The editorial comment in the Business Times last week suggests that (some) readers feel the paper is too pessimistic about events in the country. There was (and always is) plenty to be pessimistic about. Not only Sri Lanka, but the entire world led by high income countries are currently engulfed in suspended animation reeling from the Great Recession. A healthy dose of pessimism should be part of any good investors DNA. How do you ask difficult questions if you are an out-an-out optimist? Sometimes, smiles just aren't what the situation demands.
 Yet in recent years it feels like we've all been ordered to "think positive" by an army of experts in any number of fields. Doctors inform us that optimism improves our health and helps us live longer, reduces the risk of stroke, even. Corporate coaches advise us that optimistic employees earn more money and climb the career ladder more quickly. "Positive psychology" researchers broadcast studies showing that optimistic people are happier and have more friends. In every way, it seems, optimists bask in the sunshine of the world's approbation, while pessimists mope in the shadows.
We view optimism as an unqualified good, an all-purpose remedy for everything that ails us. But a more nuanced view is emerging from the lab. Researchers find that optimism and pessimism operate not only as fixed points of view but also as mind-sets we can adopt as needed, rose- or blue-tinted lenses that we can put on and take off depending on the situation. Such a targeted use of optimism may actually be more effective than a blanket policy of all optimism, all the time, particularly when it comes to investing.
Pessimism has a negative connotation which no one wishes to associate. Cautious optimism is a cute way for society to explain pessimism. Science is clearly showing that pessimism and optimism are a state of mind as opposed to a fixed personality type. Research also shows that pessimistic investors weigh and take a multidimensional approach to risk analysis than do optimists. In sideways and down markets pessimists will continue to triumph optimists, as long as their risk assessment is correct.
For those investors who do operate from a pessimistic frame of mind 2012 would not be that different to 2011. The problems of the high income countries are well documented and need no repeating here. Needless to say that Eurozone and the UK will be in deep recession for most of 2012 driven by ideological austerity measures. In the Eurozone, however, this shift to fiscal austerity is running alongside a still bigger experiment: the construction of a currency union around a structurally mercantilist core among countries with negligible fiscal solidarity, fragile banking systems, inflexible economies and divergent competitiveness.
The US will surprise most observers on the upside. As this columnist has always argued Schumpeterian growth in the long run wins over Ricardian growth. Translation: The US is still the world epicenter of scientific discovery and innovation. As long as crazy politicians don't interrupt, it will still be the pre-eminent economy in the world. Although small, the US recovery will be one strong silver lining in an otherwise difficult year. The economy will be mere sideshow as a presidential election which can unite or give us four more years of bickering beckons. With Republican self-destruction assured via yet another weird ticket, the incumbent President Obama (most undeservedly) is likely to be returned, unless Europe falters and US unemployment gets closer to 10% come October.
With near zero interest rates for the four most traded currencies, commodities, especially soft and oil should hold on to current artificially elevated levels. Most trends next year will put structural demand headwinds for both oil and metals. Oil will suffer as more Natural Gas is tapped and crude based systems are converted to gas in high income countries. Other commodities will cool as demand from China cools off the back of overall domestic adjustment.
What does all this mean for a pessimist's investment strategy? Short duration term deposits and fixed income investing in all currencies and especially Rupees. The Rupee has to either go down or interest rates need to come up; neither are attractive options for savers. This will be forced via a US dollar liquidity crisis enveloping much of Asia off the back of European banks shutting credit to markets outside Europe. With inflation running at 10% (provided oil remains stable) and an equity risk premium of 6% (being very conservative), prospective returns from stocks need to be at least 18% to give you an absolute return of zero.
This is clearly not achievable. For all the reasons outlined in these columns throughout 2011, domestic shares remain the weakest and least attractive of all asset classes.
Property would have been a fantastic inflation hedge. Unfortunately, since the state has taken away the guarantee of private property rights, its best investors put off any plans until the laws become clearer.
NRFC account holders may have a winner amidst the $US liquidity crunch. With local banks desperate for cash, investors will be able to negotiate attractive terms even if official US rates remain low. Commodity currencies ($A and $CD) will weaken as China slows and if the $US liquidity crisis continues to the second half of 2012. The brightest spark for those investors who can access them are in foreign developed market shares, especially those in the US.
This may all be in vain. After all this columnist is currently a quintessential pessimist, who got 8 of 10 calls right in 2011 to help investors. Even an optimist should find that a decent score.
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com) |
E-mail
