Sunday, December 18, 2011

2011: a Rough and Tumble Year, with Plenty of Market Volatility

Events challenging many investors this year included: 
  • the catastrophic Japan earthquake
  • political unrest in North Africa and the Middle East
  • the persistent European sovereign debt crisis,
  • concerns about China's growth, along with inflation concerns,
  • the strength of the U.S. recovery which confronts fiscal deficit issues and persistent unemployment and
  • severe floods in Thailand
Actions (sometimes just meetings) by political leaders, policy makers and central bankers, along with the release of economic data, often triggered sharp positive and negative market swings. The most recent news item, from this past week, was that the Fitch credit agency lowered its view on the governments of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus and reported that France is at risk of a downgrade.

Many of these events are reshaping our expectations of global growth for years to come. While the breath of the global economic crisis is well understood, the depth of its damage (which includes the scale of additional deleveraging needed by banks and governments, along with the road map for recovery) are less clear. As market uncertainty dissipates, the ability to assess probable outcomes (a critical component of successful investment strategies) should improve.

Sunday, December 11, 2011

Tough Eurozone Talk could be Good News for Investors

Tough talk and sleepless nights accompanied the 15th Eurozone economic summit in two years in Brussels. Each rumor and comment sent markets strongly up and down throughout the week. In the end, agreements pointed toward improved government budgetary rules within the European Union and additional European Central Bank assistance to European commercial banks. German Finance Minister Wolfgang Schaeuble said, "I am certain that we will be able to handle the debt crisis in Europe with the agreed, far-reaching measures on institutional reform of the European currency union". On Friday, investors welcomed the good news.

It may be premature to provide an “all is clear” signal, but any progress in the Eurozone is good news. Details need to be worked out and the summit may not have adequately addressed Eurozone sovereign debt risks. Initial commentary has been skeptical, but recently the markets have absorbed a lot of bad news. Eurozone leaders need to address the concerns of the skeptics (and avoid internal disputes) during the next few weeks in order to assure their credibility and stabilize markets.

Will 2012 be the Year for Clean Energy Investing?

The United Nations’ 2007 Intergovernmental Panel on Climate Change reported that global sea levels would increase two feet by 2100. Recently, the study’s authors stated that their estimate was too low and sea levels will increase by least six feet (examples of potential impact - Mumbai, India would be under water and the New York City subway system would be flooded). This week, in Durban, South Africa, United Nations negotiators met to obtain an emissions reduction treaty by 2020. Contentious negotiations lead to an agreement between proponents of improved regulation (which included Brazil, South Africa and European Union countries) and the leading emission producing countries (the U.S., India and China).

The need to minimize environmental damage (and reduce dependence on fossil fuels) has not diminished. However, while energy, technology and infrastructure are high areas of investor interest, this year has not been kind to the clean technology sector. Drivers of negative performance include: 1) credit and financial crises related issues, 2) regulatory confusion, 3) pricing pressure and commoditization and 4) weak business models. The evolving global environmental challenges will drive both preventive (clean technology) and adaptive (seawalls, relocations, etc.) infrastructure spending. A review of potential clean technology investment ideas may be a good way to start the New Year.

Sunday, December 4, 2011

Global Central Banker Trigger Massive Market Moves

On Wednesday, in an effort to reduce escalating stress in the global financial system, the U.S. Federal Reserve, the Bank of England, the European Central Bank and the central banks of Canada, Switzerland and Japan reduced lending terms to its member banks. In addition, China eased it monetary policy and Brazil reduced its benchmark interest rate for the third time since August. Markets responded enthusiastically to these actions with the FTSE 100 (Europe) up 3.1%, the S&P 500 (U.S) up 4.3% and the Hang Sang (China) up 5.6% for the day. On Friday, while addressing Germany’s parliament, Chancellor Angela Merkel said, “The future of the euro is inseparable from European unity. The journey before us is long and will be anything but easy.”

These actions by central banks reinforce the view that significant global economic issues persist. As France and Germany move closer to finding some common ground, resolving the Eurozone’s sovereign debt crisis requires consensus among a large set of players (another economic summit will take place on Friday). Debates continue on the impact of slowing economic growth in China. While in the U.S., as many politicians remain focused on 2012 election campaigns, addressing the federal deficit and financial system problems remain elusive. As Angela Merkel has suggested, we are a long way from resolving many of these problems. Uncertainty and volatility will likely continue and investors will confront more market mood swings.

U.S. Unemployment Rate Declines, Weak Labor Participation Rate Suggests Structural Change

On Friday, the U.S. Department of Labor announced that the unemployment rate fell to 8.6%, from 9.0%, and payrolls increased by a weaker than expected 120,000 in November. At the same time, the labor force participation rate (people in the U.S. either working or looking for work - 16 years and older) was 64% - close to the lowest level since 1984, and increases in hourly wage and number of hours worked continue to be muted.

Global markets, while volatile, have benefited from strong corporate profits and the effects of U.S. Federal Reserve stimulus efforts. The unemployment rate may continue to decline as job seekers exit the market, but a recovery in the labor participation rate (which has been in decline since 2000) seems less certain. Improving the labor trends will reduce the risk of stagnation in economic growth and corporate profitability.