Summit Notebook

from Global Investing:

BRIC: Brilliant/Ridiculous Investment Concept

BRIC is Brazil, Russia, India, China -- the acronym coined by Goldman Sachs banker Jim O'Neill 10 years back to describe the world's biggest, fastest-growing and most important emerging markets.  But according to Albert Edwards, Societe Generale's uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets' underperformance in 2011 and 2010, might be inclined to agree -- stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.

For years, money has chased BRIC investments, tempted by the countries' fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent  since 1993 but the compounded  return on equity investments was minus 3.3 percent.

But economic growth -- the BRIC holy grail -- is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year's 7.5 percent. Indian growth is  at the weakest in over two years. In Russia, rising discontent with the Kremlin -- reflected in post-election protests -- carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world,  is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012.  "Yet investors persist in the BRIC superior growth fantasy...If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe," he writes.

Thomson Reuters data earlier this year appeared to show some disenchantment with the BRIC concept. After rising 1600-fold between 2003 and 2007, assets in BRIC funds had shrunk to $28 billion by August 2011, almost a quarter below 2007 peaks, a bigger fall in percentage terms than most other fund categories.

What of O'Neill, the man behind the moniker? He talks increasingly of Growth Markets, a broader grouping that also includes other promising emerging countries such as Turkey and Mexico. But at a Reuters investment summit this week O'Neill noted that the main reason for BRIC stocks' underperformance has been a massive monetary policy tightening exercise in all four countries, prompted by rising inflation.  With that at an end and valuations cheaper than they have been for a long time, he expects the BRIC markets, especiallly China, to do better next year despite slower growth. Time will tell.

from Abhiram Nandakumar:

Stories of intuition and hope

Infosys’ head honcho S.D. Shibulal revealed he is an INTJ type.  It is hardly surprising then that Shibu, as he likes to be called, was one of the pioneers of the Global Delivery Model – corporate speak for outsourced IT services.

INTJ (short for Introvert, Intuition, Thinking and Judgment) is a rare personality type based on psychoanalyst Carl Jung’s works. INTJ personalities are self-starters, preferring to work alone without an authority looking over their shoulders and meticulously plan their activities to achieve success.

Shibulal’s thoughts on M&A and his company’s margins reflect his INTJ traits.

“M&A is like falling in love. There is no plan like falling in love!” he said at the Reuters India Investment Summit.

Considering it has only made three acquisitions over the last five years, Infosys clearly doesn't fall in love easily.

Still, Shibu said the Indian software services behemoth “is comfortable spending 10 percent of its revenue on acquisitions.”

from Abhiram Nandakumar:

A garage, a beaker and a Bunsen burner

Kiran Mazumdar-Shaw, one of India’s most influential businesswomen and among the world’s most powerful women, says she’s an accidental entrepreneur.

Mazumdar-Shaw has shown that modest garage start-ups can extend beyond software and hardware companies. She set up what is now India's largest listed biotechnology company in 1978 and she encourages others to follow suit.

“Today a lot of early stage research work can be done in a garage,” she said at the Reuters India Investment Summit.

Mazumdar-Shaw reckons opportunities for bio-tech startups are huge, considering the demand for sophisticated technology like genomic based systems, diagnostics for cancer stem cells, and high-end synthetic biology. All these are usually developed in small labs across the country.

“What I find today is that there are a large number of very innovative young biotech entrepreneurs who are doing things in a very small way. CellWorks is doing very interesting work on drug design.”

Her advice to budding entrepreneurs – If you have a novel idea and are looking to set up a business, don’t think twice, just go for it.

from Ask...:

Did Bernanke deliver?

Federal Reserve Chairman Ben Bernanke went where no sitting Fed chief has gone before - a live regularly scheduled press conference.

Did Bernanke deliver the transparency markets are looking for, or are things just clear as mud?

Ag committee chair says new faces mean new dynamic on Capitol Hill

They are new, enthusiastic and changing the environment on Capitol Hill.

House Agriculture Committee Chairman Frank Lucas says “do not underestimate the effect” of the large number of freshmen lawmakers on his committee, which will sit down to overhaul U.S. farm subsidies next year.

“This session of Congress is a little different from the ones I’ve participated in previously. A huge number of new members,” Lucas said at a Reuters Global Food and Agriculture Summit. “I’ve got a very enthusiastic bunch of new faces.”

It turns out that half of the House Agriculture Committee is new — 16 of 26 Republicans and 7 of 20 Democrats.

“Now, granted, freshmen Democrats are hard to come by,” he said, not missing a beat in taking a swipe at Democrats who were pounded in the November elections and lost control of the House of Representatives to Republicans.

“So literally 23 of the 46 members of the committee — no committee experience, no Farm Bill experience. It’s a slightly different dynamic as we go through the course of this year and next year,” Lucas said.

He said the large number of newbies will allow a focus on some issues that would perhaps have been more difficult if there were more senior members on the committee, with their own favorite causes. “It gives me an opportunity, with a very enthusiastic bunch of fresh faces, to conduct a lot of very necessary oversight on the committee this year.”

HK Exchange’s Arculli plays it cool

Spilling a piping cup of hot coffee down yourself in front of a room of journalists seconds before they start firing questions at you isn’t in your standard media training handbook. But 72-year-old Hong Kong Exchange Chairman Ronald Arculli, isn’t a man who gets easily ruffled. While the Reuters reporters went off in a frenzy bringing in tissues and mopping down the table, he just sat there keeping his cool,having not got a drop on his crisp white shirt or tie.

Aside from his role at Hong Kong Exchange, Arculli is a senior partner at law firm King & Wood, and his legal training shines through in interviews.

Asked what the exchange’s biggest weakness was – he thought for a while and then replied “I think in some ways our strength may be our weakness”.

Talking about the threat posed to Asian exchanges by the alternative trading venues starting to emerge in the region he went into a highly detailed analysis of how they’ve developed in Europe and the U.S, before cutting them down with an erudite, “but their business model doesn’t seem to propel them to great financial success”.

Arculli is a man used to prizes, he’s been named in the UK Queen’s Birthday Honours List and received Hong Kong’s highest award, the Grand Bauhinia Medal. But if he feels landing a mega-deal for his exchange could be a lasting legacy, he’s not prepared to show it yet.

“We don’t see that equity is necessary a component of any possible co-operation,” he said, when discussing potential tie-ups for the exchange.

from Blogs Dashboard:

When is a threat not a threat?

By Kirstin Ridley

British bankers are not threatening to head for the Swiss hills. But that doesn’t mean they won’t pack their bags. So says Angela Knight, the head of the British Bankers Association. Knight told the Reuters Future Face of Finance Summit that if British-based banks such as HSBC, Barclays and Standard Chartered consider whether to keep headquarters in London – given the banker bashing, punitive taxation and pay restrictions imposed here -- that is merely a fact.

Speaking one day after Europe’s largest bank HSBC cut profitability targets as tougher bank regulations eat into earnings, Knight conceded that she did not expect banks to move lock, stock and barrel to Geneva – and that images of jumbo jets laden with London bankers in pinstriped suits were mere “cartoons”. But she said the simple truth was that the British economic growth lagged that of peers, while fixed costs were rising. Britain was not an obviously attractive place to be for bankers. To remain an international financial centre, the country needed to be clever and get its regulation right. Banks, she said, were just telling it as it is. “Is there an expectation that employment in banking will be reduced? Yes … Is there an expectation that sentiment will turn around? No,” she said. “We are living in a country and a region where the costs of operation are high and (there is) a lot of personal condemnation (of the banking industry)... so I think that we cannot pretend that somehow that has no effect and no impact.

“Why anyone calls it sabre rattling, I do not know, other than the fact that they must themselves be in denial,” she said. “Because these are just facts. These are not threats, they are not sabre-rattling. They’re not pretence. They are straight forward facts.”

So how plugged in is the SEC chair? (technologically speaking)

Securities and Exchange Commission Chairman Mary Schapiro says her agency has its work cut out to compete with the massive amounts of money that private firms, policed by the SEC, pour into the latest technology.

“Can we keep up with Wall Street? I think we have a fighting chance. We’ll never have, under any circumstances, the kind of budgets that would allow us to spend a billion dollars a year on technology as some firms do, I mean that’s just not going to happen, and I totally understand that,” she said at the Reuters Future Face of Finance Summit.

“If we can build a forensics lab for our enforcement people to be able to download data off of iPhones and iPads and other instruments, then we will be a lot better able to pursue insider trading potentially and other securities law violations,” she said.

So how technologically plugged in is the SEC chair personally?

“I have an iPad,” Schapiro said.

“No I don’t do Twitter, I don’t have a Facebook page. You know, in my position it would be complicated,” she said with a laugh. “So maybe I’m kind of middling in terms of technology.”

Her agency has a Twitter feed and a Facebook page in development.

from Chrystia Freeland:

Barton and Kleinfeld’s tips for Uncle Sam

During the depths of the financial crisis, Alcoa announced that it would lay off 13% of its global workforce, or about 13,500 people. Since then, they have built up their presence in China and Russia, finalized a new mine in Brazil, and started construction of the world's largest aluminum facilities in Saudi Arabia. Alcoa's rate of job creation in its home country of the United States, however, has been rather tepid in comparison.

Alcoa CEO Klaus Kleinfeld acknowledged that prospects for his business today were better abroad than they were at home, but he did note that in the past year Alcoa hired 1,500 people in the U.S. in the automotive and aerospace industries and so long as the United States retained its sense of entrepreneurship, creativity and excellence in higher education, jobs will come.

Dominic Barton was similarly sober about the current state of the U.S. labor market, saying that it's currently undergoing an acute phase of creative destruction. However, he urged the audience to focus on long-term job growth, citing the example of Samsung in the wake of Korea's financial crisis in 1997:

Samsung.  In 1997 there was massive layoffs that were going on. So if you looked at them with the lens of what happened in that crisis, yep, they laid off a lot of people. The number of jobs they've created since because of the investments that they've made is many, many multiples of what they've lost. But they're different people. I think that what we need is this. There is restructuring, and there always will be restructuring. We can never get away from that.  But what's -- what are the conditions that are in place in the country to enable jobs to be created? And that's something where I think business can help play a role. Not to subsidize jobs when they shouldn't exist, but to help create the conditions to do it.

Towards the end of the Newsmaker, Chrystia steered the conversation to the relationship between the business community and the Obama administration. Klaus Kleinfeld observed that after a period of remarkable coordination during the financial crisis, government policy since then become less responsive to current developments and that the "societal dialogue" has become more "stratified." Dominic Barton agreed and offered his own solution to this problem:  stripping elected officials of some authority over issues of economic competitiveness and handing it to technocrats who will be able to administer policy over a time-frame longer than the next election. Countries like Malaysia and South Korea have lessons to teach the United States in terms of of streamlined policy-making, Barton said:

from Chrystia Freeland:

The revolutionary significance of job growth

It was striking to hear how encouraged both Klaus Kleinfeld and Dominic Barton sounded when Chrystia asked them about the effects of the recent turmoil in the Middle East on the business environment there. Barton believed the regime changes in Tunisia and Egypt were "the dawn of a new good thing that's occurring" and noted that it is likely that new capital will come into these countries as a new leadership emerges. Kleinfeld, whose company is in the process of building the world's largest integrated aluminum system in Saudi Arabia, said that Alcoa is still very comfortable in the region and that the only surprises with their Saudi partners have been positive surprises. For Kleinfeld, the most assured way to bring about stability in a region plagued by unrest is to have businesses come in and create jobs:

If there's one thing that the Middle East needs particularly for the young -- as well as well-educated people -- it's jobs. And it does it in a region which typically has not had much of an economic growth around Ras Azzour. So that's all very, very good. And not just for us as a company but also for the region. And it's gonna have a stabilizing as well as a kind of uplifting, positive element

Like Saudi Arabia, China has a large population that accepts a level of repression so long as the leadership can deliver economic growth. Barton, a China expert who headed McKinsey's Asia operations before ascending to the consultancy's top spot, said that he did not think that dissent in China would spillover and create a Middle-East-style uprising because the Chinese Communist Party has been able to stay on top of job growth. He had an interesting anecdote about McKinsey's study on the effectiveness of China's stimulus plan that illustrated the leadership's obsession with maintaining growth:

During the financial crisis, there was a stimulation program that was being put in place. And we'd been asked, almost ordered to do work to figure out what sort of discount should you put on TVs in tier three cities? It was a very focused question. And the reason was they were trying to create consumer demand in a very sophisticated manner. Do you sort of drop the price by 25 percent or do you have people buy it and they get a 25 percent rebate from the mayor? That was literally the thing.

And as we were talking about this I was amazed at how sort of precise it was. I said, you know, we gotta make sure that the impact is there and how we do -- sort of doing the McKinsey thing, we wanna make sure this happens. And this guy said to me, "I think we have a different definition of impact than you." And I said, "What's that?" And he says, "If this doesn't work, we're gonna have probably 12 million people that won't have jobs. And you should know that all of the revolutions in our 5,000 year history have occurred in the countryside."

And so there is a revolution -- it -- so he was just trying to explain to me we understand how important this is, you idiot, basically.

Posted by Peter Rudegeair.