Posts Tagged ‘International Monetary Fund’
Wednesday, April 4th, 2012
Each quarter since 2008, I have posted a template for a letter to serve as a starting point for advisors looking to send clients a summary of what’s happened in the past 90 days; and the outlook for the period ahead.
Advisors have told me that they’ve got a great response to these quarterly letters and the templates rank among my most popular articles. This letter goes into more depth on global growth forecasts than past templates. If this is more detail than you think your clients will be interested in you can easily delete this section.
Just a reminder that if you’re going to use this letter, take the time to customize it and put it into your own words, so that it truly does represent your point of view.
An overview of Q1 2012 markets: Bernanke, Buffett and Siegel on the prospects ahead:
The first quarter of 2012 represented the strongest start for the U.S. stock market since 1998; with Japan turning in its best first quarter gains in 24 years. This was largely driven by a reduction of fears about an extremely negative outcome in Europe, as well as stronger economic data in the U.S.
Of course, there are some formidable issues still to be addressed. This letter provides perspective on some of these issues, and outlines some thoughts on what we can expect for the balance of 2012 and beyond. As part of that, I have tapped into recent comments from Ben Bernanke and Warren Buffett, as well as Christine Lagarde; managing director of the International Monetary Fund and the Wharton School’s Jeremy Siegel, today’s leading market historian.
Before getting into their views, here’s a summary of market performance in the first quarter, all in local currency so as to exclude currency fluctuations. Even with strong first quarter returns, most markets with the exception of the United States are underwater over the past 12 months. Its resource exposure has meant that Canada has been a particular laggard over the past year.
|Last 12 months||–11%||7%||–4%||1%||–4%||1%|
The IMF’s view: A reduced forecast for global growth:
The single factor that more than any other will drive stock markets over the mid-term is the path of global economic growth; Europe in particular remains a question mark. In early January, the International Monetary Fund reduced its forecast for global growth, and predicted that continental Europe would see a mild recession in 2012. Here are excerpts from the IMF’s January forecast for economic growth:
|Actual||Projections||Changes from Sept 2011 forecast|
Bernanke & Lagarde: Sign of improvement … but efforts must continue:
Since this forecast was released in January, actions by global governments have changed the European outlook for the better. Indeed, it was greater optimism about a resolution to Europe’s issues that fueled the first quarter’s strong market performance.
There is still much work to do, however. March 20th featured a press conference by Christine Lagarde, Managing Director of the International Monetary Fund and, formerly Finance Minister in France. She painted a more positive but still cautious picture. Here’s how her remarks began:
“In terms of global economic outlook, we are certainly not, and I do say not in as bad a situation as we were only three months ago; and there have clearly been some significant improvements.”
“Coupled with an uptick coming out of the United States of America, it gives an overall picture (for Europe) that is slightly more positive than it was three months ago; not to say that all the difficulties have been cleared. If I have one message, it’s that the reforms and the efforts underway in advanced economies have to continue and that the same vigorous rigor has to be applied by Governments in the programs and the efforts that they have undertaken.”
The very next day, Ben Bernanke spoke to the House Committee on Oversight and Government Reform about the Federal Reserve Board’s views on Europe. He pointed to improvement in Europe and focused on three positive steps on the continent to increase stability. He also discussed favourable results of stress tests of banks in the event of a severe pullback in the U.S. economy.
But his closing comments echoed Christine Lagarde’s note of caution about the need for further action to address Europe’s structural issues:
“The recent reduction in financial stress in Europe is welcome given our important trade linkages. The situation however remains difficult and it’s critical that European policy leaders follow through on their commitment to achieve a lasting stabilization. I believe our European counterparts understand the challenges they face and they’re committed to take the necessary steps to address those issues.”
Also, you can CLICK HERE to go to the IMF’s most recent global growth forecast.
From my own point of view, it’s worth noting that given European issues and a slowdown in China, there is broad consensus that the next five years will see “2, 6 and 4” growth; an average of 2% in developed countries, and 6% in emerging economies, leading to 4% global growth overall. It’s this divergence in growth between developed and emerging countries that is driving increased focus by multi nationals on faster growing emerging economies.
Warren Buffett: “America’s best days lie ahead:”
In the face of challenges for developed economies, there is a persistent view of America as an “empire in decline.” This was reinforced by last year’s downgrade of US debt and by the stalemate in Congress over dealing with America’s deficit and debt challenges.
As I look at formulating recommendations for my clients, I don’t subscribe to the view of a declining America. Without dismissing its issues, the biggest competitive advantage for United States is its vitality and capacity for change and innovation. It continues to dominate in high tech, and remains a magnet for the best and brightest talent from around the world.
I’m not alone in this view. Here’s an excerpt from Warren Buffett’s annual letter to investors released in February:
“In 2011, we will set a new record for capital spending, $8 billion and spend all of the $2 billion increase in the United States. Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.”
“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential, a system that has worked wonders for over two centuries; despite frequent interruptions for recessions and even Civil War remains alive and effective. We are not natively smarter than we were when our country was founded, nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
You can read Warren Buffett’s full letter to investors HERE.
A long term perspective on valuations:
While economic growth enables long term increases in corporate profits as a whole, in the short and mid-term we have to pay a fair value for the companies we buy. Anyone who invested at the peak of the U.S. market valuations in 2000 learned a hard lesson about the perils of losing focus on what we pay for a dollar of earnings.
There are few more hotly debated issues on Wall Street than whether today’s market is overvalued, undervalued or priced just right. In looking at all the available data, my own conclusion is that the market is roughly fairly valued.
That’s not to say it doesn’t face some speed bumps in the period ahead. But I was interested to see a March 29 interview with Jeremy Siegel of the Wharton School. Author of Stocks for the Long Run, which examined almost 200 years of market data, in this interview Siegel looks at historical precedent; and sees significant upside potential at today’s stock valuations. To see his interview, CLICK HERE.
What this means for your portfolio:
While all portfolios are customized to clients’ specific needs, there are three guiding principles to the advice that I offer.
1. The first relates to the allocation between stocks and bonds, and comes from Benjamin Graham; the Columbia professor who was Warren Buffett’s teacher, and who is considered the father of value investing. In a recently discovered 1963 talk, Graham had this to say on asset allocation:
“In my nearly fifty years of experience on Wall Street, I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do. My suggestion is that the minimum amount (of the investor’s) portfolio held in common stocks should be 25% and the maximum should be 75%. Consequently the maximum amount held in bonds would be 75% and the minimum 25%; any variations should be clearly based on value considerations.”
2. The second principle relates to, barring a significant change in circumstances, sticking within the investment framework that we’re decided upon.
Some of you may recall my advice in early 2009, as we faced what appeared to be an end of the world scenario and some stocks hit lows they hadn’t seen in 20 years. At that time, I urged clients to maintain a core level of equity exposure. Recently, I have had questions from clients about increasing equity weight in portfolios, given low interest rate and strong stock performance in the first quarter.
While I am always happy to discuss this on a case by case basis, given the level of uncertainty that still exists, I generally advise against increasing equity allocation from the level that we had going into 2012.
3. The final principle relates to the role of cash flow from investments. In an uncertain environment for economic growth and equity returns, we continue to place priority on the cash yield from investments. In my view, the returns on some REITs, corporate bonds and dividend stocks in selective sectors continue to make these attractive relative to the available alternatives.
Should you have any questions on anything I’ve covered in this note or on any other issue, please feel free to contact myself or one of the members of my team directly. And as always, thank you for the opportunity to serve as your financial advisor.
Tags: 24 Years, Ben Bernanke, Christine Lagarde, Currency Fluctuations, Economic Data, First Quarter, Global Growth, Growth Forecasts, Historian, International Monetary Fund, Jeremy Siegel, Leading Market, Managing Director, Market Performance, Negative Outcome, Outlines, Quarterly Letters, U S Stock Market, Warren Buffett, Wharton School
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Tuesday, August 10th, 2010
During the last week there has been a great deal of interesting and unusual but positive commentary about the upturn in the market and the economy.
In our first selections this week, Laszlo Birinyi, who runs an excellent asset management shop, a long-time contributor to Forbes Magazine, and runs Tickersense.com, comments that the market rally is a signal that the economic recovery will be far stronger than forecasters’ consensus estimates. In a follow up article, Birinyi says that waiting for an economy Roubini can believe in means missing rally.
Birinyi Says Stocks Rally Signals Economic Rebound, August 24, 2009, Bloomberg.com
Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 66 percent gain from its current level. The index has rallied 14 percent since his forecast. The benchmark for U.S. stocks may rise 6 percent to 1,087 within the next three months “if it continues to progress at the rate it’s been progressing,” he said
Waiting for Economy Roubini Can Believe In Means Missing Rally, August 26, 2009, Bloomberg.com
“We’re looking at a bull cycle in phase one,” Laszlo Birinyi said in a telephone interview yesterday. Birinyi was the top-ranked Dow Jones Industrial Average forecaster for most of the 1990s on PBS’s “Wall Street Week with Louis Rukeyser.” “No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term,” he said.
John Lipsky, First Deputy Managing Director at the IMF states that there are ‘Clear’ signs of a global rebound under way.
IMF’s Lipsky Sees ‘Clear Signs’ of a Global Rebound, Bloomberg.com, August 24, 2009
The global economy is showing “clear” signs of a rebound and central banks are unlikely to raise borrowing costs for many months, the International Monetary Fund’s No. 2 official said.
“The signs are clear — if still tentative — of renewed growth,” John Lipsky, the IMF’s first deputy managing director, wrote today on its Web site. “With inflation threats distant, there is little doubt that central bankers intend to keep policy interest rates very low for some time to come.”
Kenneth Rogoff, former Chief Economist, IMF and Harvard U Prof says “There is no question the global economy is healing and emerging from recession,” in an Bloomberg TV interview August 21, 2009.
World Economy Emerging From Worst Recession Since World War II, Bloomberg, August 22, 2009
The global economy may be coming out of the worst recession since World War II as record-low interest rates and trillions of dollars in fiscal stimulus spur demand.
Sales of existing U.S. homes jumped in July to the highest level since August 2007, and German service industries expanded this month for the first time in almost a year, reports yesterday showed. The Japanese economy grew for the first time in five quarters, according to a report earlier this week.
Next, and most dear to Canadian investors, there has been excellent news on the retail sales and banking front at home. Stewart Hall, Economist for HSBC Canada says “All in, the month of June is shaping up nicely with manufacturing, wholesale and now retail sales all posting upside surprises and suggesting that the economy is stabilizing and beginning to transition over to the recovery phase.”
Surging retail sales lift hopes for Canada economy, Thomson Reuters, August 24, 2009
Canadian retail sales grew much faster than expected in June, the latest in a series of upbeat economic numbers to raise hopes the economy is pulling out of recession.
Sales jumped 1 percent from May, far surpassing forecasts for a 0.2 percent increase, Statistics Canada said on Monday.
But much of the gain was due to rising prices, especially for gasoline, while the volume of sales inched up by just 0.4 percent.
Sales were down 4.4 percent from a year earlier.
The report points to a recovery in consumer demand during the second quarter, after two straight quarters of sharp declines in spending.
“All in, the month of June is shaping up nicely with manufacturing, wholesale and now retail sales all posting upside surprises and suggesting that the economy is stabilizing and beginning to transition over to the recovery phase,” said Stewart Hall, an economist at HSBC Canada.
Our long standing love affair with our banks stocks have been warranted all along despite last year’s losses. BMO’s report today indicates that loan defaults have peaked, as BMO reported lower than expected loan loss provisions and $1 per share in today’s earnings report.
BMO Shows Credit Storm is Passing, Andrew Willis, Globe and Mail, August 26, 2009
Better-than-expected loan performance at Bank of Montreal is expected to boost all the Canadian banks, as analysts predict individual loan defaults have peaked.
Bank of Montreal (BMO-T) turned in earnings of $1 a share on Tuesday, well above the consensus forecast of 90 cents. Analyst John Aiken at Dundee Securities said: “The big surprise in the quarter was specific provisions of $357-million, well below expectations of above $400-million.”
Finally, a video featuring George Vasic, analyst from UBS:
Dividend Stocks: Get Paid to Wait for a Rebound, George Vasic and Rob Carrick, August 19, 2009
You also get tax benefits and stability, says George Vasic, equity strategist at UBS Securities.
If you have any articles to contribute to our weekly “Articles You Can Send to Clients” feature, please forward them to email@example.com.
Tags: Central Banks, Consensus Estimates, Dow Jones, Economic Rebound, Economic Recovery, Forbes Magazine, Forecasters, Global Economy, Imf, International Monetary Fund, John Lipsky, Laszlo Birinyi, Market Rally, Phase One, Roubini, Telephone Interview, Time Contributor, Upturn, Wall Street Week, Wall Street Week With Louis Rukeyser
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Tuesday, March 30th, 2010
An important note:
Over the past 18 months, the quarterly templates for a client letter have ranked among the most popular features on this site.
Research with investors has identified the five elements of an effective client letter. It has to be:
1. balanced in outlook
3. short enough for clients to get through comfortably but long enough to be substantial
4. supported by facts
5. indicative of the advisors voice and personality
On this last point, if you like the basic structure of the letter, you MUST take the time to customize it to your own philosophy and outlook — I can’t emphasize this strongly enough.
April 12, 2010
“I have no idea what the stock market will do next month or six months from now. I do know that, over a period of time, the American economy will do very well and investors who own a piece of it will do well.”
Warren Buffet in an interview on CNBC on Friday, October 10, 2008
After the market roller coaster of 2008 and 2009, the first quarter of 2010 has been blessedly uneventful by comparison — the markets ended the first quarter about where they started the year, although up almost 60% from their lows of a year ago.
That said, there is still a cloud of uncertainty that is making many investors nervous.
Causes for concern … and for optimism
Even with the stabilization of the global economy, there’s no shortage of short term causes of concern:
… continued questions on the direction and timing of the economic recovery in the United States and Europe
… US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high.
… and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits.
Here’s a New York Times article about the IMF’s views: http://www.nytimes.com/2010/03/22/business/global/22imf.html?scp=1&sq=lipsky%20imf&st=cse
The good news is that there are offsetting positives, even if the media headlines that feature them aren’t quite as prominent:
… on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007.
… on the same day the Financial Times ran a similar story about dividend increases in Europe
… and there’s growing attention to the impact that Germany’s emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn — and questions about whether this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success.
Forecasting the future
Whether you choose to focus on the positives or the negatives, there’s broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago — and there is almost no talk today of a global depression.
So the issue is not whether the economy will recover, but when and at what rate –and whether there might be another stumble along the way.
If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead … this week, this month, this quarter.
We refuse to participate in that speculation — when it comes to short-term predictions, whether about the economy or the stock market, there’s one thing we can say with virtual certainty: Most of them will be wrong. Quite simply, no one has a consistent track record of successfully forecasting short term movements in the economy and markets.
Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.
Advice from Warren Buffett
In an investment industry poll a couple of years ago, Warren Buffett was voted the greatest investor of all time; among the runners up were Peter Lynch, John Templeton and George Soros.
Buffett’s returns are a testimony to the power of compounding. From 1965 to the end of 2009, the growth in book value of his investments averaged 20% annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. By contrast, that same $10,000 invested in the US stock market as a whole, returning just over 9% during this period, would be worth $540,000.
In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully — having a sound plan and sticking to it. He went on to say that of these two, it’s the “sticking to it” part that investors struggle with the most. The quote at the top of the letter, made at the height of the financial crisis, speaks to Buffett’s discipline on this issue.
I try to apply that approach as well — putting a plan in place for each client that will meet their long term needs and modifying it as circumstances warrant, without walking away from the plan itself.
Boom times such as we saw in the late 90’s and scary conditions such as we’ve seen in the past two years can make that difficult — but those conditions can also represent opportunity. Indeed, in his most recent letter to shareholders Buffett wrote that “a climate of fear is an investor’s best friend.”
Five core principles that shape our approach
On balance, I share Warren Buffett’s mid term positive outlook, not least because many of the positives that drove market optimism two years ago are still in place, among these the continued emergence of a global middle class in developing countries like Brazil, China, India and Turkey. This educated middle class will fuel global growth that will make us all better off.
In the meantime, here are five fundamental principles that we look for in money managers and that drive the portfolios that we believe will serve clients well in the period ahead.
1. Concentrate on quality
The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a “junk rally”, with the lowest quality companies doing the best. That’s unlikely to continue– that’s why I’m focusing my portfolios on only the highest quality companies, those best able to withstand the inevitable ups and downs in the economy.
2. Look to dividends
Historically, dividends made up 40% of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find — one piece of good news is that today it’s possible to build a portfolio of good quality companies paying dividends of 3% and above.
3. Focus on valuations
Having a strong price discipline on buying and selling stocks is paramount to success — history shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems, Intel and Microsoft ten years ago are still down down 40% to 70%, not because these aren’t great companies but because the price paid was too high.
4. Build in a buffer
Given that we have to expect continued volatility, we identify cash flow needs for the next three years for every client and ensure these are set aside in safe investments. That buffer protects clients from short term volatility and reduces stress along the way.
5. Stick to your plan
In the face of economic and market uncertainty, another key to success is having a diversified plan appropriate to your risk tolerance — and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that’s the only way to achieve your long term goals with a manageable amount of stress along the way.
In closing, let me express my thanks for the continued opportunity to work together. Should you ever have any questions or if there’s anything you’d like to talk about, my team and I are always pleased to take your call.
Name of advisor
P.S. If you’re interested, here’s a link to Warren Buffett’s 2010 letter to investors: http://www.berkshirehathaway.com/letters/2009ltr.pdf
Tags: American Economy, Climate Of Fear, Cnbc, Compendium, Deputy Director, Economic Recovery, First Quarter, Five Elements, Global Economy, International Monetary Fund, Lows, Optimism, Period Of Time, Roller Coaster, Six Months, Stock Market, Target, Unemployment Levels, Warren Buffet, Warren Buffett
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