Not (Yet) Out of the Woods

The second quarter of 2009 witnessed one of the most powerful advances in investment markets in many years. For almost everyone, however, this is hardly a cause for celebration since these advances pale against the extraordinary losses incurred in the preceding year and a half. Nevertheless, we are reasonably confident that a genuine market recovery is underway and is anticipating, in typical historical fashion, an underlying recovery in economies around the world. Meanwhile, clients can enjoy a quarter of handsome gains and year-to-date performance, ranging from mid-single digits to low double digits, which would be quite respectable for the entire year.

April and May showed very strong growth in virtually every equity asset class. This continued in early June but waned as the quarter drew to a close as the markets digested their gains or, in the view of some, retrenched in fear of a false start.

The pessimistic view has some merit. US consumer confidence fell, unexpectedly, in June and the joblessness picture did not improve. More jobs were lost in June than in May, thwarting hopes for an improving trend. The unemployment rate rose, modestly, from 9.4% to 9.5%. The usual occurrence of employment totals being the last signal to improve...even after an economic recovery is underway...is little solace to the hundreds of thousands of newly unemployed workers. The unemployment rate statistic itself is a little unreliable as a predictor since it is a ratio of those without work over all those who have...or are looking for...work. Thus, the ratio can worsen even in a recovering economy because more people begin to have enthusiasm to look for work as the economy begins to improve (a newly encouraged job seeker, but who hasn’t yet found a job, goes into both the numerator and the denominator). Still, many investors focus on the statistic and they didn’t like what they just saw.

Negative and Positive Factors at Work...As Usual

In addition, there is no lack of geopolitical threat to the incipient economic recovery around the world: heightened terrorism in Iraq as US forces withdraw; a new and risky offensive in Afghanistan; taunting missile launches by North Korea; and election fraud and new repression mixed with unrelenting nuclear ambitions in Iran. Moreover, many fear the risk of inflation in the US and other economies as a consequence of unprecedented stimulus commitments. Carl Forster and Rich Palmer comment below on our prognosis on inflation and interest rates with a view that, on balance, the risks are modest.

This past quarter’s market rise has quelled much of the investment "crisis" mentality that held sway not many months ago. In the "Q&A" interview that follows, our Chief Investment Officer addresses some of the key questions our clients face. We look forward to having the opportunity to meet individually with clients to continue to set new, or to reconfirm existing, portfolio strategies. To foster a very robust conversation, we will provide a more extensive presentation in the coming weeks and we urge our clients and friends to raise specific concerns in advance so we’re sure to fully cover that ground

We’ve recently taken a thorough and sober look at the investment performance that all of our clients have achieved over the past several years. As our recently updated Performance Perspectives material indicates, absolute results have been very disappointing, through the end of 2008, though relative results have been quite good when compared to standard portfolio benchmarks. We are very gratified that our coaching over the past many months encouraged the vast majority (over 90%) of our clients to make no significant change to their long range investment strategies. So, while the future may present a relatively modest level of economic recovery in the next few years (due, in large part, to higher individual savings rates and lower consumption growth) causing overall investment performance to be at the lower end of historical recovery levels, we remain confident that our clients’ renewed investment strategies will help them to achieve attractive performance going forward from here.

The Related Rise of Emerging Markets and Commodities Prices

Two of the biggest success stories of this past quarter were the market performance of emerging markets and commodities (MSCI EM benchmark up 34.70% for the quarter and the Goldman Sachs Commodities Index (GSCI) up 19.24%). No longer completely reliant on exports to more developed economies, major markets such as Brazil, India, and especially China, are now large and rich enough to implement their own growth stimulus and to rely increasingly on burgeoning domestic demand. So, as commodities producers, we expect them to benefit. But, as rapidly growing commodities consumers, these economies face the dearth of prior investment in commodities supply. One likely consequence seems to be continued upward pressure on global commodities prices, despite what may be weak levels of growth in more developed economies.

In late May, I had the privilege to be invited to speak to a number of wealth management professionals in China in a series of conferences and webcasts sponsored by China’s professional credentialing authority, the Financial Planning Standards Board-China. Chinese professionals look to the US and other developed countries for guidance on how to best serve their clients, especially in trying times such as these. But there is no doubt among them that greater wealth and greater financial complexity is in store for their clients. They are very eager to learn as much and as rapidly as possible to be able to assist their clients to make the most of the opportunities they confidently expect in the coming years.

They also understand that their economy faces a major longer term challenge in providing support for an aging population with sparse family support mechanisms. The government of China has just inaugurated a public pension system to respond.

So, in addition to its already huge infrastructure spending, the massive multi-asset class investment fund that is likely to be accumulated for pension purposes over the coming decades will be part of what creates very substantial opportunity for global investors, including those far from China’s shores

Tim Kochis, CEO
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