Submitted by Alexander Gloy of Lighthouse Investment Management
The mystery of the equity investor
Performance of international stock market indices in local currencies. Source: StockCharts.com
Looking at the performance of international stock markets over the last 200 days, the German Dax index stands out. But why?
Sure, Germany is an island of prosperity amongst the European
turmoil. Low unemployment, strong economic growth and a stable political
system help.
You could argue if it makes sense to distinguish between Deutsche
Telekom and Telefonica on the basis of where they are headquartered. But
aren’t the largest companies (hence those included in stock indices)
serving similar customers in similar regions? Isn’t Volkswagen selling
more cars in China than in Germany anyway? 50% of BMW’s growth
contribution from China?
Or are equity investors following bond investors in a flight from the
PIIGS (Portugal, Italy, Ireland, Greece, Spain)? For bond holders, a
break-up of the Euro zone would be dramatic, as issuers will either
force conversion into (new) local currencies (leading to currency
losses) or find themselves unable to service Euro debt and default
(leading to haircuts on principle).
But equities? Imagine what a break-up of the Euro would do to German
exports to those countries. Stock markets in weak currency regimes are
usually, at least in local terms, appreciating. But for German stocks
this would be a negative.
If weak countries leave the currency zone, the Euro could actually
re-strengthen (or, if Germany decides to quit, a strong New Deutschmark
would have the same effect on German exports).
Performance of international stock market indices in local currencies. Source: StockCharts.com
Looking at the under-performance of Spanish and Italian stocks leads
to another explanation: international investors are withdrawing from
countries in danger of being future candidates for bail-outs (with the
usual prescription of spending cuts and tax hikes that could damage
local net profits and/or lead to political instability).
However, once Spain tumbles, the costs of bail-outs will become
astronomical and overwhelm the cohesion of the Euro-zone. Things will
get out of control quickly if only for the unavoidable bank runs
(depositors in weak countries withdrawing their Euro deposits before a
mandatory exchange into a new currency). Government “guarantees” of
deposits will become worthless once the government is bankrupt, too (as
seen in Ireland).
Equity investors have an admirable lightheartedness amidst an outlook
which can only be described as dire. Do they understand they are the
last asset class to get paid back? When a company cannot pay back its
debt, the equity is usually worthless. The same applies on a national
level. Before a country goes bankrupt, it will apprehend all available
profits (if any) and funds at companies in its jurisdiction. Surely some
profits can be stashed away at foreign subsidies, but which investors
will rely on those when pictures of rioting masses are dominating the
headlines?
i would say the absolute star of the day is the CNBC coverage, which has featured 122 spots about just how off the charts awesome black friday will be (aka, the day every store accepts negative merchandise margins for 26 hours) and a total of zero minutes of attention paid to total obliteration of financial conditions globally
Because hey, if we ignore it and focus on how many pink Ipad holders are sold, the problem goes away, right?
Nothing like 600 temporary toys r us stores selling Asian made goods until Christmas is over to really get this economy goin'............methinks the jobless claims numbers in january may not look too good........and for the import/export numbers for GDP, well..............
this all seems a bit confusing to this caveman portfolio manager. rather than get a headache, i am going to retreat to the comfort of my newly purchased suburban, swing over to best buy and target to buy stuff and see if i can get on cnbc in a background shot, and then head over to the Country Buffet for an all you can eat Ribs and beans eat-a-thon. i will be sure to take my fishing tackle box with me (as it doubles for my carrying case for blood pressure and cholestorol meds).....i never leave home without it.....you all keep blathering about this stuff....to me this is business as usual. and if anyone happens to show up with a brinks truck marked "Federal reserve" throwing bricks of paper into the crowd, all the better...
The Bernank has sure solved the Chinese unemployment problem.
richard- I can't help but agree that being an ostrich is one escape route.
Looks like the holiday rush made Fedex lose a radio active package. Oh well...
....damn, now my son will not get his chemistry set this Xmas....
The Dax is manipulated just like the S&P by the you know who TBTF-uckers. Why the Dax and not the CAC or the FTSE? I guess that is a question for the Bilder-Burgers.
I thought amanda drury was the star of the day with her slutty makeup.
I noticed this in April highs and later Dax refused to fall. Then looked up contituents they are mostly solid industrias companies. Siemens is offering fulltime employmen in Germany, all automakers are on a roll. We can't get Bmw Mercedes sedans in our local dealership without months wait. When Spain portugal defaults even if they leave euro, devalue what can they sell to the world more competitively? Wine and olive oil. Will they buy local cars instead of VWs.? Their problems are Already in the stock market prices, look at ISEQ, PSI, and what are they consist of, or better loook around u, ur home do u have anything made in these countries?As long as EM , rest of the world does ok Germans will boom selling high quality industrial goods, cars to them, but if china, India hit a wall, or us economy tanks to a new low, then they will go down too. Also imagine situation of Spanish investor, where should they put their money. Local stocks, banks, or In a stronger country which will survive most likely euro collapse, even in the short term benefit from it? Funds not put in PM, commodities, farmland etc..?
Yeah seems logical that guys selling luxury automobiles to china and india will not skip a beat while both countries are now in panicked effort to stop food prices from tripling
If you know that there is no rationale to the movement of the stock market then the market does make sense right? As long as americans are willing to spend their very last dollars and credit card limits buying ipads and flat screen TV's at Christmas living only on the hope that this spending will bring a better economy in 2011 then the S&P will continue it's upward path. It all makes perfect sense. Only those of us who live within our means and know that the world economy in on the brink of colapse and expect the markets to reflect this reality continue to ask - WTF?
buy gold w/ your credit card. at least you will have something shiny
The cost of the bailout for Spain and Portugal can be zero,in other words the ECB will just print the money out of thin air,there will be fudges and excuses but somewhere between the budget reductions,austerity cuts,re-writing of membership rules and deficit ratios, and money printing,some countries might leave but the Euro will survive as one of the remaining strong currencies in the world that will participate in the major restructuring of international currencies following the inevitable loss of reserve staus of the dollar and the collapse of sterling.
And please-no posts regarding the Germans not standing for the inflationary effects of the above,the ECB runs the show now,since when did the wishes of the people matter in any country?
When it all goes to crap I'll miss the Bloomberg late-night girls. (European market coverage, on at about 12 midnight my time.) Such beauties. Don't even need to hear what they are saying, just look at the video tag-lines and see their sparkling eyes. Oh lindsey, you blonde nordic goddess.
I understand this fellow's point, but there are some missing gaps in the arguments. Even though I do think fixed income remains the sweet spot, it seems good to be more flexible.
For one, there are very large companies that do not issue bonds. Their loan debt is negligible; financing comes from cash-flow and reserves accumulated by cautious management. Shareholders don't have to fear the capital structure of these guys.
Second, you make money when risk actually compensates you. This happens in equities rarely and only when everyone is running in the opposite direction.
Love 'em or hate 'em, stocks have dealt pretty well with currency devaluation. It is foolish to have no equities in your portfolio, mandate limitations excepted.