G-20: The ominous road to recovery (April 16th, 2009)
Habib F. Faris

The G-20 party is over and the fun has just started.

Disagreements aside, the mood had turned into hope, even euphoria, as the closing summit communiqué was proclaimed by the British prime minister, Gordon Brown. Indeed, an encouraging vision of solidarity to tackle the prevalent economic despair and create a new order for the international financial system.

Overcoming the stubborn downtrends in global economies was a prerequisite to prevent the dreadful and persistent meltdown of the developed world's financial system. The leaders had realized that the trillions of currencies injected so far to resuscitate the system had no tangible effect. It was in their national interest to work together to render unity in their resolve and ability to coordinate an action plan to stabilize the current global financial system.

No doubt the world today is in profound economic crisis and, if we don't get on the right track soon, the result will be crisis within nations which could potentially lead to crises between nations! Consequently, it was Brown's own efforts to orchestrate the gathering of the G-20 in order to secure pledges by all to participate in the restoration of confidence in order to save the world from an impending economic meltdown. His endeavors were remarkable and the summit concluded on a positive note. As I indicated earlier: Now the fun starts!

There were several carefully worded recommendations made, including the regulation of hedge funds, extra rigorous standards for banks, and a curb on secrecy in tax haven centers. An announcement was also made expanding the role of the International Monetary Fund by adding in excess of a trillion US dollars mainly to support countries with deteriorating economies that were hard hit by the global slowdown, including their currency reserves and banking systems.

Worldwide reaction was one of surprise and positive response. Most global markets closed on the upside as they received the verdict with excitement and enthusiasm. They were simply impressed by the world leaders' solidarity and determination to tackle the crisis and meet the goals of the summit.

Let's closely examine the communiqué and attempt to fine-tune the details. The key question remains: How would each government pursue its own internal specific fiscal stimulus while, at the same time, attend to the economic troubles of other countries!

We definitely want each one to succeed but will the new G-20 directives offer better chances for recovery with the allocated resources to better regulate the financial markets? Will the public really regain confidence and trust in the collective leadership's courses of action? That is why it becomes crucial to succeed at this most complicated juncture in the economy since the depression, 80 years ago.

The cost of this current crisis grows by the day if not by the hour and, regrettably, the politicians took far too long to realize the size and the extent of this crisis. Now, the problem is global and the road to recovery is going to be an arduous one. A quick economic recovery is rather wishful thinking but, unless the bailout pledged by the G-20 is put into use rapidly and effectively, a deep and prolonged recession will be an agonizing reality to live with.

There is an expressed need to adapt the essential reforms as presented at the summit if we are to prevent a recession, or perhaps a true depression. The world is running out of time and cannot afford further delays in implementing these reforms.

The process, no doubt, will be painful and costly in both human and economic impact and here where the G-20 must direct and focus their resources.

(Habib F. Faris [habib.faris@finavestment.com] is CEO & managing director of FinaVestment Ltd., London.)

Focus on quality assets that offer upside potential (March 23, 2009)
Habib Faris I Arab News
 

LONDON: Let me start by reminding our readers that the situation today continues to be gloomy with failing economies, troubled banks and a continuing danger of a global debt crash. This is happening despite the generous and most expensive government rescue plans in history.

Will they succeed? Perhaps in the short-term, but will they assume responsibility for the future or, will they be able to resolve the next crisis and the one after it? That certainly is the trillion-dollar question!

You don’t have to be a prolific investor to understand what the real problem was. It was sinking public confidence, and money does not buy confidence. Only with time, investors’ confidence will be restored and the markets prevail and recover. Since stock markets are incredibly difficult to predict, companies remain not nearly as difficult. But which companies you, as the investor, need to focus on in the medium-to-long-term.

Quality assets are found in companies with low P/E ratio by historical standards, good cash flow, efficient management, low debt and significant advantages with its market sector. They are likely to eventually make you a lot of money. The timing is important and here the investor needs to be patient as the explosive growth may happen this year, next year, or perhaps five years from now. If it takes longer, you just have a chance to buy more bargain shares in the meantime.

So, stay cautious. Focus on quality assets that offer reasonable upside potential in a recovery scenario that should survive this recession-depression period. I believe the next few years will be the best time to invest in stocks.

The quality assets referred to above, should be part of a more diversified asset portfolio of good companies with promising future performances. This strategy will serve as a cushion against specific unforeseen negative events and, with its extended time-horizon, will stand against panic selling. That’s how one protects against potential market uncertainties.

How can one predict which companies are going to lead the way out of this deep recession? So far, nobody dared to answer! Making predictions these days is indeed a fool’s game. There are hundreds of predictors and when one of them is right, only in hindsight, the press gives a full cover story and makes them geniuses so that investors rush to listen to them.

The risk-reward assessment is a pre-requisite for controlling risk and improving decision-making process in selecting the right assets within the diversified portfolio. If you believe that the market is close enough to a turnaround, it would then be advantageous to invest in growth stocks of emerging companies, for example technology or bioscience industries, where you feel they hit new lows from its previous low. Simply, invest before they start to recover using best judgment and having a strong confidence - mainly in yourself - with the proper tools to your timing and investment choices.

I am a strong believer that global stock markets will get back into the bull territory but will take a while. True, markets had moved down and are staying down for justifiable reasons, and unless these reasons are addressed and resolved, it will stay flat or perhaps drop more. To those investors who sustained losses over the past several months, I say to them: It’s not worth losing sleep over, just stay and watch from the sidelines. The market may not bounce back soon, as one wishes to happen, in order to recover even part of the losses over a similar period of time.

Most investors these days, and rightfully so, are stock market shy because they were battered so unmercifully. They are the one asking: Where is the bottom; where are the earnings and where are they going to come from? The bottom will be reached and the recovery is imminent just be patient and remain focused.

I say to them now is a good time to save some money and prepare to invest when the market stabilizes at least. There is no reason for them to jump in now unless they are really convinced that the market, as a whole, has reasons to move upward. Does it?

(Habib F. Faris [habib.faris@finavestment.com] is CEO & managing director of FinaVestment Ltd., London.)

Stick to a proven stock-buying strategy

Habib F. Faris

LONDON: The question on the minds of every economist and investor these days is: How rapidly this global economy will recover from the dramatic shocks evolved over the past several months and, what is needed to avoid falling into future pitfalls should the economic downturn worsens. They are simply concerned and indeed looking for meaningful assessment of the financial situation to start investing again.

I would perhaps start by warning against false expectations concerning simple remedies that might enable the formation of investment strategies for the coming months and probably years. The sheer complexity of the situation makes it virtually impossible to offer a suitable advice since risk has now become a tangible reality.

Let investment strategies be based on facts. Most investors I speak with are all too familiar with the current crisis impacting their investment and wealth and I don’t hear much about opportunities in global markets. Why? In practice, it is extraordinarily difficult to forecast the economic environment, and thus the return on investments. Global investors are already growing skeptical that banks, corporations and governments will be unable to make good on the interest they promise to pay.

It then becomes a question of confidence or, indeed, the lack of it. On the not-too-distant horizon, I see continued and unabated efforts by governments to stop the economy and stock market from massive collapse. The Group of Twenty (G-20) met in London on Saturday to tackle the international financial and economic crisis, restore worldwide financial stability, lead the international economic recovery and secure a sustainable future for all countries.

Equity markets across the globe were highly volatile as the credit crisis spilled over into the real economy. The tremendous uncertainty led to a flight to quality and investors moved funds out of equities. They were concerned about the prospects for equity markets recovery in the face of a global economic slowdown.

Investors need to avoid being trapped in major pitfalls as the economy becomes increasingly volatile. Some believes that the financial system, under the current situation, is suffering from excessive risk aversion with the overriding sentiment of being apprehensive with a desire for capital preservation.

Investing is not just about price; it is about timing and valuations. It is only natural for investors to over-react to good news and under-react to bad news on stocks they would like to acquire.

Is it today the stock market hit bottom? Has the fear reached its peak right this second? Or will the fear get worse, and will the stock market bottom in five months or perhaps in five years from now? Regrettably, I don’t have the answer to those questions.

What I do know, however, stocks will find a bottom and we are closer to a bottom than a top. Consequently, this will definitely create some historic buying opportunities in an uptrend market.

First lesson in investing is that past performance is not necessarily a guide to future performance. However, investors’ perception of the past does shape their views of the future, and it takes time to change these perceptions even in a bear market like the one today. That said, significant bear market rallies are likely and should be possible to benefit from them, as happened last week, with some returns over the shorter term.

Investors’ attempt to profit from bear market rallies is challenging and they need to have the flexibility to commit funds when an area of the market is looking distressed and offering good value. While nothing can be certain in the current volatile environment, investors will continue to shift their expectations.

To those investors who continue to take risks to generate returns, they need to diversify the risk in their portfolio in order to achieve a better chance for greater returns. This is the principle strategy for risk aversion and, remember, a well diversified portfolio of real assets, in the form of stocks, will be worth a very great deal. That doesn’t mean just buying stocks of different companies, investors must diversify industries and sectors. Of course this does assume they have a long-term investment horizon of a minimum five years.

Yes, despite all the losses, stocks have by far the greatest tendency for recovery when the world comes out of this crisis.

(Habib F. Faris [habib.faris@finavestment.com] is CEO & managing director of FinaVestment Ltd., London.)

Intervention: A question of timing
Habib F. Faris
 

LONDON: Bailouts, stimuli, incentives, etc. are just a few of the idioms being used by governments all over the globe to describe the serious attempts taken by them to stabilize the current economic malaises. Notwithstanding these efforts, the light at the end of the tunnel seems increasingly elusive.

The global economic meltdown has already caused bank failures, bankruptcies, plant closings, and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet, as people lose confidence in the ability of markets and governments to solve the global crisis. Economics and markets are increasingly and inextricably woven together, no matter what governments believe.

While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn - like all others since World War II - will be followed in a year, or two, or three, by the beginning of a typical recovery.

The World Bank's most recent status report, Global Economic Prospects 2009, fulfils those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world.

With slight optimism - as are so many media pundits - regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don't go exactly right. There are also economists who are saying that they see no end to the recession in sight!

Indeed, one has just to listen to various politicians, economists, analysts, and all those pundits to sense the dichotomy in their theories and prescriptions for the true panacea to tackle these problems head-on. Governments continue to take charge but, in actuality, what more can they do?

Well, let's start with the Troubled Asset Relief Program, or TARP. Since its introduction in the US late last year, TARP has proven to be an unpopular expenditure with the public and with many in Congress who believed financial institutions received the money with little accountability and with few strings attached.

Banking giant Citigroup has been in talks with the government about additional assistance, while insurance giant American International Group (AIG) also is seeking more relief and is working with the government to revamp its existing rescue package. In the final analysis, how much more capital they would require, will be impossible to tell.

President Barack Obama and his Treasury people have taken steps to tighten conditions on the recipients of the funds. They have allocated $750 billion bailout funds this year, a step that would more than double the direct infusion of taxpayers money into the reeling financial sector.

In essence, taxpayers would foot the entire $750 billion up front but it hasn't been predetermined how the money would be used. It has been reported, the value of the acquired assets, suggest a return to the government of 66 cents for every $1 spent, hence the $250 billion net expenditure.

The main question remains, however: What else can the government do in case the situation deteriorates further and more intervention becomes necessary?

The need for more funds could depend on whether economic conditions worsen and on the outcome of "stress tests" now being conducted on the largest US banks. These stress tests, which started last month and are supposed to be completed by the end of April 2009, are being conducted to judge whether banks have sufficient - and the right mix - of capital to survive during a much deeper recession, and to gauge the size and scope of any future government aid.

With the stress test, I believe we would have some idea of which institutions may need to become government-owned or shut down. Those capable of passing such a test will clearly have a decent chance of surviving the recession and probably will be able to raise additional capital. In all likelihood, they will see their stock prices rally.

The quicker the stress test is performed and the reorganization of busted financial institutions completed, the sooner this phase of the financial crisis will be behind us, regardless of the outcome at various banks.

Notwithstanding the government's honest efforts and methods, the trend is clear: Troubled loans are rising and will continue to rise in the near future and the government is trying to exercise control over troubled banks even without the large scale but minority ownerships, as alluded to by Ben Bernanke, the Fed chief. Is he thinking that the government ought to run a financial institution?

Just think of Fannie Mae and Freddie Mac!

That will lead me to address the question of nationalization that caused much anxieties in the markets. To start, the Feds do not need to seize banks as that would probably drop their equity prices trade down to near zero. However, the market and the stock exchanges are getting prepared for such an eventuality as they see it coming and are not underestimating the magnitude of the problem all the way along!

It is so ironic that the politicians who are now engulfed in finding solutions are the same ones who argued with the regulators who criticized the excessive and irresponsible banks lending in 2006 or 2007. The politicians and, to a lesser extent, the regulators, have massively failed to spot the seriousness of the risk-taking that was going on.

Government can, and should, demand information from banks, and they have the power to do so. We need to have, among other relevant action plans, a detailed and thoroughly transparent asset by asset audit of the major banks' balance sheets and, we also need to believe and trust the regulators and encourage their openness and critique.

Only then can a government work out a painstaking strategy within a defined time frame to safeguard tax payers' investment in bailing out troubled institutions.

(Habib F. Faris [habib.faris@finavestment.com] is CEO & managing director of FinaVestment Ltd., London.)

Global dilemma: The threat of complacency
Habib F. Faris

The next few years are going to be very difficult with high unemployment, possible stagflation and social unrest - as we are seeing in Iceland and some of the Baltic nations. Already we are hearing protectionist voices and the future continuation of globalization could be severely tested. This year will almost certainly see negative growth overall in the G-7 countries and, at best, we will see some stabilization in the second half of the year.

We should, however, be looking for a more L-shaped recovery, rather than a typical V-shaped recovery and there is a very real danger that we could be going to follow a modified Japanese scenario of the 1990s!

The outlook is extremely opaque as we are in the accelerating point of the downturn. While both monetary and fiscal policies have become very relaxed in the US, the UK and elsewhere, funds have mostly been going to recapitalize the banking systems, where they are hoarded rather than re-lent, awaiting the next set of losses and the next recapitalization. US President Barack Obama's major fiscal stimulus was passed last week and, whilst any tax cuts will have an immediate effect, the spending on infrastructure, etc., will take a considerable time to filter into the economy.

The current economic model, driven by deregulation and the financial markets, will require radical changes. The future model will have to look dramatically different.

Rather than increased bank regulation we need a regulatory agency to control the creation and issuance of financial instruments. This would prevent the introduction of instruments such as financial derivatives and subprime mortgages that do not make any positive economic or financial contribution.

Perhaps what we are seeing is the downside of globalization, where a crisis that began in the United States can infect all of the world's major economies. It is this dynamic that is having a global impact because the US consumer alone has been accounting for 20 percent of global GDP - twice that of the entire Japanese economy.

Over the past 15 years, businesses in the US, Europe and Japan relocated their manufacturing capacity to places where operating costs were the lowest, for the most part being in the Asian region, especially China, making Asia the manufacturing heartland of the world.

The global banking crisis is now over in the sense that all governments are committed to save depositors, prop-up money markets and, if necessary, nationalize weak banks. What remains, however, is the almost complete lack of new profit opportunities for banks. So banks will have to break up and sell those businesses that are not part of their core competence. At the same time we'll see much more aggressive consolidation of global banking and finance. How long before a Chinese bank buys a European or American one?

No industry or institution will be spared in the downturn and the biggest impact will be felt by companies in banking, construction, entertainment and the automotive business. Government and central bank action will not be enough to save either the financial system or the global economy. If the crisis was brought on by too much borrowing and spending you can't solve it by increased government borrowing or by paying off all the bad loans with taxpayer dollars.

Around the world many banks will amalgamate with each other in order to survive. The US dollar will continue to lose its value. The Obama administration's measures would provide artificial life support for the banks at considerable expense to the taxpayer, but would not provide them the margins and yield curves that enable them to resume lending at competitive rates. Another ceiling on banks' growth is the danger of excessive regulation due to the large losses suffered by the general public. All this means that financial institutions and banks will be less profitable, and lose their level of importance in the economy.

With the financial system bailouts, US public debt has spiraled. It is expected that at some point in time foreign holders of some $15 trillion to $20 trillion of US paper could start asking questions regarding whether the yield is sufficient to allow for the perceived risks.

Moreover, China, the Middle East and other sovereign wealth funds may have greater priorities in funding and bailing out their own economies than investing in US paper. If these holders do lose their appetite for Treasury paper, US authorities could be forced to raise yields to a substantially high level - in the range of 10 percent or so.

China, for instance, may suffer from a severe drop in trade and foreign capital inflows. Because of its structural over-reliance on exports and manufacturing, China may be required to utilize its extensive stock of international assets to boost domestic demand and this could cause reduction in its purchases of US Treasuries. As a result, foreign demand for US government bonds could shrink drastically as the US requires increased funding for its bailout and stimulus programs. This could lead to extreme downward pressure on the US dollar.

Inasmuch as I try to present a positive outlook today, the realities are different: The economy will continue to slow down; more jobs will be lost, businesses will go bankrupt and real estate fall into foreclosure. It is doubtful that the attempts to stop this momentum will show any signs of success over the next 12 months.

This is a global depression that will touch everyone.

(Habib F. Faris [habib.faris@finavestment.com] is CEO & managing director of FinaVestment Ltd., London.)

Running out of options
Habib F. Faris
 

As 2008 draws closer to the finishing line, a worse-than-expected recession is anticipated in the United States.

The latest survey by the National Association for Business Economics (NABE) in November showed about 96 percent of economists believe a recession has started and nearly 75 percent think it could persist beyond the first quarter of 2009. They further projected that the economy will shrink at a 2.6 percent in the final quarter this year and then at a 1.3 percent pace in the first quarter 0f 2009.

The numbers could get worse in 2009. The NABE economists are projecting the economy will jolt into reverse, shrinking by 0.2 percent for all of the next year. If that happens, it would be the worst showing since 1991, when the country was starting to pull out of a recession.

With the economy losing traction, the US unemployment rate will soar to 7.5 percent by the end of the next year, according to the economists polled. Other analysts think it could rise to 8 percent and it could even hit a whopping 10 percent or higher if a US auto company were to go under.

Pessimism aside, let us be realistic about this situation: The US is sinking deeper into an economic hole and it is likely to stay there for a while.

Given the above murky scenario, what options does the government have?

Normally government officials respond to these problems by over regulating the financial industry and providing relief to prevent similar fiasco from surfacing.

Let's consider the facts: Barak Obama's bailout package now edges toward $1 trillion; the Fed's mortgage refinancing scheme to support consumer cash flow; and the economic stimuli by other countries, all of which, I believe, are designed to only reduce the bigger risk of depression and limit the danger of equity and credit prices sliding to new lows.

On several occasions during the year the Treasury and the Fed took on the unusual role of negotiators and principals in merger and acquisition transactions that normally would have been arranged by private parties. As a consequence, the US government has become a major shareholder in banking and financial institutions and other private firms across the United States.

Right now, the US finances have deteriorated too far to balance the federal budget anytime soon. It is the worst-case scenario that, in my views, could seriously weaken the country for a long time in the future.

It is true, however, that serious efforts with numerous incentives were adapted to counter this precipitous deterioration without any substantive success. The prevalent consensus is that they simply ran out of options!

There were several stimulus plans since the debacle of Lehman Brothers and, as we now know, did not work and supplementary funding was needed for the growing number of sick companies. Officials were, in retrospect, clueless and did not recognize that they were dealing with a long-term process of economic and financial restructuring. In essence, the bailout under the so-called Troubled Assets Relief Program (TARP) was not a solution to the crisis but the cause of further collapse.

This year's third quarter results signaled a further recessionary trend in the overall economic performance that lead to strong downturn revisions in the expected corporate earnings for 2009 and 2010. Consequently, negative earning growth will persist for a considerable time, unless a miracle happens.

Running out of options means keep looking for solutions. A solution to this crisis, that is growing on a global scale, must first address the issue of restoring financial stability and trust in the system and, more importantly, trust in the political order.

The next 12 months will be momentous and the implementation of policies to find a panacea to the economic malaise will be equally critical.

I believe the way we manage our wealth will determine our standard of living for the next decade.

Picking up the pieces
Habib F. Faris

The G-20 Financial Summit in Washington on Nov. 15 was held at a major crossroads in the history of the world's economies. The summit brought together the world's leading industrialized nations and the leaders of the emerging nations, such as China and India, that are playing an increasingly pivotal role in the global economy. No one expected a miracle or a quick fix for the current global economic miseries, but everyone was hoping to see reforms that would ultimately lead to market and financial stabilization.

This is now the time when we need to understand the critical decisions and actions adapted by the leaders to meet the challenges of the future. I have no pretence of knowing or even contemplating the outcome, nor can anyone forecast the pending eventualities. The G-20 pledged to:

Aggressively battle the global recession by agreeing not to pass restrictions on global trade;

Improve regulatory supervision of banks;

Implement stricter accounting standards; and

Employ oversight of the derivatives markets and synchronize tax cuts, lower interest rates and spending initiatives.

That strategy may have seemed rather convincing to the leaders. The markets, however, responded with utter skepticism to the practical effectiveness of this global strategy.

Following Lehman's bankruptcy and the resulting total loss of confidence in the financial system, coordinated injections of trillions of dollars by various governments were expected to create a semblance of calmness, restore confidence and reestablish financial normalcy and stability in world markets. Instead, we saw the inevitable disappearance of trust which started out as one between banks, investors and corporations and now spread onto a diminishing trust between nations. For example, we have seen France call foul on Ireland over bank deposit guarantees; China call foul on the US saying it has destroyed the world economy with its currency and trade subsidy arrangements; Germany complaining of France's plan to assist its industry; the UK chasing after Iceland to recover savings of US depositors, etc. As a result of this deteriorating trust among nations and their perceived lack of vision and unity, the G-20 Summit was called on to reestablish this trust and portray to the world an image of unison in goals and objectives.

The pendulum has thus swung away from the financial crisis to the increasingly gloomy economic situation as macro-economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy. The World Bank has predicted an overall global growth rate in 2008 of one percent which in itself is a real problem. The IMF considers a global growth rate of 3 percent or less to be "equivalent to a global recession."

Consequently, there is ample justification for pessimism. I would venture to add that global prospects will remain highly uncertain with risks of a global recession looming large. Just imagine, this global slowdown is expected to cause an additional 20 million people to become unemployed before the end of 2009 according to the International Labor Organization, and the number of people living in extreme poverty could increase by 40 million.

Against this background of deteriorating economic conditions worldwide, it was becoming more obvious that a broader policy response is needed, based on closer macroeconomic cooperation between the G-20 to restore growth and avoid potential new financial debacles as well as support emerging market economies.

In summary, no country in the entire world is immune from the current crisis and, I believe, the world is seriously dealing with a long-term process of economic and financial restructuring. The length and severity of the recession will depend on how quickly the G-20 react and pick up the pieces!

Room for optimism
Habib F. Faris | Arab News
 

The election of Barack Obama was an unprecedented phenomenal occurrence in US political landscape when history did not repeat itself.

There were endless commentaries addressing Obama's vision for tackling the current economic mess inherited from his predecessor, George W. Bush. Let us first recap today's dismal market and economic uncertainties in the light of the Bush Administration's recent decisions and contemplate the possible courses of action considered by the new president-elect. All the eggheads and government wonks in Washington have underestimated, and sometimes ignored, the growing economic pains that persisted over the past several months.

In response, a plan has emerged for the government to take hundreds of billion of dollars in distressed mortgages and other assets off the hands of banks and other financial institutions.

The consequences were, as we all know by now, that government actions were too little and too late to stem a debt crisis that reverberated throughout the world.

Ironically, since the credit crisis erupted onto the global scene about 14 months ago, each new government countermeasure seemed to have backfired: They have encouraged imprudent inaction and, in my opinion, promoted a sense of irrational complacency leading to the prospects of an economic calamity that was far worse than anticipated.

Paradoxically, President Bush seemed somehow remarkably unaffected and detached from the realities and consequences of this dire economic situation evident by his periodical speeches in response to the situation and, of course, the markets reacted accordingly.

He leaves the presidency in a couple of weeks with fundamentally a bear market and an economy that's coming unglued at the seams, a debt collapse that has barely began, the worst federal deficit of all times, and shaky confidence in US leadership role in the world.

A new president has been elected ... enters Barack Obama!

I often wondered: What would the election of Barack Obama mean to Americans and to the world? A sense of relief can be felt with hope, especially among overseas investors, that the US new president-elect can somehow change the dire economic realities of our time and avert a possibly deeper global recession.

There are, however, much greater serious challenges to Obama as, in addition to the state of the economy, he needs to transform his campaign promises to Americans on taxes, health care, energy and education into a set of legislative priorities for his first two years in office.

One of Barack Obama's top priorities should be to reassert America's role in the world and re-assume financial leadership from its current doldrums. This will, of course, be accomplished concomitantly with the implementation of reasonable and effective economic policies to recover the US from its stagnant state of vitality and growth.

Rising Democratic power in Washington will play a major role in providing the new president whatever support needed to pass laws for tighter financial regulations, increased social spending and more labor-friendly policies amid a more challenging climate for business. In addition, I believe there will be more regulation in health care, energy and other areas spelled out during the election campaign.

President-elect Obama has been given a mandate and a compliant Congress. He is expected, without a doubt, to bring to his new Administration the best and the brightest minds in an attempt to address overwhelming obstacles to improving or even surviving the challenges the US and the world face. Is this going to be good enough to turn-around the situation? Too soon to tell!

One thing for sure, Barack Obama will not sit on his hands until January 2009. It's going to be an excruciatingly slow recovery in these terrible period of stagnation for investors, with the economy burdened by high energy prices, high inflation, rising unemployment and slow growth.

The victory of Barak Obama offers hope - of historic proportion for Americans and indeed the world - for economic recovery. This is the most urgent task before the president-elect, the only thing that matters now, is the future.

Extreme volatility undermines equity markets
Habib F. Faris | Arab News
 

Equity markets have demonstrated mixed performances in reaction to economic news and fresh action policies by central bankers. Uncertainty of directional trends is forcing investors to digest the news and, depending on the perceived assessment of the situation, markets may swing in dips or rallies. Consequently, volatility in the current financial market crisis will linger on as long as available credit continues to shrink with an erosion in consumer and business spending.

Investors ask themselves if this is the right time to get back in the market, just because the US Federal Reserve Bank decided to cut interest rates by 0.5 percent.

True, in reaction, the Dow raced ahead last week for its second-best point gain as investors went on a shopping spree. But what kind of stocks are they buying? A rising tide, albeit sporadically, will not lift all stocks for there will always be weak companies out there that will either merge or go out of business.

It is here where investors need to be cautious and ask themselves if they should be buying right now.

Here is why: I believe the prevalent slow-growing world economies will keep earnings growth depressed from levels investors now regard as customary. That means price-to-earnings ratios will have to come down to something below the historical averages for stocks. Given that the economy is already struggling with inflationary pressures, the sentiment of a recession is getting stronger by the day evidenced by a recovery now seen as much slower than previously expected.

There are several observations I would like to make about the US and European equity markets based on the past few weeks of spectacular gyrations.

There are changes occurring in the approach and actual collaboration between the central banks that consistently attempt to realign their policies and position themselves for an upturn in this vicious cycle of economic uncertainty and financial volatility. I am tempted to believe that their concerted efforts will eventually pay-off. But for investors, however, it is no longer an issue of whether these policies will be implemented. Now it is a question of what the impact will be and how long it will take.

October was a brutal month to say the least, but how should the investors react in these unsettling conditions up the end of this year? Well, begin by building a new portfolio based on the following modest assets allocation criteria:

. The largest part of about 40 percent in cash by taking advantage of any rallies that may occur by the end of the year.

. Invest 20 percent of the portfolio in natural resources stocks. At current prices, I believe investors need to look for long-term rewards, as demand for these stocks will eventually drive prices to a new floor.

. Invest 20 percent in high-dividend stocks in sectors with huge potential for growth in 2009, i.e. "Get paid while you wait."

. Invest the remaining 20 percent in growth stocks at a reasonable price with PE ratios of 25 or less to reduce risk on a sell-off, and a price-to-earning growth (PEG) ratio of 0.75 or lower.

I would conclude by saying that yes, the continuing financial crisis has left investors on edge, as it has negatively impacted economies around the world. No country or region has been completely isolated or immune from the financial storm. Regardless of what the pundits say about their concentrated mission to revive the economy and the short-term reactions in the equity markets, investors must always remember that these are only efforts and only time will prove their successes or failures.

(Habib F. Faris is the CEO and managing director of FinaVestment Ltd., London)

Vanishing credibility: No time to relax!
Habib F. Faris

It is becoming more and more excruciating trying to formulate some common sense of what's happening in the financial markets these days. Ironically, whenever I get closer to what I believe to be true interpretation for that day, the next day negates all rationality and logic. What a difference a day makes.

The credit crisis had an unsettling effect on economies worldwide leading to a dramatic drop in global growth not for this year, but apparently for the next year and may be longer. The year 2008 will go into history as the year everyone wanted to forget or to remember as the year when the credit crunch went out of control leading to a recession that could possibly be a long-lasting one. Hence, no time to relax!

This dismal economic outlook presents enormously tricky challenges to both: Financial strategists and politicians as both have essential interests in finding potential solutions. The problem is however that most share a questionable and shaky credibility. As usual, John Doe ends up paying for all the mess they created. It is a question of confidence, not only in these people, but in the system itself. If banks are not lending each other due to lack of surety for repayment on time, how one would expect the public to trust them!

Over the past two months and since the debacle of Lehman Bothers, so much noise and actions seen around the world with concerted efforts to rescue the banking system and, still, credibility remains in the lost-to-be-found department.

Without delving in the obvious scenarios that covered world newspapers and magazines in the past few weeks, let me elaborate on where we are and what to expect from this bizarre situation.

Frankly and the way I see it, the Federal Reserve Bank has a choice: Either do nothing and let the economy, including major world economies, slide into the worst recession since the 1930s, or just do whatever it can and hope that problem will just go away. They opted to take actions, but the problem is not going away. One should not dismiss the concerted intervention from other central banks that was designed to restore much needed confidence. However, that did not alleviate the fragility of the stock markets and, as a consequence, shares continued to tumble across the trading boards.

Truth is, in my 25 years in private and investment banking; I have never seen such a frightening global scenario where bankers almost giving up on the banking system, more banking breakdowns, failing money market funds, rising inflation, and panicky investors: All happening simultaneously.

Every week we witness few nasty surprises, shocks and wake-up calls. The fear factor is predominant everywhere and the mixed messages we are receiving from the politicians and economists are creating more fear than reducing uncertainty. That explains why investors are more anxious than ever to sell during market rallies and get the heck away from the risk.

So, what's next?

Let us assume that the trillions of dollars bailout by collective governments will have a positive impact, which I remain skeptical about, when would we see real reversal in this crisis? Timing and, until we grasp the tangible evidence that this is happening, uncertainty and volatility will prevail. Until then, risk-aversion is paramount to prudent investors waiting for the right moment when a turnaround in market sentiments and trends occurs.

Finally, and until then, I advise investors to make sure they have a strategy for actually making money in crashes and bear markets. Work with professional investment managers who combine ultra-conservative investments with hedges to give both relative safety and profit opportunities in their portfolios.

Your decision and action today will determine your future wealth!

(Habib F. Faris {habib.faris@finavestment.com} is the CEO and managing director of FinaVestment Ltd., London.)

The ghost of John Maynard Keynes

Some comments on the present market and economic conditions

1/What is your view of how long the financial system crisis will continue and how much deeper it will it get?

One can only hazard a guess by looking at other experiences with banking crises. Japan took about 5 years from the time it started 

to recapitalize its banks. Sweden and Thailand took a little less time but neither were V shaped recoveries. 

There is a far greater urgency to efforts now in the US and Europe after a year of dithering and denial but these are early days and the 

scale being global is larger and we have the unprecedented scale of the derivative problem. It could still spiral out of control requiring the 

whole banking sector to be taken into public ownership, but more likely we will have an extended period of recession and subnormal 

growth covering much of the Obama presidency – assuming he wins. He will inherit the most poisoned chalice but with a substantial, 

probably enhanced majority in Congress, will have an opportunity to do well or to screw up.  In the face of this, the markets could be 

even more volatile since change causes many winners and many losers.

2/How deeply do you expect the crisis to ramify into the "real" economy and how long the overall downturn (slump/crash/Depression) will last?

In my opinion we could well be at one of those transition points in economic history. The past 30 years of market liberation and 

deregulation are going to be challenged and called into question in a way unimaginable 2 or 3 years ago. It is quite possible that 

Obama will be presented with problems akin in magnitude to those facing Roosevelt in 1933, forcing a major rethink in the way the 

economy is managed. Old industries, such as automobiles, are on their last legs and looking for government handouts. Millions are 

facing foreclosure of their homes. 

The healthcare and pensions crises require addressing and come at the worst possible time when the financial sector is in meltdown. 

The situation in Afghanistan and Pakistan is worsening by the day. The whole concept of globalisation, on which prosperity has been 

based, could face substantial challenges if the US economy, in particular, deteriorates significantly.                  

3/Has the crash in stock and other financial markets created buying opportunities in general  yet, or is the "heat of battle" still so

intense as to obscure any coherent strategy? If it is still too dangerous to move back into markets, what signs and signals should

investors look for to tell them when it is time to move?

The crash has been precipitated in no small measure by indiscriminate hedge fund liquidation of good assets as their loans are called

by their banks and prime brokers. This means that many good assets now have real value even if the markets have not reached their

ultimate bear market lows. A sure sign of value is companies with unimpeachable dividend records yielding 50 to 100 percent more

than 10 year Treasury bonds. Look at BP and Royal Dutch Shell, for instance. These sorts of opportunities do not arise every day.

Studies show that a significant part of the long term returns from stocks are from dividends. Well covered dividends that can grow are a

vital protection against long term inflation that could well be the results of the explosion of liquidity the central banks are pouring into

the markets once fear dissipates and animal spirits resume more normal service.

4/If there are buying opportunities, where and what are they. - E.g. in equity, bond or other markets? Advanced versus emerging markets?

Outside the government bond markets prices in most asset classes are very much more attractive than they have been except for the 

bottom of the markets in 2003 and 1974. That’s not to say we have seen the ultimate lows. I do not believe we have, but I can foresee 

a decent recovery rally after the extreme drop into the early days of the Obama presidency – as I expect it to be. That could easily run 

out of steam as the magnitude of the challenges and the size of the mountain to climb become apparent again. But where there is great 

value it is a time to buy as Warren Buffett has shown. It’s not a crime to lock in a profit later.

Emerging markets have been savaged, especially the BRIC favourites. China alone is off 65 percent from its peak and valuations are 

accordingly more reasonable. China’s growth will slow in 2009 but is likely to exceed 7 percent whilst OECD members show zero economic 

growth. Value is obviously there.

At the same time, those emerging markets, especially in Eastern Europe, such as the Baltics, Hungary and the Ukraine, that ran large 

current account deficits are in very real trouble and will be seeking assistance from the IMF.  They have been decimated but do not have the 

resiliency of Asia.

I have previously suggested that emerging markets in general be invested in through hedge funds or ETFs, which can be long or short. That 

advice remains valid although a more selective long bias is more justified now. There are special situations galore right now. It is even possible 

to get double digit dividend returns in selected blue chip companies in emerging markets.  As Ronald Reagan said: if not now, when?

5/What is the outlook for gold and other precious metals?

It can hardly come as a surprise that given the macroeconomic background I believe a position in gold absolutely must be retained, in fact, 

enhanced if at all possible. The sell off since August reflects the giant margin call that hedge funds have faced as banks are trying to reduce 

their loan books. There is a huge disconnect between the paper market in precious metals as represented by futures and the physical market 

as represented by coins and bullion. The latter has been on fire and physical is selling at a premium to the paper form. 

The US Government is up to its usual games making gold ownership more expensive by suspending the production of gold coins whilst, at the 

same time, debasing the dollar like never before. It is not beyond the realms of possibility that they will try and make ownership of gold by 

Americans illegal again in any future crisis. Would you rather own gold or the paper of a hugely indebted government whose budget deficit next 

year as a percent of GDP could get close to double digits? 

Silver and platinum are even more depressed but both metals have some industrial uses which are less in demand under present circumstances.  

But they are cheap on both a relative and an absolute basis.

6/Are there any other points that are not addressed in the above questions?                    

Commodities, in general, have been hammered and in some cases, such as oil, are at a level close to the cost of finding and bringing new 

production on stream. They also have much better value than earlier this year as many of the leveraged speculators have been forced out.

Property in those countries that experienced the biggest booms: the US, UK, Ireland and Spain still has a way to go to reach the bottom. 

That may not happen till 2010 or even later. Whilst that situation endures the consumer will be under pressure to rebuild his balance sheet. 

The pressure will have to be taken up by government investment in areas such as infrastructure and alternative energy as well as domestic 

demand in Asia, whose currencies should strengthen against their Western competitors. Much as we may regret it, the era of big Government 

is back. The ghost of Lord Keynes hovers over us and Milton Friedman, who died last year, must be weeping in his grave.

William R. Thomson

October 19th, 2008

Advisor to the Board of Directors

FinaVestment Holdings SA

Self-Regulation Brews up a Perfect Storm, January 2008 (by Ian Mullen, Senior Advisor, FinaVestment Holdings SA)

Interest Rates’ Direction Guides World Economies
Habib F. Faris, Arab News
 

In a recent poll, economists said they expected the US economy to grow at a rate of 2.7 percent this year which is the slowest since 2002, and indeed an improvement in last year’s prediction of a 2.5 percent rise as inflationary pressures ease. In their own minds, they believe strong consumer spending will offset the slipping housing market. Moreover, the annual rate of inflation is expected to drop below 2 percent to its lowest level in five years.

The anticipated fall to 1.9 percent from 3.2 percent in 2006 was a direct result of the sharp fall in energy costs as oil prices remain well below last year’s high of $78 a barrel. Looking ahead however, growth of 3 percent is forecast for 2008, which is an improvement this year, but still below 2006’s 3.4 percent figure.

Consequently, and not surprisingly, the anticipated decline in economic growth from 2006 has led to a decline in market interest-rate expectations. As it currently stands, the markets are now anticipating the Fed to eventually cut rates twice, from 5.25 percent now, to 4.75 percent by the end of the next year. The question is one of timing: when is the Fed expected those rate cuts occur? Last November the markets expected the Fed to cut its rates twice before September this year, and rates were expected to remain broadly unchanged until the end of 2008. While this scenario is still for rates to be at 4.75 percent at the end of the next year, it is now predicted that the two rate cuts will not occur until around the end of this year — roughly six months later than before. Let’s take a contrarian view: there are some analysts who predict the Fed will cut rates a bit more aggressively than the consensus — to 4.5 percent by the end of 2007. This implies the first cut coming sooner, perhaps by the time Fed meets in late June.

There is also the chance that there will be more evidence available showing that the moderation in the pace of home-equity appreciation is causing households to save more and spend less. Given this argument, it would be a less reason to suspect that the Fed will wait any longer.

Europe is a different story! The European Central Bank (ECB) has responded to the recovery in the euro zone economy by raising interest rates six times in just over a year. Despite this however, it has stuck rigidly to the view that interest rates remain low, suggesting perhaps that its work is far from done.

There are undoubtedly some good reasons to think that euro zone interest rates might be close to, or even at, a level consistent with low and stable inflation numbers over the next few years. Not only does there seem to be some slack in the economy, but various factors may have had a downward influence on the neutral level of interest rates in recent years.

At the same time, the interest rate-sensitive elements of the money supply are no longer growing at inflationary rates of expansion. Given these points, some economists would argue that interest rates are already no longer growing at inflationary rates of expansion and further their argument that interest rates are already no longer low. However, as long as the ECB itself remains of the view that interest rates are low, there would seem to be a danger that it will yet push them significantly higher. At a minimum, rates are expected to rise to 3.75 percent in March and another possible increase to 4 percent looks thereafter. But there might be reasons not to take the ECB’s hawkish signals on the subject entirely at face value. After all, even if it believes that interest rates are almost high enough, it is unlikely it wants to give a clear signal to that effect to consumers.

In the last major tightening cycle of 2000 and 2001, the ECB stuck to the line that interest rates were justifiably low and, accordingly, many expect 4 percent to be the peak of this interest-rate cycle. This level could even be higher than is absolutely necessary to keep inflation in line with the ECB’s target over the medium term, suggesting scope for interest rates to perhaps come back down a little next year — a prospect not yet being seriously considered by the markets. Indeed, the further rates raise above current levels, the greater the likelihood that they will fall again in 2008.

Here in the UK, the sharp drop in retail sales last month suggests that household spending growth is very likely to slow in the first quarter of 2007. Furthermore, and with investment perhaps unlikely to match the surge in the 4th quarter, GDP growth could start this year at a rather slower pace. The drag from net trade, which was relatively small (0.2 percent in 2006) may increase

this year as the global demand environment weakens and the strong pound takes effect.

As such, many economists expect GDP growth to be rather weaker that the 3.1 percent rate expected by the Monetary Policy Committee (MPC) this year.

The MPC appears to have raised its estimate of the sustainable rate of GDP growth recently in response to the effects of immigration and rising participation in the labor market. Notwithstanding its response, the committee has recently put more emphasis on estimates of market output and the demand for resources, which have been growing a bit more quickly than GDP itself. Consequently, for now at least, the more aggressive voices on the MPC will point to the continued strength of demand as a reason to lift interest rates at least once more in this cycle.

Investment Culture With Local Flavor
Khalil Hanware, Arab News
 

Q: What made you take this initiative?

A: Well, we looked at the global market's performance over the past few years and realized how a long-term profitable growth has become increasingly difficult to create. We also realized that there is a need for dedicated representation to investors and businesses to cope with the dynamic changes in global markets. Our initiative was to

address these concerns and meet the challenges to ensure investors' added value to their investments both locally and internationally.

Q: Where is the company based?

A: Our head office is on Park Lane in London with two other offices in Switzerland and Jordan. Our ambition is to open an office in the Kingdom and we are currently in the process of doing that.

Q: Competition being very strong in the Kingdom, how do you plan to meet it?

A: We plan to meet the competition by being different and offering different solutions. FinaVestment has developed a niche investment advisory organization with an investment culture but with local flavor. Here lies our differentiation strategy. By simply understanding what investors need, we can offer solutions by leveraging our strengths, capabilities, expertise, and market contacts. We feel, for example, that the local market in the Kingdom is under served in various ways and we plan to work diligently to address some of the existing issues.

Q: Which clients are you targeting?

A: The criteria for selecting clients include all those who really demand special attention to their assets. We listen, analyze, diagnose, and come up with suitable recommendations, and finally we follow-up and monitor the investment to ensure proper management and growth. We realize how important it is to maintain an ongoing dialogue with our clients and are committed to them and to their success.

Q: What about the response so far from the prospective investors?

A: Amazingly encouraging. The market opportunity is extensive, involving many potential lines of business and locations; this is due to FinaVestment management's extensive local and international banking expertise. We show our clients that we care about them and we work for them to ensure best satisfaction to their investment goals and returns. In essence, they pay our salaries and we only can offer them best services and solutions. This honest and transparent approach had indeed created a most positive response.

Q: How is the response from Saudi investors?

A: As I mentioned the overall response has been encouraging and Saudi investors are equally enthusiastic to talk to us.

Q. The mood of investors in the Gulf is not good at present. Do you think it will affect your strategies in the region?

A: You are right. The mood is one of resignation and confusion. I have been covering this market for the past 30 years and have seen the ups and downs, and it is a "down syndrome" the region is experiencing these days. A wave of pessimistic views had led to lack of confidence as reflected in the drastic drop of the Tadawul All-Share Index and created a ripple effect in other major markets in the UAE, Qatar, Egypt, Jordan and others. So my answer is "yes." Investors' unsettled mood necessitated our constant review of strategy and approach in the region. Are we worried? Definitely not.

Q: You being an expert in stock markets, why do you say investors should not worry?

A: Because there is an underlying commodity in top-gear demand globally - oil. The Kingdom's economy will resume its phenomenal growth in the coming years and there will be incremental demand for oil and its by-products as long as China, India and other fast expanding economies try to enhance their current growth trends. Therefore, the state of the Saudi economy is "safe" and doesn't pose any problems and investors must rest assured of this. In this instance, the investors need not worry. The stock market is a different issue. It depends on the participants' own diligence and evaluations in specific companies before they decide to invest one riyal.

Q: Do you think Saudi investors who had already burned their fingers will recover from the recent market collapse?

A: Investors must never time the market as even professional equity traders fail to read market trends. The problem in my view is one of controlled measures in trading and understanding the fundamentals of equity trading in the country and the region in general. Earlier this year, the stock market started to show signs of overheating and I presented cogent arguments to my clients to reduce their holdings. Only a few heeded my advice while many stuck with it. The real question is not whether investors will recover their trading losses, but why, or what, would cause such a recovery. Once I wrote that it is easy to buy stocks but hard to sell them. Investors feel somehow obliged to hold them, or fall in love with them, and will not accept a loss scenario. It is the psychology of the market. The other point, I believe, is the investors' indulgence in trading without understanding the fundamentals of the companies they are investing in. For example, what they do, who are the management and what are their future plans, what's the company's valuation, etc.

Q: Will they recover their losses?

A: This is a subjective question to an objective answer. If an investor has realized losses, the damage is done, and the fingers are burned. Did he sell too soon? Should he have waited a bit longer? Remember what I said earlier, no one should time the market. However, if we learn from the recent history, specifically in October 1987's Black Monday, the market dropped more than 30 percent on that miserable day but recovered in a few weeks. Those who opted out in panic were really hurt and those who rode the market recovered and in fact made more money. They recovered their losses because they were patient and had a longer-term investment vision.

Q: Any final word to those investors in the market today?

A: Just be careful and don't build your investment strategy on hearsay or rumors. Stick to facts and fundamentals. Don't allow yourself to fall into the debt trap. Build confidence in what you invest in by questioning company's business and management.

I wish to address my final comment to those skeptics who need to reflect on what had evolved over the past few months and draw a useful lesson. The stock market environment is becoming highly disciplined to add credibility, accountability and adequate procedures to trade. The CMA (Capital Market Authority) is expending tremendous efforts in creating effective regulatory governance and they had done a great job. These are the ingredients for a healthy future trading environment