Europe: A contrarian perspective

With a weakening global economy European markets will no doubt test those lows. When they do, the worst place to invest might just become the best

Over the past few weeks an army of financial professionals have been frightening the markets about the potential meltdown in Europe. They tell us that the core of European bank reserves consists of toxic sovereign debt. With a meltdown imminent, the safe investments are US treasuries or German Bunds. Yet it might be time to think again. The greatest returns on investments come when fear is greatest. As Baron Rothschild said “Buy when there’s blood in the streets, even if the blood is your own.”
First as to the analysts, basically they should be ignored. According to Professor Philip Tetlock’s new book “Expert Political Judgment”, political forecasters are worse than a crude algorithm at predicting events. The more prominent the expert, the worse the predictions and there is an inverse correlation between the confidence of the individual forecaster and the accuracy of their predictions.
Problems in forecasting are not limited to the political realm. Financial experts are best only when markets are reasonably calm. They failed to predict the upside momentum of the internet boom between 1997 and 1999 and also failed to predict the depth of the crash between 2000 and 2002. They were reasonably accurate between 2003 and 2007, but of course they failed miserably in 2008. So when you need the experts most, they are not around.
The real problem is that no one can reliably forecast the future, especially the short-term outlook for economies or stock markets. Warren Buffett does not even believe that it is worth anyone’s time to do so.
But amid the uncertainty and hot air, one thing is definite. Markets do eventually return to mean. Business cycles are called cycles for a reason. Down cycles are always followed by up cycles as night follows day. It just takes time. The difference is that it may take even more time.  Governments and central banks trying to solve the problem may have made it worse. The stimulus that is supposed to be so indispensable to save the market from itself may be preventing the markets from reaching equilibrium. So instead of preventing pain, they just prolong it.
But depressions and recessions even with government help do not last forever. During a financial crisis investors have to remember one thing. The basic components of an economy don’t just evaporate. Most companies have tangible assets. Their stock may be falling like a rock, but the real estate, equipment and intellectual property is still there. Some workers may lose their jobs. Others might be underemployed, but they are still around. As investors discovered in the US, real estate loans are secured by land, which doesn’t dissipate in the morning mist. Its value is not what it was, but it does still have worth. Yes, some investors do lose money, but there is always another side to the trade. Someone’s loss can be another’s opportunity.
The Greek situation is unresolved and may remain so for many weeks. Markets do not like unresolved issues, especially political ones. This uncertainty will weigh on the markets, especially European ones. Doubt also surrounds the rising bond yields in both Spain and Italy. So it is hardly surprising that European shares have fallen 16% since the early April highs compared to 6% in the US. Money has flowed out of large stock European funds for the past 14 months. It appears that Europe is the worst place to invest, which is exactly the point.
The reality is that European equities are not totally European. American and many emerging market corporations, especially state-owned ones, earn profits mostly in their home markets. In contrast 44% of European profits come from outside Europe. European corporations earn 24% of their profits from emerging markets, almost double the amount as American corporations. So the problems in Europe will be cushioned for European corporations by their exports. The higher exports of European corporations will be helped by a plunging Euro, but this assumes that the economies of their trading partners remain strong.
Another advantage of European shares is their dividend payout. The average dividend yields for corporations in the strongest European countries, France, Netherlands and Germany is 4.1%. This compares very favourably with government bonds and the average yield for US stocks, which are only 2.2%.
Some European countries are also positioning themselves for a rebound. The recent stresses to some economies like Spain have forced their governments to make the real reforms that are necessary for sustainable growth specifically in the labour market. Germany’s present strength is due to similar reforms ten years ago.
The German market and others have not reached their lows of last September. It will take another 14%. With a weakening global economy European markets will no doubt test those lows. When they do, the worst place to invest might just become the best.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)


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Fitch cuts India outlook to negative due to 'heightened risks'

India faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms, the ratings agency said


Fitch Ratings said it revised India's outlook to negative from stable due to heightened risks to India's medium to long term growth potential.

"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, director in Fitch's Asia-Pacific Sovereign Ratings group.

The ratings agency said its outlook revision reflects heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.

"The negative outlook also reflects India's limited progress on fiscal consolidation and, in particular, on reducing the central government deficit despite improvement in the financial health of state governments," it added.

Fitch Ratings affirmed India's long-term foreign- and local-currency issuer default ratings (IDRs) to BBB-, short term foreign currency ratings at F3 and country ceiling at BBB-.

The rating affirmation reflects India's diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding. The Indian government is able to issue long-term debt at a low cost in its own currency. Net external debt is very low and still high foreign exchange reserves of the Reserve Bank of India (RBI) provide a cushion against potential external shocks. The underlying drivers of the last decade of rapid economic growth remain in place - a fast growing pool of educated workers and an innovative private services sector, it said.

Fitch, however, notes that India faces an awkward combination of slowing growth and still-elevated inflation. Real GDP grew just 6.5% year-on-year (yoy) in FY12, down from an 8.4% rise in FY11. India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms.

Fitch forecasts real GDP to rise 6.5% yoy in FY13, down from a previous projection of 7.5%. Headline wholesale price index (WPI) rose 7.6% yoy in May 2012, up from 7.2% yoy in April. Fitch is projecting WPI to rise by an average of 7.5% in FY13 which, though lower than the 8.8% rise in FY12, continues to be higher and stickier than Fitch previously expected, diminishing scope for monetary policy flexibility.

India's public finances are a key rating weakness compared with other 'BBB'-rated sovereigns, which constrains scope for fiscal policy flexibility. Fitch estimated general government debt stood at 66% of GDP at end-FY2011-12, against the 'BBB' median of 39%. Moreover, India's government revenue in-take is low at 19.4% of GDP.

The central government fiscal deficit climbed to 5.8% of GDP in FY2011-12, against a target of 4.6%, largely reflecting an overshoot in subsidy spending. The government has repeatedly delayed reforms to the tax and subsidy systems. The confluence of weaker economic growth and a large subsidy bill means India will likely miss its 5.1% of GDP deficit target for FY2012-13; Fitch expects it to be 5.6%-5.9% of GDP. General elections due in early 2014 could see politically driven pressure to loosen fiscal policy, which could further weaken India's public finances relative to peers, the ratings agency added.

India's external financial position remains a rating strength, although this is eroding as foreign exchange reserves have fallen at 11% since August 2011 and net external indebtedness is rising. Reserves remained at $286 billion as of end-May 2012, equal to six months of current external payments, which still provides the sovereign with an important buffer during periods of elevated global risk aversion. The sovereign is a net external creditor to the tune of 10.2% of GDP at end-FY2011-12, against the 'BBB' median of 3.3% of GDP or the 'BB' median of negative 4.1% of GDP.

According to the ratings agency, slowing growth should curb India's current account deficit and slow the weakening of the external finances, although oil prices pose a risk. Prolonged and intensified pressure on the currency and/or foreign reserves would be negative for the credit profile.

A significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India's sovereign ratings. In addition, a material downward revision of Fitch's assessment of the India's medium-term growth potential along with persistent high inflationary pressure would hurt India's sovereign creditworthiness.

Conversely, an improvement in India's investment climate, which supports greater infrastructure investment and a sharp sustained decline in inflation, would be supportive for India's sovereign ratings. Fiscal consolidation and structural budget reform would also support the ratings, Fitch added.



Sudhir Badami AUTHOR

5 years ago

The issue is of abdication of responsibility of Government Agencies. For example, is the annual fatality figure of nearly 4000 on railway system responsibility of only the railways or is it of Urban Development ministry to address the overcrowding issue being the root cause of the fatality? UD Ministry is looking at long term solutions by promoting Metro Rail and monorail, which will take 30 years plus to achieve the planned target which any way does not meet the required public transport capacity. Meanwhile in 30 years more than 1,00,000 families would have met with unexpected tragedy.
Government agencies will wakeup only when there is great noise by public. I don't see that happening.
If the readers feel strongly about such matters, the least they should do is mark their protest against government agencies abdicating their basic responsibility of protecting life of its citizens. Article 21 of the Constitution.

Gyan Mitra

5 years ago

The 'Electric Chair' was invented in the U.S.A. Now we have improved upon it in Mumbai, to create the 'Electric Bench' !

The life of 21 year old Abdul Karim Shakil was cut short simply because of possible neglect of

1. No EARTHING PIT for the stainless steel bus stop which would have safely sunk the leakage of current, limiting or eliminating shock felt by unfortunate victim.

2. No secure BRASS PLATE connecting the steel bus stop to the EARTHING PIT. ( Contact needs to be excellent, measures taken to outwit corrosion at contact point ) EARTHING PIT needs to be local, not at a distance when human safety is imperative.

( If BRASS could not be brazed, even a stainless steel strip could have worked though this is irregular )

3. EARTH LEAKAGE CIRCUIT BREAKER which would trip if leakage of current were detected. But this would work correctly ONLY if EARTHING was sound.

4. NYLON INSULATORS to mount glow sign boards

5. Use of crimped lugs for wiring, with no joints permitted. If necessary, connectors to be provided.

6. Periodic check of integrity of Earthing and insulation.

We must not forget that Mumbai's air deposits salt on surfaces and during the rains, water penetrates these glow signs.

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