Stocktake: O’Neill plays the letters game

Former Goldman Sachs economist Jim O’Neill

Former Goldman Sachs economist Jim O’Neill


Former Goldman Sachs economist Jim O’Neill, who popularised the Brics (Brazil, Russia, India, China) as an investment concept, is now making the case for Mint (Mexico, Indonesia, Nigeria, Turkey).

O’Neill, who once joked he didn’t want to be remembered as “the guy that just constantly created acronyms”, had previously talked of the Mist economies (same as Mint, except for South Korea instead of Nigeria).

He was also involved in Goldman’s gimmicky-sounding Next 11 fund (the next 11 emerging economies).

O’Neill is not alone. Citigroup came up with the Carbs (Canada, Australia, Russia, Brazil, South Africa); Blackrock introduced the Cassh economies (Canada, Australia, Singapore, Switzerland, and Hong Kong).

Others made the case for the Ticks (Taiwan, Israel, Chile, Korea).

Then there are the Civets – Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa – named after the Indonesian cat-like animals that eat coffee cherries and then egest them.

Civet coffee is famously expensive, due to high demand among westerners attracted by the colourful story.

Coffee geeks will tell you the coffee is mediocre and over-hyped.

The same could be said of the Brics (“bloody ridiculous investment concept”, said Société Générale’s Albert Edwards), and investment acronyms in general.

Consensus expectations are already priced in
The main problem with such concepts is there is little correlation between GDP growth and stock prices, as a recent Vanguard report confirmed. The report, which examined long-term market returns and GDP growth in 46 countries, found real equity returns averaged 4 per cent annually in the countries with the three highest GDP growth rates, compared to 4.2 per cent for the countries with the lowest GDP growth rates. The economic high-fliers, despite growing five times faster (8 per cent compared to 1.6 per cent), proved poorer investments.

Why? Mainly because consensus expectations are already priced into equities. Unexpected growth can drive equity gains, but predicting growth surprises, the paper notes, “is very hard to do”. Investors “should avoid making portfolio decisions based on their expectations for a particular country’s or region’s economic prospects”.

All-time US highs create ‘reluctant bulls’
US equities may be at all-time highs and global stocks at six-year peaks, but there’s no exuberance among investors, according to Merrill Lynch’s latest monthly fund manager survey.

More than two-thirds regard US stocks, which have soared 25 per cent in 2013, as expensive. More than half see global indices (up 20 per cent) as expensive – the first over-valued verdict in almost 10 years.

Accordingly, cash balances, at 4.6 per cent, are very high. Anything above 4.5 per cent is a buy signal for stocks, says Merrill, with sell signals recorded when cash balances fall below 3.5 percent.

Investors are “reluctant bulls”, said Merrill’s Michael Hartnett.

“Who would have thought all-time highs in US stock prices would coincide with high cash levels?”

It is quite bizarre, and contrarians will see it as evidence the current bull market is not about to top out anytime soon.

However, note that just days before the fund manager survey’s release, Merrill cautioned that its composite Bull & Bear Index, which measures global investor sentiment, was near a “cautionary sell signal”.

The index stood at 7.2, up from 1.8 in July and just below the 8.0 reading that has historically preceded near-term drops of 5 to 8 per cent for global equities.

Still, the fund manager survey indicates any decline will be brief, with enough money on the sidelines to catalyse further market gains.

On the billionaire bandwagon
Investors have a new index to choose from – the iBillionaire.

The index, which consists of 30 large-cap stocks bought by 10 billionaires such as Warren Buffett, Carl Icahn and John Paulson, would have produced annual returns of 12.6 percent over the last eight years, compared to the S&P 500’s 7 per cent, say its founders. An exchange-traded fund (ETF) will follow.

It’s an underwhelming idea. The index will track the holdings of billionaires, but investors needn’t disclose their positions until 45 days after a quarter ends. By then, the more active billionaires may be on the verge of selling. Secondly, investors also generate returns through hedging strategies, short bets and all kinds of other means the index cannot capture.

Most importantly, the investors may be billionaires simply because they had a good run of luck. Paulson, for example, made his fortune betting against the subprime market in 2007 but endured a disastrous 2011 and 2012. Yesterday’s winners are all too often tomorrow’s losers.

Too much stock in good looks?
A new study has found stocks jump following chief executive interviews on CNBC only to give up their gains in the following days.

Gains didn’t always fizzle out, however. Apparently investors “keep on buying if the interview was both carried out by attractive anchorwoman and was watched by more male viewers”.


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