Beyond building BRICSA world of opportunity

September 2011

Chris HartChief Strategist

Ave E CW DSAI

Metamorphosis of risk

Contrasting paths of BRICS/EM and

the Developed World.

.

Spending the problem. Consumption vs Production

Source: INet

Fundamental problem: governments have grown too big

Source: INet

The systemic Ponzi – dynamicsAt the 11th hour, as government compensates

Systemic collapse

Time

Debt needed to sustain the systemBCA: the debt super cycle

Systemic instability

Credit worthy capacity

Deb

t

From 2010: The debt trap: more debt no solution

Source: INet

From 2010: Projected debt burdens: US and UK servicing requirements in a worse position than Greece in 2040.

The Argentine disease

The EM contrast: yield, growth, solvency

2007EM Crisis

Interest Rates GovernmentSpending

SovereignDebt

BubbleResolution

Difference in economic performance very stark

Crisis and riskMarket response and the changes

.

Financial Markets and safe-havens:…swinging between risk and reward

Source: INet

Debt Distressed Italian Financial Markets – no swing but general exodus.

Repeated in … Greece, Ireland, Portugal & Spain!!

Risk and the USD.

Source: INet

Euro: convergence and divergence trade.

Source: INet

French Spreads over German Bunds. …..France as well!!!!???

Source: INet

EUR vs USD – Range Trading

Source: INet

A chart for the generation: USD vs Swiss franc.

Source: INet

EUR vs CHF – huge move over the past year.

Source: INet

S&P: Bearish?

Source: INet

S&P: Long Term Outlook Turning Bearish as well

Source: INet

JSE: Bearish!

Source: INet

JSE: better long term outlook, but bearish s/t. Contrast with S&P very stark!

Source: INet

The rand. Very Volatile. Really????

Source: INet

SA Bonds: yield and solvency!!

Source: INet

The EM opportunity: changing nature of risk

InvestmentOpportunities

Growth Yield

SolvencyDifferentiation

BRICS and EM becoming safe-havensRelative risk diminishing

A Soft Patch….….or Double Dip?

Slowdown aggravates debt distress

.

Quantitative Easing.

…1, 2 and maybe 3?? Otherwise better described as printing money

Record budget deficits also added to the mix

…and deficit spending

Source: INet

As far as the eye can see. Anyone for tea??

Record budget deficits also destabilizes

OECD Lead indicator: no recovery; pointing to stagnant 2nd half at best.

Source: INet

Risk metamorphosisHistoric experience problematic

.

Governments - becoming the investor’s enemy…but are friends when emerging from the restructure

RisingTaxBurden

Investment Incentives

Pragmaticregulation

LabourInstability

HostileRegulation

Low LabourCosts

BankruptcyBlamegame

US; UK; Japan; PIIGS

Brazil; Zambia; Turkey, Thailand

Protectionism Concentration

Challenge to asset management doctrine and foundationDoes ‘risk free’ rate become redundant?

Cash

Risk

Return

Bonds

EquityProperty

“aggressive/growth”“Defensive”

Inflation adjusted and the model falls apartDoes ‘risk free’ rate become redundant?

Cash

Risk

Return

Bonds

Equity

Property

Submarine assets

“Cheap”“Expensive”

Risk hierarchy.

Source: INet

Gold

Cash

Bonds

Gold – a safe haven

Source: INet

Conclusion

• EM investors get growth, yield and solvency

• Market response to risk is changing fundamentally

• Conventional Investment Wisdom needs a rethink to deal with systemic risk

Twitter: chrishartza

Thank YouChris Hart

Chief Strategist

Ave E CW DSAI

Twitter: chrishartza

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