Tags: invest | economy | fed | stocks

Time Could Be Running Out for 'Wait-and-See' Investors

Time Could Be Running Out for 'Wait-and-See' Investors
(Dollar Photo Club)

By    |   Wednesday, 03 February 2016 08:47 AM

Strange things are happening in the markets these days.

No doubt, this is a situation that raises many legitimate questions, especially among long-term investors, and unfortunately, for which clear answers aren’t available yet.

Maybe we could get some hints from the biggest bank group in Switzerland UBS that just announced its dividend for 2015 at 85 centimes (Swiss francs) per share, which was up from 75 centimes for 2014 and that beat estimates.

At first sight surprisingly, UBS shares tumbled on the news in Zurich, Switzerland by 6.8 percent, which is their biggest decline in more than a year.

When we look a little bit deeper in the information UBS provided us, we see UBS wealth-management unit, which is the bank’s largest unit and that saw its pretax profit falling 47 percent to 344 million Swiss francs or about $338 million from a year earlier, and at the same time, and which could be much more important, the unit saw 3.4 billion francs or about 3.34 billion of net new money outflows, which is a situation that hasn’t happened since Q2 of 2010.

When we take into account that the UBS wealth management unit is considered as one of the biggest wealth managers in the world, and that unit lost more client assets than it gained during Q4 of 2015, then there are some red lights that start blinking.

I must say the answer the UBS group CEO Sergio Ermotti gave on the subject was enlightening, “The three months through December has been the ‘most challenging’ quarter the bank has experienced in several years. No matter how you look at it, risk aversion is still very high. Clients know they should invest more, but cash helps them sleep better at night. While the long-term outlook remains sound, they are questioning the predictability of tomorrow.”

And yes, herein lays precisely the crucial question for all long-term investors as only very few have really a solid (risk-tested) idea of where we could be (in my opinion are) heading, economically and financially speaking of course?

That said, and we have then Goldman Sachs who writes in a just published study: “Over the next 2-3 years, we expect the Bear arguments to overpower the Bull arguments and weigh on high-versus-history margins as input cost benefits are competed away, room for further cost cutting shrinks, the headwinds of greater competition (from asset-light business models and EM competition) gather momentum, interest costs bottom out and social/regulatory pressures become a more sizable part of P/L statements. Consensus forecasts for 2016 and 2017 net profit margins for the US, Europe and Japan are currently 1-2 pp higher than the last five-year average margins, but these expectations will be tough to meet, in our view ... if we are wrong and high margins manage to endure for the next few years (particularly when global growth is below trend), there are broader questions to be asked about the efficacy of capitalism,” and states because it may have to question capitalism itself.”

Yes, Goldman Sachs puts in question capitalism, as we know and practice it in the West, itself.

Now, over the last decade we have seen well above historical averages corporate profits supporting equity markets.

For example, in the U.S. post tax profits represented 10 percent of GDP in 2014 (it was about 5 percent in 2000) and all this while we experienced sub-trend GDP growth, a disinflation environment, overcapacity and competition coming from the emerging economies.

Maybe long-term investors could do well asking themselves for how long the industries’ spectacular “margin progression,” as we have seen over the last 10 years, will be able to go on knowing it was driven by, but not exclusively:
  • Overall commodity price inflation;
  • Production cost arbitrage for manufacturing through the Emerging Markets;
  • The Emerging Economies’ growth exposure in consumer- and luxury goods;
  • The increasing role, and still not well priced in, of tech-driven operating leverage.
And maybe one of the biggest historical misallocations of funds has been the fact markets have rewarded, which is understandable, the corporates in the Developed Markets that focused mainly on buybacks of their own shares (thanks to financial engineering and cheap money) and M&A instead of spending their resources on Capital Expenditures (CAPEX)  and/or Operating Expenses (OPEX).

This period apparently seems to be coming to its end and that will profoundly change markets’ rewards over the short to median term.

Maybe the wealthy investors at UBS with their “wait and see” attitude that clearly emerged during Q4 of 2015 could give long-term investors a prudent hint of what could be best for conserving of what they have today.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Strange things are happening in the markets these days. No doubt, this is a situation that raises many legitimate questions, especially among long-term investors, and unfortunately, for which clear answers aren't available yet.
invest, economy, fed, stocks
Wednesday, 03 February 2016 08:47 AM
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