Muster by wulinqing

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									Unconventional Thinking
Tools for a Successful Investor in
Today’s Global Marketplace


A presentation to

Arab Bankers Association of North America
May 9, 2007

Presented by
Rudolph-Riad Younes, CFA
Head of International Equities
Julius Baer Investment Management LLC
    Pyrrhic Victories




2
Agenda


 The Jungle – equity markets and the laws of gravity
 Tools and Weapons – process and philosophy
 The Current Climate – global imbalances
 Prey – investment opportunities




3
Hunting


 What is the best hunting style?
       The Lion’s or the Eagle’s way?
 What is the best investing style?
 Style and process depend on: the human talent available, the team‟s
    advantage and expertise, the degree of risk tolerance, and the amount of
    money under management. Within those constraints there is an optimal style
    that should be adopted.
 Not only do we change but so does the jungle (market) …therefore the
    optimal point is constantly changing.




4
    The Jungle (Equity Markets)




5
Law of Gravity 1 – No Asset Class Grows Above GDP
Dynasty Fund


                Investment Account – Growing at 12%        GDP – Growing at 5.5%
      1.E+22
      1.E+20
                                                                            2343
      1.E+18
      1.E+16
      1.E+14
      1.E+12 USD13,000,000,000,000
      1.E+10
      1.E+08
      1.E+06
      1.E+04
                   USD20,000
      1.E+02
      1.E+00
           2002                2052   2102   2152   2202    2252     2302
      Source: Internal Model



6
Law of Gravity 2 – Earnings Growth is Below GDP


 Earnings cannot grow indefinitely at a higher rate than GDP...
 Nor can they grow at GDP rate. Otherwise there would not be any new
    business formation...


                             How does this assumption test historically?
                                                               S&P 500
                                              GDP
                                                             Reported EPS

                        1950 - 2006           6.91%             6.21%




Source: Sanford Bernstein


7
Law of Gravity 3 – Earnings Are Cyclical


                           Reported Earnings % sales          AVG = 5.4
     9.50

     8.50

     7.50

     6.50

     5.50

     4.50

     3.50

     2.50
         1973      1976   1979   1982   1985   1988   1991   1994   1997   2000   2003
      Source: Bloomberg



8
    Tools and Weapons




9
Understanding ‘The Brain’


 Top-down approach is analogous to right brain thinking
 Bottom-up approach is analogous to left brain thinking
 „Style‟ or „box‟ managers use half their brains
 „Indexers‟ use other people‟s half brain




                            Use your full brain
                One can’t beat the markets with half a brain
10
The Role of the Hunter


 An optimal process understands the role and tasks of a portfolio
     manager:
      He or she is a strategist, an analyst, and a trader simultaneously
      Money management is a combination of pragmatism and dogmatism
 The Strategist
      The big picture, the right brain, dogmatism
 The Analyst
      The trees and valuations matter, the left brain, dogmatism
 The Trader
      Risk managementThe Strategist is your pragmatism
                       is essential, discipline, right brain,
                          the Analyst is your left brain,
                         and the Trader is your discipline
11
Portfolio Risk


 How does one get respected in society?
        By respecting two things…
        Respecting others and respecting oneself…
 How does one get respectable returns?
        By getting respect from the market…
 How does one get it?
        By respecting two things…
        Respect the market
        Respect your own opinion at the same time
 One added benefit: you may spare yourself PYRRHIC victories




12
One Key Reason We Fall Into Bubble Traps
It Is Not Always A First-Mover Advantage World

 When early is too early? – The Nth mover advantage
        At times: „the early bird gets the worm‟
        At other times: „the second mouse gets the cheese, while the early mouse gets its
         neck snapped by the mouse trap…‟
        What‟s the difference between a pioneer and an early settler?
 An emerging market application…




13
       After Many Waves of Pioneers…
       Is It the Dawn of Early-Settlers?

                           India - Nifty 50 (USD)                                  Saudi Stock Market
  120                                                                              (Tadawul All Share Index in USD)
                                                                   6000
                                                       April 07
  100
                                                                   5000

      80
                                                                   4000




                                                                  USD
USD




      60
                                                                   3000

      40                                                           2000
                                                                                                                   April 07

      20                                                           1000


      0                                                                 0
      1990      1993       1996    1999   2002      2005 2007            1994   1996   1998   2000   2002   2004   2007
       Source: Bloomberg


       14
     The Current Climate




15
 Structural Imbalances – Structural Problems
 Pressing Historic Limits

Total Debt as % of GDP            Current Account as % of          Personal Savings Rate
2.20                       Dec.   GDP                              16
                           06     2

2.00
                                                                   12
                                  0
1.80
                                  -2                               8
1.60

                                  -4                               4
1.40                                                        Mar.
                                                            07
                                  -6                               0                           Mar.
1.20
                                                                                               07

1.00                              -8                               -4
   1960 1970 1980 1990   2006     1960   1973   1986   1999 2007    1959 1972   1985   1998 2007
Source: Bloomberg


 16
A Storm With Two Eyes



Investment Bubble in China                                  Consumption Bubble in Anglo-Saxon Countrie

50                                                   2006    2


40                                                           0


30                                                           -2


20                                                           -4
                                                                                                        Mar.
                                                                                                        07
10                                                           -6


 0                                                           -8
1980       1985       1990    1995     2000         2006          1960   1973       1986        1999    2007

                     China Fixed Investment Ratio                         Current Account as % of GDP
 Source: Bloomberg


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As Bubbles Persist and Bears Capitulate
Theories Emerge


 The first bubble (1990s)
      Dow Jones 36,000 (zero risk premium)
      Price / eyeball (new pricing metrics)
 The second bubble (2000s)
      Dark matter theory (zero trade deficit)
      Sweat equity theory (new savings metrics)




18
The New Opium War?


Opium trade 1800s (UK vs China)                             Opium trade 2000s (China vs US)
   UK seeking more markets for its factories                  China seeking markets for its 1 billion labor force
   UK wanted tea and silk from China…                         China needs energy and raw materials
   but UK had nothing to offer in exchange: “We have          Still the West has little to offer…the yawning
    no use for your country‟s manufactures” Chien               trade deficit is China‟s way of telling the US “it
    Lung emperor                                                has no use for its manufactures”
   until the British East India Company suggested             Until the Asian central bank started buying US
    Opium                                                       debt pushing interest rates to record
                                                                lows…leading to addiction to borrowing and
                                                                hallucination about asset prices
   1820 – 1830: the amount of silver leaving China            US current account deficit is 7% GDP!
    quadrupled
   By 1867 opium accounted for 50% of China‟s                 US debt is greater than 200% GDP!!!
    imports
   China got the opium; UK got the tea, silk, and silver      US got the opium, China is getting its tea, silk,
                                                                and silver. It is consuming 30-50% of most
                                                                commodities known to mankind! And has a
                                                                trillion in reserves!!
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    The Corporate Lobby – America’s Achilles Heel
    Much Lower Taxes – Yet No Increase In Investment


Corporate Taxes as % GDP                      Total US Investment as % GDP
9                                             22
8
                                              20
7
                                              18                                        June 06
6
5                                             16
4                                   June 06
                                              14
3
                                              12
2
1                                             10
1947 1955 1963 1971 1979 1987 1995 2003        1947 1954 1961 1968 1975 1982 1989 1996 2003

              Taxes % GDP   Avg = 3.5%               Capital Spending % GDP     Avg = 16%

    Source:
    BEA
    20
     Prey




21
Avoid Fiat Currencies
The Fed‟s Obsession With „Asymmetrical Risk‟ (Jan. 1929 – Jan
1932)
      20.0%

      10.0%

       0.0%

      -10.0%

      -20.0%

      -30.0%

      -40.0%
                                         Unlikely to EVER
      -50.0%
                                         happen again
      -60.0%

      -70.0%
          Lg. Company Stocks (S&P 500) 91 Day T-Bills   CPI
      Source: Ibbotson


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  Avoid Fiat Currencies
  Inflation Data Are Questionable

                        DPI (3 yr. avg.)            CPI (3 yr. avg.)                              Housing Prices     Shelter CPI
7.00%                                                                                 150

                                                                           2004       145                                          2004
6.00%
                                                                                      140
5.00%                                                                                 135

                                                                                      130
4.00%
                                                                                      125
3.00%
                                                                                      120
                                                                                                                                   2004
2.00%                                                                      2004       115

                                                                                      110
1.00%
                                                                                      105

0.00%                                                                                 100
             1999       2000        2001       2002        2003       2004              1999   2000   2001    2002   2003     2004
Note: DPI is an alternate measure of inflation that takes into account asset prices
Source: Ricardo Reis of Princeton University, Bloomberg

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Avoid Fiat Currencies
Ultra-low Rates For As Far As The Eye Can See



                                              90 Day        5 Year
                                            Future Rate   Future Rate
        USD                                   5.33%         4.71%

        GBP                                   5.82%         5.27%

        Yen                                   0.68%         1.18%

        Euro                                  4.14%         4.24%

        CHF                                   2.50%         2.60%
       As of May 1, 2007
       Source: Lehman Brothers, Bloomberg


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      Buy Undervalued Real Assets
      Mirror, Mirror, On The Wall, Which Is Cheapest Of Them All?


House Price Index                                                  Commercial Premium Office Rent
                      700

                      600
                                                            2005                 Commercial        Commercia
                                                                               Office Rent 2006      l Yield
Base yr, 1985 = 100




                      500                                                      (EUR / Sq m / Yr)      2005

                      400
                                                                   London            1259            4.5%
                                                                   Tokyo             798             3.7%
                      300
                                                                   Munich            345             4.5%
                      200                                          Frankfurt         402             4.5%

                      100                                          New York          461             5.5%
                                                            2005
                       0
                            1985 1988 1991 1994 1997 2000 2003
                                  UK         Germany       Japan
      Source: JP Morgan, Knight Frank


      25
 Long Equity / Short 30 Year Bonds


                                                            Implied Growth Rate
 Stocks are dirt cheap relative to Long
                                           Czech Republic         -0.21%
  Bond yields
                                           UK                     0.11%
 Implied growth rate assuming:
                                           Italy                  0.68%
         Payout ratio converges on 50%    Netherlands            0.81%
         Dividend yield converges on 3%   Spain                  1.06%
                                           Hong Kong              1.52%
                                           Germany                1.74%
                                           Switzerland            2.12%
                                           France                 2.34%
                                           Poland                 3.20%
                                           Japan                  4.43%
                                           S&P 500                4.61%
                                           Hungary                4.69%
                                           Austria                6.60%
 Source: Bloomberg, Internal Model
                                           NASDAQ                 9.23%

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Pavlovian Trades



                    Avoid the Pavlovian Traps – NASDAQ and
                                     Japan
                                                     Div.
                                           P/E
                                                     Yield
                    NASDAQ              43.68        0.64

                    Nikkei 225          37.68        1.06


                    S&P 500             17.45        1.76

                    DJ Euro STOXX 50    13.89        3.15
As of May 1, 2007
Source: Bloomberg

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Other Themes


 Front-run the Indians and the Chinese:
    Luxury goods
    Commodities
    Seaports/airports
    Indian/Chinese real estates
 Invest in laggard economies:
    Germany
    Italy
 Regions not reliant on global imbalance:
    Central and Eastern Europe




28
Summary and Conclusion


          Most likely more bubbles are on the way…
                  To avoid Pyrrhic victories…



           Left                          Right
           Brain                         Brain




                      Just use it…
                        All of it!
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Disclosures


    This material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase
     or sale of securities.
    The views expressed solely reflect those of Asset Management Americas (a business unit of Julius Baer Investment Management
     LLC.) and its managers, and do not necessarily reflect the views of any affiliated companies.
    The material may contain forward- or backward-looking statements regarding intent or beliefs on current or past expectations.
     Readers are cautioned that such statements are not a guarantee of future performance, involve risks and uncertainties, and actual
     results may differ materially from those statements as a result of various factors. The views expressed are also subject to change
     based on market and other conditions. Furthermore, the opinions expressed do not constitute investment advice or
     recommendation by Asset Management Americas or affiliated companies.
    All material in this presentation, unless specifically indicated otherwise, is under copyright to Julius Baer Investment Management
     LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any
     other party, without the prior express written permission of Julius Baer Investment Management LLC.
    Certain information contained herein is derived from historical price data from various indices (described below) and does not purport
     to represent investment results of an actual portfolio. These results do not reflect the deductions for investment management fees.
     Past results do not guarantee future results.
    Foreign securities generally pose greater risks than domestic securities, including greater price fluctuations and higher transaction
     costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign
     countries there is a possibility of naturalization, expropriation or confiscatory taxation, imposition of withholding or other taxes and
     political or social instability that could affect investments in those countries. These risks can be greater in the case of emerging
     country securities.




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