KastelCo, In case you are not confused enough, I received this in the e-mail, and I pass it on FWIW:
Talking Heads: Views from the top for 2004
Robert Parker, Deputy chairman, Credit Suisse Asset Management
The Financial News 01/05/2004
Copyright (C) 2004 The Financial News; Source: World Reporter (TM)
Heads of investment banks and asset managers give their views on 2003 and the risks and opportunities for the year ahead - from a crisis for the US dollar and embarrassing failures in the IPO market to a bloodbath in fixed income.
Lesson of 2003: The main lesson we took from 2003 was that strategically compelling, rational deals can and did happen where the fit was right and synergies could be achieved. I'm thinking of Alcan/Pechiney, Air France/KLM and Granada/Carlton.
Opportunity for 2004: This will be to identify correctly those sectors where circumstances conspire to precipitate an above-average level of corporate activity, as happened in the retail sector in 2003.
Risk for 2004: We will see the beginnings of a resurgence in initial public offering activity and, as tends to happen, this will result at some stage in a glut and indigestion. The biggest risk of the year, therefore, will be to mis-time an issue and be left with an embarrassing failure.
Mark Anson, Chief investment officer, California Public Employees' Retirement Scheme
Lesson of 2003: Patience will be rewarded. The California Public Employees' Retirement Scheme was patient in its investment plan that the credit markets and equity markets would rebound from a world-wide economic slump in 2001 and 2002.
In 2002, we began to position our portfolio to take advantage of depressed investment-grade corporate bonds, high-yield bonds and distressed debt. As the credit markets began to rebound in the latter half of 2002 and throughout 2003, our bond portfolio surged with our overweight to these bond sectors.
Similarly, we positioned our equity portfolio at the end of 2002 to take advantage of an expected rebound in 2003. We maintained an overweight in domestic and international stocks. While we did not predict the magnitude of the stock market rebound, we applied our capital patiently, waiting for the rebound to occur. Our confidence was rewarded.
Opportunity for 2004: We see opportunity in real estate, private equity and sovereign bonds. We believe that there will be more writedowns in real estate valuations in 2004. However, the real estate market will bottom out and in the second half of the year we will look for opportunities to add to our real estate portfolio. With respect to private equity, we have seen a pick-up in commitments drawn by our private equity partners.
We expect this to continue in to 2004 as economies around the globe gather momentum. The rebound in the domestic and international equity markets provides stronger equity currency for leveraged buy-outs and other corporate restructurings, as well as public exit strategies for private companies. Last, we like sovereign bonds. A declining dollar helps propel the returns associated with these bonds.
Risk for 2004: Rising interest rates. Right now, the only place for interest rates to go is up. We expect that this increase will be moderate. However, if the global economy heats up too quickly, central bankers may have to raise rates quickly to keep pace.
This will hurt investment grade bonds, Treasuries and the mortgage market. However, we expect the credit markets to remain strong as economies around the world continue to grow. This will be good for high-yield bonds and distressed debt which are more equity-driven. Sovereign debt should also outperform as the dollar stays weak and improving economics provide a strong backbone for tighter credit spreads associated with sovereign issues.
Phillipe Blavier, Head of corporate and investment banking, BNP Paribas
Lesson of 2003: The main lesson of 2003 was not a new one. Falling interest rates, tightening credit spreads and the prospect of an economic recovery are a friendly environment for investment banks. The combination of this friendly environment and the significant rationalisation measures which most investment banks have taken in the past two years has allowed them to perform well despite the fact that volumes in equities and corporate finance have remained relatively low.
Opportunity for 2004:The combination of an improved economic environment and a strong euro will create opportunities for large European banks such as BNP Paribas to accelerate their growth outside Europe in a booming Asia and, more importantly, in the US market. Risk for 2004: The main risk in 2004 is that the likely rebound in equities and corporate finance activity will not compensate for reduced activity in debt and interest rates markets. The main challenge will be to expand product platforms even further and to maintain constant innovation in order to deepen client coverage.
Alan Brown, Group chief investment officer, State Street Global Advisors
Lesson of 2003: Is your glass half full or half empty? Think back just 12 months. Weren't you full of worries at the time? Deflation; would the American consumer stop spending; war in Iraq. Instead, we have the US economy growing at 8% in the third quarter and the stock market up by more than 20% in the US and 10% in the UK. On top of that, since the middle of the year bond yields have risen a little, helping to eat into those pension deficits from the liability side. That is an outcome that I suspect we would have given our right arm for at the start of the year. And also one that most of us would have put a low probability on.
It makes me think a little humility is in order. Predicting markets in the short term is a difficult game, even if it is possible to make some sensible statements about the long term.
Paradoxically, the opposite may be true about individual companies. It may be a lot easier to have a view on a particular stock over the next 12 months and well-nigh impossible over the next 12 years.
Opportunity for 2004: If you are hearing the same voices as I am, it seems that we are nearly all agreed: equity markets will go up, but not by as much as last year. Bond yields and interest rates will rise, but not by much. And the dollar will continue to fall, but in an orderly way.
Wouldn't that be nice? And it is a perfectly plausible scenario. The US economy settles to nearer to trend growth. Europe and Japan manage modest recoveries. Interest rates and bond yields move off the bottom, not in response to material inflation fears, but in reflecting narrowing output gaps and a move back to more normal levels as deflation fears become a distant memory.
Risk for 2004: The risk is, of course, that all this sounds far too convenient and orderly. And just like 2003, it is quite likely that the eventual outcome will be one that we would not give the time of day to right now. What worries me today is that I really don't know what to worry about. Sure, I can speculate about the impact of a dollar crash, or once again get concerned about whether the US consumer can really keep going, but even then I may be missing the point entirely.
I prefer to remember that valuation levels are still high and that markets are probably discounting something like my rather rosy scenario. That leaves me to think that I need to be more concerned about potential disappointments than that the market will run away from us. Not time to leave the party, but time to remember not to get too carried away.
Bob Doll, Chief executive, Merrill Lynch Investment Managers
Lesson of 2003: The lesson of 2003 is that history repeats itself. In the economy, we have been able to observe that monetary and fiscal policy stimulus consistently results in eventual economic improvement, although the time it takes to work will vary. And within equity markets, we have seen that in the first phase after a significant market bottom, the best-performing assets are the highest-risk, lowest-quality investments. It's a function of investors taking their foot off the risk brake, allowing the risky assets to move up the most.
Opportunity for 2004: We believe the opportunity for 2004 is security selection. We don't think the markets will have the type of broad-based run that they had in 2003. It is going to be a selective market for stocks and bonds, and the difference will be earnings. Companies that deliver earnings will see their securities do well, and those that don't will underperform.
Risk for 2004: In our view this would be a back-up in interest rates. That obviously would be bad for bond prices, but it could also create some valuation challenges for equities.
John Fraser, Global chairman and chief executive, UBS Global Asset Management
Lesson of 2003: We must not be afraid to improve our organisations and this will inevitably mean changes for many firms. An asset management business must be run like a business. Effective organisational structures and focused growth and pricing disciplines, backed by reliable management information and support processes are essential. Remuneration must be competitive but set in the context of ensuring the viability of the business over the long term, thereby supporting longer-term career development.
Opportunity for 2004: There will be continued consolidation and restructuring of the asset management industry, with more polarisation towards global-scale managers at one end of the spectrum and niche or smaller organisations at the other end, focusing on particular investment capabilities or markets.
Insurance companies, other financial institutions and some medium-sized asset management firms, may decide to outsource non-core investment management activities to focus on more core activities. This all presents opportunities for large managers with a broad array of capabilities and a well-known brand. Innovation will be important - there is increasing demand for non-traditional investment solutions from institutional and high net worth individual investors.
Risk for 2004: The importance to the industry of restoring public trust following recent US regulatory scandals cannot be overstated. Asset managers must elevate compliance and risk control to a level that anticipates and exceeds regulatory standards. They also have an obligation to play an important role in improving the corporate governance of the companies in which they invest. The rising regulatory complexity will put further pressure on costs and, combined with competitive pressures on fees, may become a further force for consolidation in the industry.
Bill Gross, Chief investment officer, Pimco
Lesson of 2003: I've learned two lessons in 2003: One, that tax cuts and easy money can perform miracles in the short run. Long term is going to be another story. Two, that money changers (and money managers) make too much money.
Opportunity for 2004: I continue to remain optimistic about the cyclical outlook, forecasting a continued upturn in the US over the next six to 12 months with a positive spillover effect into global demand. Secular growth in China and India continue to be a dynamic factor. This revival will, however, either exacerbate or fail to redress secular imbalances such as the US current account deficit, structural rigidities in Europe and huge public sector debt in Japan. I am pessimistic that the upturn will be sustained beyond a cyclical timeframe because confronting these imbalances will constrain growth.
Risk for 2004: I would keep my eye on three things: the dollar, inflation and interest rates. A weaker dollar ultimately means higher US inflation and that is the enemy of the bond investor. As inflation moves higher, perhaps by 0.5% based on the currency levels that we're seeing, interest rates have to move up in accordance with that. At some point in the second half of 2004, fiscal and monetary stimulus in the US will lose its potency and the US economy will have to stand on the legs of the private sector. That will be the true test of the current recovery.
Bob Jenkins, Chief executive, F&C Management
Lesson of 2003: I think we were all reminded in the industry that reputations are hard won and easily lost.
Opportunity for 2004: For F&C there is a terrific opportunity to maintain momentum in organic growth and earnings growth.
Risk for 2004: The big iceberg in the marketplace is a bond debacle similar to 1994. There is a strong desire in the industry to believe that the worst is past. Everyone is educated to understand the ramifications of a bloodbath in the equities market, but they don't understand the ramifications of a bloodbath in the bond market. That is something that many pension plan sponsors and insurance groups that have retreated to bonds may not have prepared themselves for.
Wilco Jiskoot, Board member responsible for investment banking, ABN Amro
Lesson of 2003: Many large companies realised the importance of having relationships with their banks that were not purely transaction driven. In 2003, many companies found that access to capital was limited by market conditions and as a result of banks reducing the amount of capital they were making available to clients. As a result, both sides recognised the need for strong, focused relationships.
Opportunity for 2004: Providing the best advice and service to our clients. Economic conditions in Europe remain challenging, so we need to make sure that we are helping our clients take advantage of the opportunities that this presents to them.
Risk for 2004: The biggest risk is the potential impact of the US's burgeoning current-account deficit on the dollar. Though we are assuming a gradual managed depreciation of the dollar, there is a risk the dollar could fall more sharply and far more quickly than anyone expects, raising concerns over the financing of the trade deficit. This would be a big problem for Europe.
Joseph McAlinden, Chief investment officer, Morgan Stanley Investment Management
Lesson of 2003: Don't fight the presidential election cycle. Historically, the market tends to have a strong year in the third year of a presidential term. Usually there's an accommodative monetary policy and stimulative fiscal policy, and we had super-powerful doses of both last year. By the end of the first quarter, investors were ignoring those issues and worrying instead about events in Iraq. By mid-March, the market was down almost 7%. However, the easy money and tax cuts won the day. After the initial hostilities with Iraq, the market went higher. The lesson, to rephrase the old saying "Don't fight the Fed," is: "Don't fight the presidential election cycle."
Opportunity for 2004: The bad news is that it's not year three of the presidential cycle. The good news is that it is year four and year four is the second best of a president's term. The bull market should continue into 2004 for pretty much the same reasons. It's going to get additional underpinnings from the blossoming of corporate fundamentals, rather than just low interest rates and stimulative fiscal policy. This will show up in strong GDP growth, and higher corporate profits and dividends. That will extend the market's recovery.
Risk for 2004: The biggest risk is a potential blow-up in the foreign exchange arena. This could manifest itself in several ways. There could be a dramatic further decline in the value of the dollar. It could be tied to sharply higher valuations of the Chinese currency. Or the domestic inflation rate might suddenly accelerate because of weakness in the dollar. My guess is there's about a 10% chance of one of these happening. More likely, it will have a negative effect on the market in 2005 or 2006.
Interest rates will definitely go higher. Long rates will be up 50 to 100 basis points by the end of the year. The Fed funds rate will probably start moving around the middle of the year, and could be up 50 to 100 basis points by the end of the year.
Nicolas Moreau, Chief executive, Axa Investment Managers
Lesson of 2003: Many asset managers will see an improvement in their 2003 results, due to rising equity markets. However, this alone is not enough to sustain the industry - we must concentrate on our value-added and profitable activities, successfully combining innovation with discipline.
Opportunity for 2004: Unmet pension liabilities will continue to be a significant opportunity for the asset management industry. Institutional investor sophistication and requirements continue to evolve, offering excellent prospects for alternative asset classes and leading-edge investment management techniques. On the retail side, asset managers will benefit from renewed interest in equities. We can help tempt individual investors back into equities, but this must be done through advice-driven distribution platforms.
Risk for 2004: The asset management industry could face renewed financial pressures if the nascent global economic recovery should falter. Otherwise, regulatory and compliance issues must be properly addressed and asset managers need to do more to anticipate them.
Jean-Pierre Mustier, Chief executive, SG Corporate and Investment Bank
Lessons of 2003: It was a year of tremendous opportunities, where, after a slow start, exceptional conditions from equity to interest rates and credit markets were extremely favourable to most segments of corporate and investment businesses. This year has also seen the confirmation of the importance of the euro capital markets where for the first time euro-denominated bond issues surpassed the US dollar ones in volume.
Opportunity for 2004: While such an exceptional environment can hardly be repeated, 2004 is likely to put growth more firmly on the agenda. We see developments in capital markets led by a stronger ECM pipeline and continued fixed-income momentum. In derivatives, we think growth will be led by the renewed interest in equity derivatives, and in structured finance we expect to see investments picking up.
Risk for 2004: Macro risks - for example, US deficits, the level of the dollar, potential overheating in China - could temper our "born again" optimism.
Robert Parker, Deputy chairman, Credit Suisse Asset Management
Lesson of 2003: Don't chase markets. I'm thinking of the poor old insurance companies which, for one reason or another, were forced to reduce equity holdings in the first quarter, and I'm thinking of the global macro hedge funds that got clobbered by the bond market turnaround in June and July.
Opportunity for 2004: This year will be a difficult year - a lot of the obvious trades that generated performance in 2003 have happened. The decline in the dollar, the compression of credit spreads, and the equity market rally are behind us. The overall theme will be volatility collapsing and equity market returns won't repeat. In 2002, hedge funds underperformed bonds. In 2003, they underperformed equities.
In 2004, a sideways market could be great for hedge funds' performance, because it will be a great market for trading opportunities. If you buy the argument that capital gains will be few and far between, it will be a year for income, which means real estate, particularly on the Continent rather than in the UK.
Risk for 2004: A further fall in the US dollar. What happens if the guys who are forecasting the dollar at 1.30, 1.40 or even 1.45 to the euro are right? I don't think they will be, but if the dollar is at 1.40 that means a US with emergent inflation problems and Europe and Japan back in recession. So the thing to watch is foreign exchange markets getting out of control.
Andrew Pisker, Chief executive, Dresdner Kleinwort Wasserstein
Lessons from 2003:The industry has learned that controlling risk is as important as cutting costs. Another lesson: deepening relationships with clients and customers is key to maintaining profitability in an intensely competitive environment.
Opportunity for 2004: Firstly, we're likely to see increasing levels of activity in European mergers and acquisitions. Second, on the capital markets side, we will see the continued emergence of credit as a significant asset class rather than just a sub-set of fixed income.
Risk for 2004: The continued strength of the euro may continue to stifle economic growth and throttle the recovery in equity markets. The upturn in M&A and equities may not compensate for the slowdown in the fixed-income market.
Steve Schwarzman, Chief executive, Blackstone Group
Lesson of 2003: Buy companies in cyclical downturns and utilise liquidity and low interest rates to finance new acquisitions and to refinance existing deals wherever possible.
Opportunity for 2004: 2004 is a continuation of that opportunity but slightly different. Equity values have risen and interest rates are likely to increase so the opportunity for setting up transactions may be better in the first half.
Risk for 2004: The risk is that as interest rates and equity prices go up later in the year it changes the risk/reward equation.
David Stewart, President of European institutional business, Fidelity International
Lesson of 2003: How vulnerable pension schemes were, and continue to be, to equity markets in the light of pension holidays and the lack of contributions over the past decade. The importance of having a diversified portfolio and sticking to that strategy for the long term so that no one event derails the scheme.
Opportunity for 2004: To develop products to match the long-term inherent liabilities of pension funds. A combination of defined benefit and defined contribution options in hybrid schemes to ensure satisfactory funding levels for employees at an acceptable cost for employers. Simplification of the pension's regime.
Risk for 2004: The lessons learnt from the last three years might be ignored. Pressure on profits continues to reduce the contribution levels into company pension schemes. The move from defined benefits to defined contributions is entirely valid but is undermined if used to cut costs and lower contributions. We are asked to contribute to another review by the UK government and this is used as an excuse for more delaying tactics - which will result in more uncertainty and less saving.
Mark Whiston, Chief executive, Janus Capital Management
Lessons of 2003: We know we must work hard to earn our clients' trust every day - and now we're working even harder.
Opportunity for 2004: We'll continue to focus: working hard to restore the full trust and confidence of every Janus client; building on our improved performance; continuing to broaden our product line-up; and expanding our growing international business.
Risk of 2004: Amid the mutual fund industry investigation in the US, we and the industry as a whole need to ensure our focus remains squarely on the job we have been hired to do.
Nick Watts, Head of European investment practice, Watson Wyatt
Lesson of 2003: That pensions are not paid out of relative return and any benchmark ought to be liability-oriented. The industry should concentrate on investing for the long term more in line with the length of pension fund liabilities. Pension funds saw the benefit of increasing diversity in their portfolios by investing in alternatives and other new asset classes.
Opportunity for 2004: More absolute return investing particularly in long-term equity mandates and more in alternative asset classes. There is likely to be an increased focus on risk budgeting and commensurately a greater use of derivatives to control risk in the pension fund.
Risk for 2004: Increasing government legislation in the pensions industry. The hedge fund industry overheats and causes instability in the markets.
Andreas Utermann, Global chief investment officer, Allianz Dresdner Asset Management
Lesson of 2003: Last year proved that concerted policy action can work and that the old adage "it's always darkest before dawn" proved correct again. A fourth year of significantly down equity markets was avoided. China emerged for the first time as an important factor in the development of world economic growth but also inflationary developments. Currency movements such as the value of the Chinese currency and the euro/dollar exchange rates have become important factors determining policy as well as equity and bond returns.
Opportunity for 2004: The big bounce-back from oversold equity levels has occurred - 2004 will be a year for favouring stock picking. Currency movements will continue to present interesting opportunities.
Risk for 2004: An overheating in China or too rapid a slowdown; faltering recovery in Europe caused by sluggish reforms and too strong a currency; a sharp rise in yields across the yield curve, with the subsequent negative impact on business investment and the heavily indebted US consumer; and the geopolitical risks that we have become accustomed to but do not feel it appropriate to forecast. |
