Meanwhile the gold heads east, because if people are selling the ETFs in the United States and to some degree in Europe, consumers in India and China, and bar and coin investors around the world, are buying that gold."

Chinese demand hits record

Chinese coin and bar demand hit a quarterly record of 109.5 tonnes in the first quarter, up 22 percent. India saw the biggest overall rise in bar and coin investment, with demand up 52 percent to 97 tonnes.

US buying also rose by 43 percent to 20.1 tonnes, while European demand fell 28 percent to 47.5 tonnes. Buying of small investment products like bars and coins rose 10 percent overall to 377.7 tonnes in the first quarter, the WGC said.

Jewellery buying was the sector showing the most strength, with offtake up 12 percent to 551 tonnes. China led the rise, with consumption rising 19 percent year on year to a record 185 tonnes, while Indian buying rose 15 percent to 159.5 tonnes.

"These figures show that notwithstanding the slowdown in China that we've seen, this was a very strong quarter, and all the evidence in Q2 so far is that it (demand) remained very strong in April as a result of the price fall," Grubb said.

Tuesday, 14 May 2013

Mark Mobius on Investing in BRIC and African Economies

Mark Mobius, executive chairman at Templeton Emerging Markets Group, explains his outlook and strategy for investing in BRIC and African economies.

Growth in BRIC economies has slowed down in 2012 and early 2013. They are now facing major problems. How do you perceive the macroeconomic situation in each country? What are their major risks?

It is a bit of an exaggeration to say that the BRIC countries are “facing major problems”. The BRIC countries’ GDP growth rates have slowed, but apart from Brazil, the other three economies are still growing much, much faster than most developed countries. Investors are concerned that China’s growth rate has slowed to 7.7%, but when was the last time the US, Japan, Germany or the UK saw that pace of GDP growth? One should also keep in mind that as these countries grow rapidly, the base gets bigger and it is therefore much harder to maintain the double-digit growth rates seen previously. China is now a US$6 trillion economy, second only to the US. The fact that an economy that size can grow at close to 8% is in itself an amazing feat.

On a country by country basis:


Brazil continues to show tremendous potential. It has a young and large consumer population and vast mineral and farming resources. With rising income levels, Brazil is likely to become an important market for consumer goods. President Rousseff’s government is very focused on eradicating poverty and expanding the middle class. Some of the changes have created short-term problems for a few companies, but we think they will make the necessary adjustments and eventually get it right. Inflation and low growth could be of concern in the short term. There is also a need to remove some of the bureaucracy and free up the economy. In our opinion, the complex tax code clearly needs revision, and acceleration in the granting of concessions by the government to improve infrastructure is also vital to support stronger growth for the country. The quality of investment in education is another area that could benefit from improvement.


The Russian economy is very dependent on the price of oil, and if oil prices stay high, Russia’s economy is likely to continue to hum. Like China, it is facing an aging population problem. However, the middle class should continue to swell as wealth from commodity exports filter down into the economy. Businesses supplying consumer goods and services to this burgeoning market appear to have the potential to benefit. Russia’s financial structures are underdeveloped and consumer debt levels are generally low. The Central Bank left its benchmark interest rate unchanged at 8.25% thus far this year in view of rising inflationary pressures. Russia suffers from an investor-confidence issue, demonstrated by the persistent outflow of capital from this market. If the government can instill good governance in corporate giants like Gazprom and Rosneft, we think the situation could change quickly.


In our view, bureaucracy is the biggest problem in India, the world’s second-most populous country, and Indians themselves often joke that the country grows in spite of government policy, not because of it. One should note that there is a huge disjoint between what the elected government wants to achieve and what the bureaucrats are willing to do to help the government achieve its goals. India’s Prime Minister and Finance Minister have been very active in encouraging more foreign investment into the country, but when investors try to bring capital into the country, they are often overwhelmed by red tape. There have been significant improvements in corporate governance, including the launch of an electronic voting system that could help raise the voice of minority shareholders. However, we think there is more to be done in terms of minority shareholder protection, especially from related-party transactions. India has a vibrant stock market with thousands of listed companies and a strong culture of entrepreneurship and investment.


Chinese equity markets have been volatile, as bouts of enthusiasm have often been followed by fears of government tightening measures. The property market has presented the Chinese government with a great challenge. It needs to maintain prices at affordable levels but must also ensure that its price control mechanisms do not cause a crash in property price. China’s economic data has generally remained positive. As we said more than a year ago when there were questions as to whether China was going to have a “soft or hard landing”, we did not think that China was going to “land” at all but that it would keep on growing at a robust pace. Exports have remained resilient while domestic consumption is picking up rapidly as wages rise and disposable income increases. The Chinese government has over US$3 trillion in reserves, and thus its ability to stimulate the economy when needed cannot be questioned.

Outperformers in the past, the BRIC markets have been underperforming in recent years. The BRIC asset class has also been recording outflows. Do you expect these trends to continue?

No single market will outperform others on a consistent basis. If we look at historical returns, the best performing market in one year is seldom the best performing market the following year. Hence, it is important to be properly diversified, investing across all markets. There have been some outflows from BRICs as the so-called “hot money” goes in search of short-term gains, but this is usually a good sign that a market has hit a bottom or is close to the bottom. While we cannot predict what will happen to stock markets, we can confidently say that (1) emerging economies, driven by the BRIC countries, have been growing much faster than developed countries like the US and are likely to continue to do so for many more years; and (2) most investors today are chronically underweight emerging-market equities. While emerging markets now represent about 35% of global market capitalization, most investors have less than 8% invested in this area.

One of the themes discussed at the BRICs Summit was infrastructure in Africa. What is the current involvement of the BRIC countries in Africa infrastructure and how it will shape the markets there?

The BRIC nations have pulled together combinations of economic development and investments to propel rapid economic growth to a cohort of new economies, especially several in Africa, including Egypt and Nigeria, as well as others such as Indonesia, Vietnam and Turkey. Opportunities continue to beckon particularly as BRICs nations’ growth rate influences many frontier markets, considered a subset of emerging markets.

Emerging economies in Africa could not only help offset any growth shortfall that might occur as the BRICs mature, but by supplying resources and markets, they may also help to insulate more established emerging economies from the impact of sclerotic growth and slowing demand in developed countries. Newer markets typically have more room to grow, and the search for growth potential amid acute global volatility has been encouraging many investors to expand their horizons. Africa is also well known for its wealth of natural resources, much of it barely developed, which includes oil and gas, a variety of metals and minerals, as well as huge tracts of agricultural land.

What is the role of China in Africa now? How did China and Africa’s economic ties evolve from trade and project contracting to investment and finance, and how will they advance further?

We believe that China plays a role in the development of African countries. For example in Ghana, during our visit to the Central Bank, we met a very competent group of executives eager to promote Ghana as an investment destination. Their current focus was on containing inflation and creating a stable business environment. Credit in recent years has been tight, but the Chinese government has continued to provide loans. Since 2007, all university and college institutions in Ghana provided Chinese language courses. This initiative reflected China’s growing role as a superpower and Ghana’s close ties with China. Chinese involvement in the country goes far back and has been close since the 1960s, when President Kwame Nkrumah lobbied for China’s reinstatement in the United Nations.

Another example is Kenya, which we think has an attractive position as a centre for India’s and China’s investments and interests in Africa. We have seen many companies setting up their operations in Nairobi, Kenya’s capital city. The United Nations also has a large base there that it uses for its operations on the rest of the continent.

Before arriving for the BRICs Summit in South Africa, Chinese President Xi Jinping visited the United Republic of Tanzania and Congo Republic. What could the visit bring to the table in term of boosting the local economy? What is the role of South Africa in particular?

These countries could benefit from Chinese investments in Africa alongside countries like Nigeria and Kenya. The Chinese have been very focused on investing primarily in infrastructure in Africa – building roads, railway tracks, power plants, and so on. Such investments provide the backbone for economic activity and growth.

South Africa is the largest economy in Africa, and it is the only country on the continent where we think the “frontier” market label doesn’t apply. South Africa stands out among its African peers with a large, wide, deep and liquid equity market. Moreover, a number of South African companies provide exposure to markets further north that might be difficult to secure locally. South Africa’s corporate governance is held in high esteem by many in the global investment community, and it is also a country that has proven able to reinvent itself politically and economically. We believe South Africa and its people appear well positioned for greater long-term prosperity.

Could you name some frontier countries that have significant growth potential and explain why?

Individual countries such as Nigeria and Kenya are projected to continue growing faster than other economies globally. Growth on this scale has created burgeoning middle-class populations and dynamic domestic economies that can provide opportunities for consumer companies as well as a degree of insulation from problems in developed markets.

Nigeria is the second-biggest sub-Saharan African country with plentiful natural resources, but at present it is held back by a critical lack of infrastructure, notably power. The country’s reformed banking system has provided an attractive means to invest in a fast-growing domestic economy, in our view, and we will look to invest in other areas as regulatory reform proceeds.

Kenya, with a new constitution following serious political disturbances in 2007, is attractive to us both for its significant natural assets, notably in agriculture, and as an entry point for much of the investment into the rest of Africa. A well-regulated telecommunications market provides opportunities to invest in mobile telephony, in our view, while investment opportunities in retail and banking are also available.

Myanmar is also another country where we see opportunities. Firstly, our hopes are high that Ms. Aung San Suu Kyi will nurture this historically troubled nation into a new era of democracy and personal freedom. We had already witnessed an improvement in Myanmar’s relations with the rest of the world, signaled by a visit from US Secretary of State Hillary Clinton, an exchange of ambassadors with the US, and collaboration with the International Monetary Fund (IMF) on currency reforms. As we see it, for Myanmar to realize its full potential, it must work to convince Western countries to ease or eliminate sanctions, bring in foreign direct investment and develop its infrastructure. We believe investment is essential to the reform process, and successful reforms generally raise economic productivity, which in turn could help bring more goods and services to the public.