My blogging has been quieter than anticipated these last few months – getting my business off the ground coupled with preparing for some teaching at one of the local Business Schools next year has been way more time consuming than I had imagined.
I have been thinking about next year for a while now, but I can find little to “Light My Fire”.
I do not see a resolution to the Euro problem in the next 12 months. I do not think 2011 will be the year that Greece or Ireland, defaults, but frankly, I am just guessing when I say that. I do think 2011 will be the year that the markets work out just how deep Germany has sunk into the mire. Wherever you look in this crisis, there is a German bank facing big losses. The cynic in me thinks the only reason Merkel is participating in these bailouts is that it is politically cheaper than bailing out the German banks directly. At 72% Debt/ GDP, plus all the contingent liabilities from the bailouts, her balance sheet does not look pretty. Meanwhile, as the protests over the rise in retirement age have shown, France is in even worse shape. Wolgang Münchau at the FT has a very level headed take on the Euro problem - Expect some answers from the eurozone.
The recent showdown in the US congress over tax-cuts for the rich suggests that most of the establishment there has yet to get with the program. Yes, I know the US has one of the most progressive tax codes globally; I know that ending the Bush era tax-cuts for those earning over $250K would make the US even more dependent on that 10% of the population who currently pay a record 70% of US taxes; I know that the additional taxes raised would only cover about two weeks worth of the deficit.
I also know the world needs to see that the US understands how rapidly its finances are spiraling out of control. I am short ETF’s of medium term US Treasuries and I see this as a structural position; I have been called-in already, but I just reestablished it the next day.
I believe that chances of a double-dip in the US economy are receding, but the recovery is going to stay anemic, with unemployment only falling slowly. US Treasuries will remain the assets of choice in any flight to “quality” in periods of Euro stress.
Welcome to the new normal.
So, given that backdrop, what does the Emerging World do?
My wild card guess for 2011 is that China raises the rate at which the RMB appreciates against the USD, possibly to twice the current rate. I believe that the rising inflation in China is just a warning, and that eventually the authorities will work out that their unorthodox policies are part of the problem not the solution. As Churchill famously said of the US, you can always trust them to do the right thing – after they have exhausted every other possibility.
Imported commodity inflation and domestic asset bubbles are not one-off exogenous factors, but symptoms of a bigger problem and, as a result, I see the market struggling for the early part of the year as the inflation story unfolds.
Brazil, my perennial favourite (and the largest position in my fund) is going to be interesting. I was shocked how short President-elect Rousseff’s honeymoon has been; about a day as far as I can work out.
Despite being Lula’s anointed successor, she is definitely not going to get the free pass that he did, and she is going to have to pass some decent reforms. If she does put forward a meaningful program to bring the country’s debt/ GDP back down to 40%, and she does cut off the lending fire-hose otherwise known as the BNDeS, it could easily be the next leg-up in the Brazil story. If, however, she adopts a “business as usual” attitude, things could go off the rails quickly. The Real is getting very dangerously overvalued, and deindustrialization is significant; the Government’s policy towards Petrobras has only exacerbated these trends (as a reference Norway suffered significant deindustrialization when it developed its North Sea oil fields), whilst Credit/ GDP is rising very fast (off a low base).
The FT has a couple of interesting, and contrasting, look ahead’s on Dilma’s Presidency, 11 for 2011: Will Brazil’s government tighten fiscal policy? And Brazil’s new leader set to take hands-on role.
Russia is cheap, there are no two ways about it, but the risks are huge. Corruption is endemic and appears to be getting worse, were that possible. As the resent trial of Mikhail Khordokovsky shows, there is no such thing as the rule of law. I am under no illusions as to what sort of person Khordokovsky is or how he accumulated his wealth, but even if the trial was merely pour encourager les autres, I am also reminded of the treatment meted out to Bill Browder, and Hermitage’s lawyer, Sergei Magnitsky. It will be very interesting to see how well the upcoming privatization program goes, and how closely they authorities get questioned on these issues. “If you sup with the devil, carry a long spoon”.
India is suffering from realizations that the Government is either corrupt or incompetent (or both). The revelations about how cheaply the regulator gave spectrum to various wireless operators, coupled with how many of the firms are struggling to make meaningful returns given the fierce competition is certainly making many question the investment case.
The greater publicity that the tragic suicides of farmers in Andhra Pradesh, “hounded” by microfinance lenders, has also highlighted many of the deep seated cultural problems that still pervade the country and which hold it back (Mark Tully’s short stories on India shine a bright light on these). Many people have drawn unfavourable comparisons between their plight and the opulent palace being built by Mukesh Ambani.
The Indian story is not over, but the premium at which it traditionally trades has been eroded for now. I always see it as expensive, but I am inclined to use the recent weakness to add some exposure adding exposure.
Mehran Nakhjavani at MRB (http://www.mrbpartners.com) forced me to eat some humble pie on India recently. He pointing out to me that India is in a sweet spot for returns on infrastructure spending. China may be suffering from malinvestment, whilst Brazil does not do nearly enough, but just right now, every dollar invested into Indian infrastructure gives outsized economic returns, buttressing growth.
Elsewhere, I am keeping an eye on Argentina; following the death of her husband, Nestor Kirchner, and Venezuela no longer able to act as her lender of last resort, Christina Fernandez has started to make nice to the IMF again. I do not own anything there currently, and nothing looks cheap short term, but if they are going to have another attempt at reforming their economy, who knows what might happen?
Venezuela faces another devaluation sometime in the first half of the year, although it should finally throw off the recession – the last country in Latin America to do so.
Eastern Europe is generally a mess. Poland might prove a bright spot later in the year IF it can decouple from Euro contagion, but I am not holding my breath.
I like Turkey, pace the growing current account deficit. It has historically low interest rates coupled with one of the best growth stories going, and valuations that do not appear particularly stretched. As ever, it comes with a wealth warning, as it is high beta and certainly not for the weak stomached.
In Asia, Indonesia looks to be in good economic shape. The spike in inflation should be controllable, and the authorities appear to be acting promptly. Earlier efforts to reduce fuel subsidies were well timed given the subsequent rebound in the oil price, so Government finances should be better insulated this time around. The market has already discounted a lot of the good news, and it is hard to find value in many of the big names. I am long, via the ETF, but expect to be lightening up into the current rally.
I have been doing some opportunistic trading in the Middle East. I bought some Egypt on weakness, and sold it shortly afterwards when it recovered. There are some interesting stories there, but you have to be very disciplined about your entry points.
Overall, I think 2011 will be better than 2010 in the markets, although I doubt returns are going to be spectacular. Book your profits and leave something for the next man – it worked for Sigi Warburg.