Research Watch

Deposits vs dividends, Kissinger on China, buys guns, the commodities comeback, and the underwear indicator.

PORTFOLIO POINT: This is a sampling of this week’s best research notes. In a world of too much information, we hope our selection helps you spot the market’s key signals.

Stocks have been looking cheap relative to bonds for some time now, as central banks the world over stimulate their stalling economies. Now, Citigroup points out the gap between Australian dividend yields and term deposit rates has finally closed – and the prospect of further rate cuts by the Reserve Bank can only boost the case for equities. It’s certainly not a great time for savers. Meanwhile, investors searching for better yields are increasingly abandoning bigger emerging markets in favour of Goldman Sachs’ new batch of small, growth economies, while the truly adventurous might prefer to take JPMorgan’s advice and buy into Venezuela, following Hugo Chavez’s victory in recent presidential elections. And rounding out the emerging market coverage, Henry Kissinger offers his views on the Chinese leadership change, following the former US secretary of state’s chat with China’s presumed president-in-waiting. Elsewhere, Barclays points to a commodities turnaround, analysts consider investments in gold versus guns, and men’s underwear sales suggest the US economy may soon snap back. On video, the strange tale of a hedge fund manager who has physically seized an Argentinian Navy vessel in an effort to recover an unpaid bond.

Deposits or dividends?...

(Citigroup, October 9)

Time to look beyond BRICs...

“Lately, stock markets in [Brazil, Russia, India and China] – the four biggest emerging markets – have gone soft. The MSCI BRIC index lost 2.45%, annualised, over the three years through September, while MSCI’s broader emerging-markets index gained 3.13%. … ‘The BRICs represent 44% of the MSCI emerging-market index,’ said John R. Chisholm, chief investment officer at Acadian Asset Management in Boston. ‘That’s a big percentage. But if you were investing in the US, you wouldn’t limit yourself to only the four biggest sectors. That wouldn’t make sense. Similarly, it doesn’t make sense to limit your universe among the emerging countries.’ … By focusing only on the BRICs, an investor would have missed the bull markets this year in Egypt, up about 30% through September, and Turkey, up more than 60%. … Even [Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the BRIC acronym] has moved beyond his Big Four. His latest emerging-market terms are ‘MIST’ and ‘N-11.’ MIST stands for Mexico, Indonesia, South Korea and Turkey, and N-11 for the next 11 economies surging behind Brazil, Russia, India and China. (The MIST countries are a subset of the N-11.) Goldman judges the MIST countries as the most promising and developed of the N-11, all of which have young, swelling populations and other good conditions for economic growth...  Thus, starting last year, Goldman began to offer an N-11 Equity fund to complement its BRIC fund. … Both funds could have roles in retail investors’ portfolios, either as someone’s full emerging-markets allocation or as an add-on, particularly for a person invested only in an emerging-markets index fund. That’s because the leading emerging-markets index, by MSCI, excludes Nigeria, Vietnam and Bangladesh – three countries that Goldman counts as promising.” (New York Times, October 7)

Buy Venezuela...

“Hugo Chavez’s victory in presidential elections on Sunday means Venezuela’s radical socialist leader could remain in power for another six years, extending his rule to two decades. That’s a disaster for markets, right? Wrong. JPMorgan, for one, says this is a buying opportunity, shifting their position on Venezuela’s debt to ‘overweight’ on Wednesday. Ben Ramsey, a JPMorgan analyst, says Chavez’s conciliatory words since Sunday’s election suggest that he is unlikely to embark on any radical changes right now. So far at least, he has not told the nation about any major plans to deepen his socialist revolution. ‘Chavez’s strategy appears to be to avoid rocking the boat, and rather let the momentum from his presidential win carry over the governorship races [on December 16],’ wrote Ramsey.” (Beyond BRICs, October 10)

Kissinger on China... “The new generation, Kissinger said, faces a ‘transformation over the next 10 years’ of moving ‘400 million people from the countryside into the cities.’ This will involve not just technical infrastructure problems but a change of values and also a change in the role of the Communist party, he said. Kissinger said he had spoken to Xi Jinping, the expected next Chinese president, and believes he will seek such enormous internal changes that ‘it’s unlikely that in 10 years the next generation will come into office with exactly the same institutions that exist today.’ ... ‘This is one reason why I do not believe that great foreign adventures or confrontations with the United States can be on their agenda,’ Kissinger said. But because Xi faces the need to make difficult domestic changes, he may be more assertive in responding to foreign critics, he added. ‘What we must not demand or expect is that they will follow the mechanisms with which we are more familiar. It will be a Chinese version . . . and it will not be achieved without some domestic difficulties.’ One other point to remember, Kissinger said, ‘Mao could give orders. The current leaders have to operate by consensus, at least of the standing committee.’” (Washington Post, October 8)

Prepare for the collapse of paper money...

“The global financial crisis of 2008 forced Western central banks into a mode of ongoing balance sheet expansion, where quantitative easing will continually be incrementally increased so long as economies do not recover to central bankers’ satisfaction. With government bond markets in the likes of America or Japan still trading off nominal GDP trends and not supply concerns, there is for now no seeming constraint on central-bank ‘printing’ in this manner. Still, the game will be up when investors cease viewing the relevant sovereign bond as a safe haven and that government bond yields spike as a result of supply concerns. … But the critical point for investors to understand in the meantime is that this is not a normal cycle. This is why it remains essential for investors to hold gold, and for the more speculative minded, gold-mining stocks as hedges against the anticipated systemic crisis... Gold is an essential hedge because no one can be sure whether the final outcome will be deflationary or hyperinflationary or, as is most likely, a nasty combination of both. For gold is the only effective hedge against both. Whereas other assets, be it bonds, equities, cash, real estate or commodities, behave very differently depending on the nature of the outcome.” (Chris Wood of CLSA, October 5)

And buy guns, watches and coins...

“We all know the familiar story about precious metals– gold and silver have a long-standing tradition as stores of value dating back thousands of years. But there are a number of other alternative stores of value worthy of your consideration: 1) Ammunition and Firearms... FBI firearm checks have been going through the roof in the US over the last few years, and each one of these represents another buyer of weapons and ammo. Consequently, both have handily withstood the effects of inflation. According to, for example, the price of Remington .223 rounds rose 224% from 1999 through 2011. 2) Watches. A single watch can be worth hundreds of thousands of dollars. Imagine putting $200,000 on your wrist and leaving the country – it’s an easy way to move wealth. … Most watches are like cars, they depreciate. But scarce models (like a Patek Philippe) hold value. 3) Rare coins. … While millions of new ounces [of gold and silver] are pulled out of the ground year in, year out, there are only a certain amount of 1907-1933 St. Gauden $20 gold pieces in the world. And they can’t go back in time to make more of them. 4) Agricultural property. Few asset classes are as inflation-proof as high quality productive land, because, no matter what, it will always have value. Human beings will always need to eat.” (Sovereign Man, October 9)

Commodities comeback... 

“Given the difficult regulatory backdrop, a slowing Chinese economy and the wide range of Macro-economic and financial market risks currently hanging over investors, this is a positive result for a sector that has been under pressure for most of the year-to-date. Whilst the net flow of funds into commodity investments for the year to date at just $7bn remains a long way below last year’s $25bn in the first eight months of the year, the consistent inflows over the past 3 months suggest a turning point in investor flows may have been reached.” (Barclays Capital, October 8)

The underwear indicator snaps back...

“When he served as chairman of the Federal Reserve, Alan Greenspan used the sales of male underpants as a way to take the temperature of the country’s economic wellbeing. And if the Maestro were to take a peek right now, he’d find evidence that things are gradually improving. The NPD Group, a leading market research company, has shown an uptick in sales of men’s underwear over the past year. Between August 2010 and August 2011, sales for all men’s ‘underwear bottoms’ were roughly $2.074 billion. In the period between August 2011 and August 2012, that number was $2.194 billion. That represents a 6% jump in sales from year to year. … ‘If you look at sales of male underpants it’s just pretty much a flat line, it hardly ever changes,’ NPR’s Robert Krulwich explained of the theory... ‘But on those few occasions where it dips that means that men are so pinched that they are deciding not to replace underpants. And [Greenspan] said “that is almost always a prescient, forward impression that here comes trouble.”‘ (Huffington Post, October 9)

Video of the Week: Pirates of Wall Street...

An Argentine naval vessel crewed by more than 200 sailors has been physically seized by the US hedge fund Elliott Capital Management in an attempt to collect on a 2001 bond Buenos Aires owes.

Graph for Research Watch

(Bloomberg, October 5)

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