Being a portfolio manager in the 80s and 90s was easy. The chart below shows how well investors in stock and bond markets fared in the 80s and 90s. Everyone knows what a disaster being a stock investor was in the late 60s and 70s. That was the first secular bear market since the Great Depression. In 1966 the Dow Jones was hovering around 1,000. In 1982, it was still there, hovering around 1,000. After adjusting for inflation, the results were even more disastrous. The early 80s saw Time magazine quoting “The Death of Equities” and other similar headlines (great contrarian indicator in retrospect). This of course coincided with the start of one of the greatest bull markets of the 20th century, as equity markets bottomed in 1982 and staged one of the greatest rallies on record.
From 1982 until 1999, US equity markets suffered only 1 negative year! And that is factoring in Black Monday – the one day market correction of over 20%! The average annual return for US stock markets during this period (total return) was 18.6%. Even being conservatively positioned in bonds, investors saw great returns. The Lehman Aggregate returned 9.5% average annual returns during the same period. Like I said, being a portfolio manager in these years was easy.
The Good Times: Stocks (black) versus Bonds (amber) in the 80s and 90s
The current decade was another story. Since January of 2000 (through November 2009), Equity investors are still underwater even factoring in dividends. The annualized return during this period is -1.5%, or a total loss of -14.3%. How have bonds fared? Far worse than the previous two decades, but still a respectable 6.5%. This has been one of the most trying times in recent memory for any investor. When looked at from a longer term perspective it is clear we entered another secular bear market some time in early 2000, and as history has shown, these can go on for many more years than investors are ready for. And just when you are ready to throw in the towel, a new bull market is born.
The Bad Times: Stocks (black) versus Bonds (amber) since 2000
For the time being however, it is clear that Buy and Hold is a disastrous investment strategy in a secular bear market. Investors will be rewarded for being dynamic, not static. Keeping a global perspective on investment opportunities and not having a dogmatic approach both to asset allocation (the mix to stocks, bonds, commodities) will aid portfolio managers who need to generate alpha over the coming years. Now is a time when portfolio managers will earn their salaries!
Cheap money does not cure all debt ills
Monday, November 30th, 2009The market reaction to Dubai last week seems emotionally driven and an exaggeration given the size of the problem. Concerns regarding a second round of the financial crisis due to Dubai should not be taken too seriously. Lehman for example had nearly $1 trillion in debt in its books when it collapsed.
Dubai has requested a “standstill agreement”, a likely precursor for a hoped-for debt restructuring. For weeks newspaper articles have been talking about the $80 billion debt overhang and Dubai’s inability to pay its debt that was coming due. The implied guarantee by Abu Dhabi is being tested and the lack of any support last week was surprising. This weekend’s actions by UAE fueled the reflex rally today in Asia (Hang Seng was up 3.3%, Australia was up 2.8%, even the sleepy Topix was up 3.6%). Good summary article from the FT about the UAE’s actions, but long story short the central bank is setting up an emergency liquidity facility (sound familiar?) to provide banks with fresh liquidity to offset fleeing capital after the shock of Nakheel (the real estate arm of Dubai World). Sadly this sounds too familiar, given the real estate bubble in Dubai, and the over-reliance on construction and real estate as a driver of their economy.
Pressure will definitely mount to not allow Dubai to default. The United Arab Emirates is comprised of seven emirates, the largest and richest of which is Abu Dhabi, the “senior partner” in the group, controlling 90% of UAE’s vast oil reserves. Not to mention that Abu Dhabi has the largest sovereign wealth fund at a little over $650 billion. It seems that Dubai’s problems can be solved by a check from its bigger brother, even though the bigger brother claims a blank check is not going to happen. There has clearly been a global central bank push to lower rates, which has encouraged a massive refinance wave to extend maturities. I agree that sufficient debt write downs are lacking, and the Dubai news highlights that cheap money does not cure all debt ills.
In conclusion, I don’t think this Nakheel issue poses a serious threat to derail the market rally. However it is evident how “spooked” the market can get (Shanghai A shares were down 7% last week), a sign that many market participants are skittish. As John Mauldin put it recently: “when anything as relative small as Dubai spooks the market, it should serve as a warning sign.”
Article from the Financial Times:
http://www.ft.com/cms/s/0/e9334100-dca8-11de-ad60-00144feabdc0.html
Tags: Dubai, investment strategy, market commentary, Nakheel
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