Insight Articles
Is Europe the next Japan?
August 2010
On the face of it, Europe today faces many of the same challenges as Japan did 20 years ago – namely aging populations, stretched real estate prices and rising deflationary pressures. In Japan, these problems have led to two decades of economic stagnation and poor stock market returns. The question on many investors’ minds is whether Europe is heading in the same direction? In this paper, Stephen Macklow-Smith, managing director and portfolio manager within J.P. Morgan Asset Management’s European Behavioural Finance Team, reveals several key differences between Japan in 1990 and Europe in 2010. Although comparing Europe with Japan makes for provocative journalism, it doesn’t tell the whole story.
No place like home? Negative equity and labour mobility
August 2010
This week’s poor existing home sales figures from the US highlight the impact of negative equity on the housing market. Homeowners are unable to sell their homes and move to regions with better employment prospects. Until the housing market recovers, unemployment may remain unusually high.
A yen for yield: Searching for yield in a low yield world
August 2010
With government bond yields at record lows and a cloudy outlook for equities, where are investors to look for better returns? We consider some alternatives offering higher yields in a low yield world.
Theme investing
August 2010
2007, emerging market consumers have been outspending US consumers. By 2020, more than 50% of the population of Japan will be of retirement age. By 2030, almost 60% of the world’s population will live in towns and cities. In this paper, we look at how theme investing can help investors capitalise on these shifting patterns of globalisation, demographics and urbanisation, and examine how these trends are contributing to two of the key themes powering equity markets today – consumption and infrastructure.
Stress lite
July 2010
The bank stress test results announced last week should help to improve sentiment and market access for eurozone financial institutions, we believe. Not because of the tests themselves, however, but because of the disclosure of sovereign debt holdings of the participant banks that accompanied the results.
In focus: Latin America
July 2010
With an estimated GDP of approximately USD 4 trillion – around 7% of the global total – and a population of over 600m people, Latin America provides a wealth of investment opportunities. Yet it is often underappreciated by investors who overestimate its risks. In this paper we look at the structural changes that have transformed the region, and examine how rising consumption and infrastructure investment are presenting opportunities far beyond the traditional commodity play. We also discuss the higher returns on equity that are helping to differentiate Latin America from its emerging market peers.
China ends currency peg to US dollar
June 2010
China’s central bank, the People’s Bank of China (PBoC) has announced that it will manage the renminbi’s (RMB) exchange rate more flexibly, following nearly two years in which the Chinese currency has been pegged to the US dollar. The ending of the dollar peg will have wide ranging implications for investors, both in the short and long term. In this paper we look at some of the reasons for the announcement and analyse the likely economic and market impact of the move.
Austerity and its risks
June 2010
Since the Greek parliament passed its austerity budget in May, many other European countries have followed with deficit reduction plans. This trend runs counter to the pro-growth fiscal policies that have been fashionable since the collapse of Lehman Brothers, and carries its own set of risks. In this paper we look at whether European leaders really are ‘mad’, as Paul Krugman has described them, or if they may be able to achieve fiscal retrenchment in a manner that boosts long-term growth.
The future of consumption
June 2010
The global crisis of the last few years had a major impact on consumer demand, particularly in developed markets. Following years of strong growth, sales to consumers fell in the developed world from 2007-09, but in emerging markets they still grew, albeit at a slower pace. We believe emerging markets will continue to provide the majority of growth in the years ahead.
In focus: China
June 2010
After an exceptionally strong rebound from the equity market correction that resulted from the global financial crisis, Chinese markets have recently underperformed global markets. In this paper, we provide a detailed look at the factors that have contributed to this period of relatively weak performance and explain why we believe the turning point may be close.
Eurozone debt update
May 2010
Concerns over a possible Greek sovereign debt default have caused high levels of volatility on global financial markets. In this note we take a brief look at how the crisis in Greece has escalated, explain why it is having an impact beyond Greek shores, and provide an overview of what the authorities are doing to address the situation. Finally, we analyse possible scenarios going forward and the likely longer-term impact of the crisis on bond markets.
In focus: Brazil
April 2010
The Brazilian market has produced powerful returns over the past year as the economy has weathered the global crisis and investors have recognised the fundamental opportunities offered by this vibrant market.
In this paper, we look at the themes that have driven Brazil’s recovery and are now positioning it for long-term growth.
Emerging markets: Normalisation after the Great Recession
April 2010
As the last vestiges of panic disappear most measures of valuation and corporate earnings in emerging markets have recovered to 'normal' levels. We believe this shifts the onus of performance to growth in earnings which is underpinned by structurally higher return on equity. In terms of the market cycle, we are starting to witness signs of recovery from the so-called Great Recession across the developed world and emerging markets are transitioning from early to mid-market cycle. This expansion phase is typically longer than early or late cycle, giving us confidence that we can still see low double-digit annualised USD returns over the next five years. However, the short-term risk continues to be inflation and the big topic for 2010 will be what this means for monetary tightening over the course of the year.
Far horizons: International investing in a globalised world
April 2010
The efficient market hypothesis is not the only theory that has taken a knock following the credit crisis of the last few years. Investors have long been told that they should diversify their portfolios internationally in order to achieve better, risk-adjusted returns. The gains were premised on having access to markets and assets with lower correlations than were likely available in the investor’s domestic market.
In focus: Africa
March 2010
Africa is one of the fastest growing regions in the world, and also one of the most overlooked by investors. In this paper, we take a look at the themes that could transform Africa from frontier market to emerging market and examine how investors willing to take on higher risk for potentially higher returns can access this dynamic region.
A Chinese revaluation: Why now and what will it mean?
March 2010
Once again, economists and investors are wondering for how much longer the Chinese authorities will keep the renminbi pegged to the US dollar, to which it has been tied since July 2008 at 6.82/USD. This is currently a ‘hot’ debate because it is not only western economies that want to see the Chinese currency strengthen, arguing that an undervalued renminbi is a protectionist policy that contributes to global trade imbalances and poverty elsewhere1. China’s attitude towards its currency may be changing too.
Government deficits: The key debates and some investment themes
March 2010
While economists and politicians may be able to find reasons to prolong fiscal stimulus policies, the bond market is not so patient. It wants answers now, not tomorrow, from governments as to how they intend to curb the rapidly increasing issuance of sovereign bonds. The major sovereign issuers may be at risk of being sold off in a similar way that Greek bonds have been sold off in recent months, if cyclical deficits appear to be becoming structural.
Behavioural Finance Process: Evaluating the opportunities for European investors
February 2010
We believe that significant opportunities have arisen for the Behavioural Finance (BF) process in Europe following the market events of the last 3 years. Recent performance by our BF process has raised questions over the robustness of our philosophy and whether changes are needed to our approach. This paper analyses data on value/momentum strategies going back to the 1920s to see whether recent performance has been unusual or unprecedented, before using that historical record to assess the potential future course of returns from behavioural finance strategies.
Opportunities in emerging market currencies
February 2010
Emerging market currencies are benefiting from a range of positive economic and political trends. In this paper we look at how these long-term structural trends are attracting capital inflows to emerging markets and suggest that emerging market currencies may represent a compelling long-term investment opportunity as a result.
Emerging markets: The way ahead currencies
February 2010
After emerging markets (EM) rose a stunning 75% (USD) in 2009, some investors may well be feeling a sense of vertigo.
Passive vs active investing: Why buy average?
February 2010
Investors who choose passive over active investing, are actually guaranteeing below average returns for themselves in exchange for a small saving in management fees.
Review of European markets over last decade and outlook for 2010
January 2010
This paper is a review of some of the more important themes that affected European investors over the last decade. It is not exhaustive, and focuses on particular themes that we hope will be of interest.