Views

The markets are messy right now. I believed that the reason is that politics dominated genuine economic talk.

It would appear that politics has become the new currency rather than economics and the markets. That being said, it has become a zero-sum game where innovation and risk is put on the back-burner. The climate is therefore more survival than improvement.

I see more hand shaking and summits than I see real policy decisions. The reason would be that of fragmentation. Certain countries and blocs have become so fragmented that it has become atomized, so much so that even individual countries have a say in a larger blocs. The reason is derived from politics. The elevation of smaller power blocs unto a larger platform meant that a small interest conversely can have a proponderant influence on a larger sphere. This meant that critical and larger issues are ignored for the sake of rather particularistic interest.

This works well perhaps in markets but definitely not in politics, as the balance is always hung on a precarious thread. In markets, innovations can be found in narrow areas due to their rather democratic nature but not in politics where, it is matter of bartering and exchanging as change is a much bigger risk in the area than it is in markets.

Hence the idea of an political economy is not that politics is economics and economics is politics but rather they are interwined. It would take a long time to unpack the nuances of an political economy but sufficed to say is that one would not be able to do without the other.

Hence how then can one have allocate their assets in such a climate.

I have seen a couple of trends due to the above situation 1) The reflex action towards authoritarian or hardline rule. 2) Endless bargaining and bartering 3) Staying below the radar.

There are certain industries which are taking advantage of the fragmented nature and consolidating their positions in the markets. At the same time, on the political front- hardline and use of force appear to be modus operandi in combating the conflict-rifed fragmentation of societies. The former is not good for innovation and the latter is not good for markets.

Therefore, in the markets, innovation is subdued resulting from the restive political climate. Suffice to say launching new products appear to be suicide, as authorities appear more hawkish than normal. And likewise, risk is subdued and in this bitter climate, consumption appears to be on the rise. Investment has dropped and government spending reduced- as a result of negative press coverage on deficit expenditure- has pushed consumption to the forefront. It would therefore be not surprising that retail stocks often appear on current financial news program.

The problem with buying retail stocks is that you do not know much of the upside has been priced in the market. Earnings could be poor the last quarter and would appear expensive but what if there is a 50% jump in sales the following quarter, then in this case, the retail stocks would then be cheap in nature. If one were to be insist on buying a retail stock, my guess would be buy your favourite shop or luxury brands. At least you would not be swayed by market sentiments and the latter has become quite mainstream nowadays as wealth grew in many emerging economies.

2) Endless bargaining and bartering. The recent slew of partnerships in tackling markets has confirmed the zero-sum trend outlook in many companies. Even Apple called their new phone: just New iPhone 4 rather than iPhone 5 for fear of attracting unnecessary competition.

I believed this trend is the result of sharp distinction between what is "your's" and what is "mine". Crowdsourcing and other social sharing websites used to be "cool" even though more likely than not financially would be a hard sell. But now, dictators are cool. The show "Dictator"has demonstrated that. If crowd sourcing is uncool and dictator cool, what this means is that the crowd sourcing will die. Because they have even lost their alternative status, and they do not have sufficient clout to be mainstream.

What this means is that websites will require more security- which is not a bad thing actually- and would be more didactic than before. Conversely, you can expect traditional companies to be more innovative. Retro is in vogue. Traditional and lynchpin companies seldom produce groundbreaking new products but are more focused on their core products. Hence we can expect more re-invention rather than innovation.

The focus would would then be on tech companies emphasizing more on their designs than harping on their powerful specs. Previous tech stars like Facebook would focused on empahsizing their security and could take the opportunity to seek control on their information.

Innovation and creativity in such a climate appear to be more cosmetic than real. Hence where can we find the next big thing: emerging economies. The recent wave of fallen authoritarian rule and change of guards provide opportunities for multi-national companies with expertise to penetrate into these newly open economies. Providing infrastructure and other forms of expertise and services in the nation building process. The process would differ nation to nation but the trend is definitely towards privatization.

We all want novelty things and where do we find "new" things and ideas then. I do not believe that the tech companies are dead. This process towards centralization is probably more for companies would have already established themselves and are looking to protect their interest. The world wide web can only bigger, and there is always space for everyone. It is not limited by geographical boundaries but rather your ability to type the addresses on your keyboard. Innovation would still comes from here but expect established names to secure their positions. Probably being more "old-school" but not boring at the same time.

Hence in such a climate where there is widespread deadlock of exchanging and bartering, stay with high dividend stocks but be mindful of the price that you are paying. Anything below 3% for low risk investments and 5.2% for those with higher risk investment profile appears to reasonable. At the same time, take note of their history of paying dividends otherwise stick with investment trusts whose mandate is to pay dividends. Stocks appear to be poorer option for this. For those with access, bonds would be a better due to lower volatile nature and credit markets appear to be in disjuncture. Asian bonds looks expensive due to their relative unscathed deficit spending media coverage. Pick up instead corporate bonds from around the world where, pricing seems rather attractive due to low-key profile resulting from the emphasis on politics than markets.

3) Staying below the radar. Certain industries and countries are at the crossroads of going towards centralization or accept the "natural" progression towards democratization. Therefore, they have adopted a wait-and-see attitude. They are the ones that you do NOT see anywhere in the mainstream media because they would want to be neutral until the dust has settled before committing. Therefore exposing themselves would mean being forced a hand.

Such industries include therefore those that are more cyclical and are more conservative in their approach. They ride the wave on the uptick but exit before the peak, and stay on course in spite of downturn but probably exit before the bottom.

But stocks and many investment products are mostly sentiment driven. Hence despite their healthy outlook and relative strength in tackling a downturn, prices would still be dragged down along with the rest of the markets.

Such companies and countries are probably those with a strong balance sheet and have a clear identity of their company and at the same time which are nimble enough to manouveour around downturn. Therefore such companies and countries are probably those medium size in nature, and not market leaders but probably comfortable in their market positioning and have a stable and sizeable client base.

I believe that the key point is having a strong balance sheet: being nimble can be quite relative. The identity of course would then depend on the culture of the company. The stonger and more intense the focus, the more likely the company or country would stay on course.

Hence therefore even though the No 2s and No 3s would probably bear less brunt of the downturn, having a "wait-and-see" attitude for this group also means that they would be overly-conservative and does not augurs well for the long term prospect of the company.

Therefore the critical factor is the industrial make-up and how prolonged the down-turn is expected to be. The longer, the down-turn, the more entrenched the position and all the more likely that industry will remain status quo and all the more set the demise of of the industry as a whole. Therefore the company might be in a sunset industry for all we know and therefore the long term trend might not augurs well.

Hence choose a No 2 and No 3 in a fast moving and innovative industry, this would then ensure the competive-ness of the company.

If one is always biased towards No 1, then choose one with a strong balance sheet in a relatively small market where mobility might not have such a huge impact. Alternatively, focused on the culture of the company and even though, the industry and market might not be doing well, it's intensity and focus might just be able to find ways of coping with the downturn.

Depending on your strategy and outlook, the above can either be a strategic or tactical one.

Strategically speaking, it is always good to stick with the market leader but a small market means that a big fund might find it rather risky to focused on a small area. Therefore, in allocating the assets, stick with the above and find the smart, innovative and ambitious no 2s and 3s in a larger market and hedged the risk by buying their bonds instead of the stock outright. But I do believed this is a low risk move- as a strong company with a strong balance has a limited upside in the credit market-, a medium and higher risk taker should participate in the equity outright.

Alternatively, one can buy into a convertible bond with a low equity premium and surf the upside in uptick and if indeed the company proved to be a winner- it then can be converted to shares. But such a move would require one to be mindful of both the bond and equity markets, this would prevent one from suffering an arbitrage loss.

Tactically, neither is a good move as more likely the stocks will fall along with the markets.


Eugene

* Disclaimer: The above is my views and my views only. Hence any decision taken by you as a result of the above information is at your risk.