Just received this letter from my friend, Anne McBride, and want to share it with you:
Dear Clients and Friends,
Headlines from a recent single day (November 9, 2007) in The Wall Street Journal demonstrate the extraordinary turmoil and critical issues the world financial markets face:
"Two Weeks that Shook the Titans of Wall Street"
"Why Fed Expects Growth to Slow"
"Why Europe Isn't Lifting Rates"
"Lifelines for the Drowning Dollar"
A quick glance at these headlines indicates that much of the bad news emanate from the United States. Problems in the subprime market have rocked the U.S. financial markets. Significant, and in some cases, massive subprime mortgage related write-downs and losses have taken a toll on many of the well-known U.S. banks.
On October 24th, Merrill Lynch announced that third quarter losses on investments connected to subprime mortgages would be $8.4 billion, up from a previous estimate of $5 billion. 6 days later, Merrill Lynch CEO Stanley O'Neal resigned. ("Two Weeks that Shook the Titans of Wall Street" Wall Street Journal, November 9, 2007) Citigroup warned of perhaps $11 billion of additional write-downs on subprime mortgages and related securities on November 4th. ($6 billion-plus of charges had already been reported for the third quarter). Charles Prince, Citigroup's CEO, resigned. ("Citigroup's Prince Steps Down, Rubin Named Chairman, Bloomberg November 4, 2007)
The banks affected are not only U.S. headquartered banks. Sanford Bernstein & Company analysts wrote that Barclays and Royal Bank of Scotland might write down $4.4 billion in the second half due to the breakdown in the market for credit-related securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).
"The financial markets are worried about further possible large writeoffs related to subprime defaults and the fear that excessive losses could lead to a very dramatic seizing up in credit, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).
The U.S. dollar has been extremely weak recently. On Friday the 9th, Reuters reported that the dollar fell to a "26-year low against sterling and a record low against the euro as expectations grew for more interest rate cuts from the U.S. Federal Reserve." The weakness of the dollar is a partial reason for the recent jump in oil prices. On November 7, oil touched an intraday high slightly above $98. It has since pulled back but remains above $90.
In mid-October, the International Monetary Fund forecast a slowing in 2008 world economic growth "with recent turbulence in financial markets triggered by the fallout from the U.S. subprime mortgage market clouding prospects." The European Central Bank is putting off taking any interest rate actions in the face of "surging" currencies, high oil prices and market turmoil. Euro-area firms are complaining about the euro's strength making their exports more expensive. ("Why Europe Isn't Lifting Rates" Wall Street Journal November 9, 2007) A weakening U.S. economy hurts the growth prospects of countries like Mexico which exports a high percentage of their goods to the United States.
Certainly investors have to guard against possible further deterioration in world financial markets and economies. It is possible that investors may increasingly gravitate to what they perceive as extremely safe investments and asset allocations. Yet, the broad-based turbulence in financial markets could represent an opportunity for publicly traded non-U.S. companies, especially in emerging markets.
The IMF notes that the major emerging markets have become the primary drivers of global growth. "For the first time, China and India are making the largest country-level contributions to global growth." The Financial Times notes that many emerging economies are in "far better shape than ever before to weather broader financial turmoil." Many emerging market economies benefit from the strength in commodities while a number of emerging market governments have strengthened their resistance to global financial turmoil. "The improvements in their economies have attracted a more diverse group of investors - including pension funds, central banks and local investors which analysts say are increasingly investing for the long term."
Additionally, David Malpass of Bear Stearns notes that a weakening dollar has an upside for international equities and emerging market economies. "The weaker the dollar in recent years, the more quickly capital has flowed out -to emerging markets, commodities and foreign real estate." ("Lifelines for the Drowning Dollar" Wall Street Journal, November 9, 2007).
Emerging market companies are benefiting from strong earnings growth. Earnings at Chinese companies traded in Hong Kong are expected to increase about 34% this year, according to Morgan Stanley. Morgan Stanley also believes that Brazilian companies will increase profits approximately 31 percent, Indian companies should grow about 29% and Russian companies about 17%. William Fries of Thornburg Investment Management points out "there seems to be plenty of capital in the world for companies that are growing." ("BRIC's big potential; Brazil, Russia, India, China indexes post exponential gains" Bloomberg News November 7, 2007).
Christian Deseglise, head of emerging markets at HSBC Investments, states, "What has changed is investor perception of emerging markets. The fact that emerging markets may be less of a source of risk than the developed markets is increasingly being recognized by investors." ("In for the long haul? Why a boom is under way in emerging markets, Financial Times, October 18, 2007)
To be sure, the picture in our economic/financial market crystal ball is cloudy. For example, it's not clear what will happen if the United States economy weakens even more than current forecasts. A severe global liquidity crunch would create few safe havens. Also, some investors worry about a stock market bubble in China and India.
Nevertheless, non-U.S. public companies should consider taking a more global approach to their investment outreach. Developed Asian financial markets such as Singapore and Hong Kong or markets benefiting from the commodity boom such as Dubai should be considered for outreach.
Further, U.S. investors are interested and may become even more interested in international equities. Last year, the Wall Street Journal noted that a number of domestically focused U.S. mutual funds are holding a surprising percentage of foreign stocks. ADR volume has been extremely strong. The Bank of New York Mellon reported on October 23rd that depositary receipt DR trading value (for American and global depositary receipts) exceeded $2 trillion for the first time ever. DR trading value increased 53 percent versus the same period in 2006. "A record 53.1 billion U.S.-listed DRs, valued at $1.872 trillion traded on U.S. exchanges during the first nine months of 2007."
Slow U.S economic growth and a weak dollar very well could encourage additional U.S. investment in international equities. Non-U.S. companies should look for opportunities in less obvious places in the U.S. such as certain domestically oriented fund managers or sophisticated retail investors.
Best regards,
Anne McBride
Vice Chairman, Global Investor Relations & Financial Communications
theglobalconsultingroup
STRATEGIC FINANCIAL AND CORPORATE COMMUNICATIONS
22 Cortlandt Street
New York, New York 10007
T: 646-284-9431 | F: 646-284-9485 | E: amcbride@hfgcg.com
