January 16, 2010Stock markets around the globe continued to rally during the fourth quarter. As in the previous quarter, this trend was driven by the prospect of a global economic recovery. It is worth noting, however, that individual investors sold roughly $40 billion worth of domestic stock funds during the quarter and purchased over $20 billion worth of international stock funds. This suggests a growing consensus that the economic recovery of international markets will be stronger than the domestic recovery β a position that Chess has held for some time. Meanwhile, bond market returns during the quarter continued to benefit from investors seeking higher-yielding alternatives to money market funds. This resulted in many sectors of the market recording double-digit gains for the year β a situation that is unlikely to be repeated anytime soon. A notable exception was long-dated Treasuries, which showed sharp declines as investors grew increasingly concerned about the mounting budget deficits in the US. It is our expectation that the returns of the major assets classes will generally be lower and less correlated in the year ahead. We reach this conclusion based on several factors, the first of which is the current state of commercial real estate. US banks now hold roughly $800 billion of commercial real
estate loans that mature in the next five years. According to some
estimates, two-thirds of these loans may exceed the value of the
underlying properties. A similar β but less extreme β situation
exists internationally. Hopefully, an improving global economy
will lift property values enough so that lenders are willing to
renew the majority of these loans. If not, we should expect a
second wave of loan losses (residential real estate was the first)
that would impede the recovery in both banks and stocks. Speaking of banks, it is likely that interest rates across the globe
will begin to increase in the year ahead. This is important because
low interest rates have contributed to the rise in prices for financial
assets. Even if the forecasters are correct and the increase in rates
proves to be modest, all financial assets will face a headwind. Given the dramatic increase in public debt β especially in
developed countries β we think an increase in taxes is also likely.
As with interest rates, there will be some political pressure
to delay these increases for fear of choking off the economic
recovery. Under the
best scenario, any
increase in taxes
will be paired with
reduced government
spending. On a more positive note, there is a tremendous amount of cash sloshing around the world earning very little in the way of interest. As of this writing, investors are holding $3.5 trillion in money market funds. In addition, banks here and abroad are sitting on reserves $2 trillion in excess of regulatory minimums. Ideally, some of this cash will be drawn into the real economy in the form of purchases, investments and loans. This would bolster economic growth and allow governments across the globe to curtail stimulus programs. We closed this column a year ago by reminding ourselves
that our country had a long history of prevailing against the
most formidable obstacles. Our hope was that investors would
look back and say the same thing about the financial markets β
both here and abroad. Now, a year past the depths of the
financial crisis and on the threshold of a new year, our hope
seems more plausible. The past few years have made it easy to forget that during the last two decades, some 500 million people across the globe have escaped poverty and entered into a broad, burgeoning middle class. It is currently estimated that more than a billion people will travel this same path during the next two decades. For those countries that encourage this transition, and the companies that respond to the needs of these people, the opportunities will be enormous. (c) Chess Financial
|
Most Popular Articles
