THE GREAT MISMATCH PART II: The Barriers to Efficient Capital Flows

Efficient cross-border capital flows—allowing investors to search for reliable returns, and in the process, meet legitimate capital needs wherever they are—would be a more effective way to finance the global economy than today’s system. In theory, few dispute this. In practice, many barriers have been erected that hamper efficient flows. The deliberate or inadvertent barriers to efficient global capital flows have been erected by a unique combination of regulators, governments, historical conventions and path-dependencies, investor mindsets and capital-seekers themselves (see below exhibit).


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Not game over for China

If popularity has its price, then major investors in China are now paying those consequences. Chinese stock markets have taken a plunge and continue to face a roller-coaster path of sorts. There’s no telling how long the ride is or what turns lie ahead, which means investors have been increasingly concerned over the uncertainty.

But it’s not the time to panic. It never really is. The foundation of investing isn’t and never was based on making flash gains. It’s always been about making strategic decisions for a potential haul in the long term.

We still believe in China’s potential because many companies still have attractive long-term growth prospects, in our opinion. The challenge for us as stock pickers, of course, is what to buy.

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The Great Mismatch: Addressing Barriers to Global Capital Flows

Executive Summary

Cross-border capital flows are at an inflection point. While in aggregate they
have not returned to pre-crisis high watermarks—primarily driven by a significant decline in bank lending—they are increasingly varied in their scope and direction. More countries around the world are seeking and providing capital across borders than ever before. And asset managers and asset owners—not just governments, corporations and banks—are becoming increasingly influential in determining the scale and stability of global capital flows.

Yet capital around the world is being deployed inefficiently—large pools are not getting the returns they should, even as many needs for investment, both public and private, go unmet. This “great mismatch” is driven by a confluence of governments focused on near-term electoral cycles and rent-seeking, emerging-market financial institutions lacking investment management expertise and depth, and investors prioritizing short-term gains over sustainable long-term investment priorities.

Correcting this mismatch represents one of the most significant opportunities for global growth over the next decade. Success will require both long-term institutional investors and policymakers re-thinking long-standing assumptions and re-shaping their role in global markets. This report provides the backdrop and lays the case for six key recommendations over both the nearer and longer term:

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China: Ecological Civilization Rising?

Returning to China for the first time in a quarter century this month was equally awe inspiring and terrifying. The observation deck of the truly gorgeous Shanghai World Financial Center is breathtaking, a fitting testament to China’s rise. But it was the unexpected sense that we might be experiencing history at DeTao Group’s summit in Shanghai, “Future New Economy: Sustainable Model Toward an Ecological Economy,” that left an indelible mark on me.

I had the honor to address the DeTao Group summit on the topic of regenerative investing in natural capital. Inspired by the vision and leadership of DeTao Chairman George Lee, it was an extraordinary experience. The warm hospitality and genuine appreciation and respect extended to all the visiting “experts” was quite exceptional. As George told me, “in Chinese culture, we honor our teachers.”

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Mongolia Investment Outlook

Mongolia is one of the world's fastest growing economies, with a year-on-year real growth rate of 7% in 2014. Recent growth has been primarily driven by development of new mining projects, growth in the real estate and agriculture sector, and an expansionary fiscal and monetary policy.

Mongolia's economy is highly dependent on trade with China. Economic growth has been negatively affected by a slowdown in the Chinese economy, which accounted for 94.1% of Mongolia's exports in 2013. In addition, Mongolia is dependent on Russia for all of its fuel and some of its energy needs, which makes Mongolia vulnerable to price pressure from Russia.

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Book Review: The End of Copycat China

CopyCat-ChinaIn 2005, Shaun Rein founded China Market Research Group, a strategic market intelligence firm based in Shanghai. Their clients included private equity firms, hedge funds, as well as Chinese businesses and multinationals. In the course of his market research, he comments, "As I traveled, I realized the changes and reforms were happening so fast that they were hard for people outside the country to follow." In his previous book, The End of Cheap China, and now, with The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia Shaun Rein shares with the readers his knowledge of the rapidly changing Chinese economy, and how businesses and investors are adapting, and must adapt.

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Book Review: China Goes West


The financial world lives to gain from new trends, to get out front, grab an edge, and bring in the profits before the trend matures and a lot of competition moves in. With this focus, Joel Backaler's new book is especially welcome in its description of, and insights on, the ramping up of Chinese overseas investments. China Goes West: Everything You Need to Know About Chinese Companies Going Global has detailed, sophisticated analysis of the Chinese companies that are expanding outward, and of what this can involve. It is a realistic picture rather than just a trend forecast.

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Book Review: Age of Ambition


Age of Ambition: Chasing Fortune, Truth, and Faith in the New China may be the best of the recent books on China. Author Evan Osnos was the Beijing correspondent for The New Yorker there, and his book is the record of an active journalist, "based on eight years of conversations." The resulting picture is of a large, dynamic country in the midst of rapid change, often in different directions. Osnos told the stories of individuals: some thriving in the system, others in deep trouble with political opposition, which gives a graphic feel for what it's like to strive and survive in China. We see practical realities ranging from how to bribe judges, to starting a Internet dating service.

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Book Review: Can China Lead?

ChinaChina is viewed as the only real competitor to U.S. economic and geopolitical position, and its future is one of the most timely and high priority economic issues here. Can China Lead?: Reaching the Limits of Power and Growth focuses on the issue by looking at the role of the Chinese Communist party. The authors are well qualified to evaluate China's future as a potential world leader: William C. Kirby and F. Warren McFarlan are on the faculty of Harvard Business School, which has done many case studies of Chinese companies (sixty-six are listed in the book's Appendix). Regina Abrami is at the Wharton School, and Director of the Global Program of the Lauder Institute. PMc Farlan is a guest professor at Tsinghua University, and codirector of the HBS China Business Case Center. Kirby is Chairman of the Harvard China Fund, and a honorary professor at several Chinese universities.

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Book Review: The Dollar Trap


The author, an international finance expert, focuses on the complexities of the US dollar as the global reserve currency. Exploring current fundamental modeling and the politics of international financial coordination, he details why, in spite of news reports concerning its demise, the dollar will continue to be the dominant world currency.

International investments are ultimately driven by the value of the dollar, the core currency around the globe. Currency movements are a primary determinant of international fixed-income diversification and are important for any international equity decision. Nonetheless, hedging is the default approach among money managers because their ability to forecast currency movements is so limited. Given the difficulty of forecasting, relatively little time is spent analyzing the fundamental components of currency returns. Dollar dynamics are often relegated to being treated as a mystery.

–Mark S. Rzepczynski

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Book Review: Unbalanced: The Codependency of America and China


The codependency between China and the US has been obvious for a long time. China's exports to the US help maintain employment, a key component to economic and social stability. This stability is seen as essential to the continued power of the Communist party. The US has become dependent on flow of capital from China's high savings rate, and on imports of cheap consumer goods. The thesis of Stephen Roach's Unbalanced: The Codependency of America and China is that this dependency is "unbalanced," and is starting to change dramatically. We are facing a "realignment of the world's two largest economies." Both countries are viewed as "on the cusp of important transformations."

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Equity Opportunities in Canadian Capital Markets

Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) – Canada’s major equities markets – are home to more oil and gas and energy services companies than any other global exchange group. Ranked first in the world by the number of listings in the energy sector, TSX and TSXV are the world’s leading marketplaces for oil and gas companies to list and go public.

More than 360 oil and gas companies are listed on TSX and TSXV, with a total market capitalization of over $407 billion. About 10% of these companies are headquartered outside of Canada. Supported by reliable access to North American and global capital, these companies have operations on several continents and maintain strong ties to key markets globally.

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Five Reasons to Consider Mongolia As Your Top Investment Destination

Mongolia submission

It's the second fastest growing economy in the world: Strong economic growth is expected for the mineral resource–rich Mongolia, with rising mining output from world-class mining projects such as Oyu Tolgoi—a copper and gold mining operation, where Rio-tinto owns 66% and the government owns 33%. This project is expected to contribute 1/3 of Mongolia GDP alone. The Economist Intelligence Unit has projected that Mongolia will be the second-fastest growing economy in the world in 2014 with gross domestic product rising 15.3% thanks to the first full year of operations of Oyu Tolgoi. And, though IMF predicts that growth will slow down to 9.5% (owing to a slow-down in China, the main export destination for Mongolian minerals), the economic growth is high even by regional, let alone international, standards.

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Book Review: Europe's Unfinished Currency


The financial media are full of news about the fluctuations of the euro, alternating between hope and despair amid accounts of complex European politics. Thomas Mayer’s new book, Europe's Unfinished Currency: The Political Economics of the Euro (Anthem Finance), covers the euro from its inception and helps to make sense of the turbulence. Mayer was chief economist of Deutsche Bank Group and head of Deutsche Bank Research; today he is a senior advisor to Deutsche Bank’s management.

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Great Famines: Lessons from the Nineteenth Century

Of all horsemen of the Apocalypse, Famine has the most connection with economics. The final death toll in most famines is mostly determined by another horseman, Pestilence, which follows famines through many obvious and less obvious channels. My purpose is a study of economic, not medical, history, so I’ll refer to “famine,” although most excess deaths can be attributed to epidemics.

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Recent Research: Highlights from September 2012

"The Most Successful Theory of Economics "
The Journal of Derivatives (Fall 2012)
Mark Kritzman

Ross has called options pricing theory “the most successful theory in all of economics.” Kritzman expands on Ross’s comment to justify this assertion and notes the role of The Journal of Derivatives in disseminating the benefits of this most successful of theories to the world at large.

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What's Going to Happen to the Euro?

The Eurozone has changed; it’s very apparent. In the last year or so, the playing field has been tipped with mountainous debt problems that Greece, and now Spain and Italy, are experiencing. Of course, all of Europe will experience a huge knock-on effect from the problems in Greece and Spain—but the question is, by how much? If the Euro fails, will all hell break loose? This article outlines some of the possible outcomes of the current Euro crisis.

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Video: Major Changes in the Metals and Mining Industry

NYSSA's 12th Annual Metals and Mining Industry Conference featured a number of speakers from top business leaders. Raymond Goldie, PhD, VP, and senior mining analyst at Salman Partners, opened the conference with an industry overview.


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Book Review: What Chinese Want


An understanding of the Chinese worldview is essential for anyone doing business or investing in China. We may think that we know what the Chinese want, but our assumptions are often faulty. Tom Doctoroff is well qualified to enlighten us. He is Northeast Asia area director and Greater China CEO at J. Walter Thompson, and has lived and worked in mainland China for 14 years. As an advertising executive, he knows how to hold our attention. He organized his recent book What Chinese Want: Culture, Communism and the Modern Chinese Consumer into short and focused chapters.

China’s primary goal is stability. This reflects a long history of traumatic change, including foreign occupation, famine, and Mao’s Cultural Revolution. The Chinese do not take survival for granted, and personal identity is tied to the family and the nation.

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Sailing South: Investment in North African Emerging Markets


The North African states of Morocco, Algeria, and Tunisia lie just beyond the borders of Southern Europe. As investors look around for undiscovered emerging markets, how do these countries look?

Following the Arab Spring of 2011, the entire Arab world has received more attention in terms of the possibilities for democratization, economic revitalization, and also in terms of risks and opportunities for investment. The three western-most countries in the Arab landscape are all relatively small markets and exhibit differences both in their economies and the political risk factors they face.

Morocco is a liberalizing constitutional monarchy with a well-liked king devolving power in a more decentralized manner. Algeria is technically structured as a republic, but with tightly controlled political parties and little rotation of power-holders over time. It is effectively an authoritarian regime. Tunisia is an early transitional democracy in the process of consolidation, having ousted a regime not unlike Algeria’s. Although there is hope for meaningful change and advancement in Tunisia, the range of possible outcomes is currently quite wide. Although many people picture North Africa as a land of desert, the coastlines along the Mediterranean and the Atlantic Ocean are actually fertile, meaning that agriculture is still an important contributor to both the economy and employment in these countries. The entire region was known as a breadbasket as far back as Roman times. However, agriculture is an industry sensitive to drought, and so changing climate and rainfall patterns can wreak havoc with both economic and political stability in this region.

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Investing in High-Tech in Russia, Part II: Challenges and Opportunities

In Part I of this article, I dealt with misconceptions about Russian high tech and Russian markets in general. I now explore investment opportunities outside of the familiar defense, oil, gas, and commodities sectors. I also examine financial and cultural barriers to investing, and macroeconomic considerations.


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Video: Family Offices in the US, Europe, and Asia

NYSSA recently held its 4th Annual Family Offices Conference, focusing on the latest trends in private weath management for  ultra-high-net-worth clientele. Based on her work as the executive director of the Institute for Private Investors, Mindy F. Rosenthal gave a comparative analysis of family offices in the US, Europe, and Asia.
  • US
    1. Offices typically have about 4 to 6 employees.
    2. Fully integrated wealth management shops are becoming increasingly rare, with small targeted offices becoming more prevalent.
    3. Larger, (usually) older family offices are looking to sustain infrastructure and keep younger generations engaged by partnering and sharing services with other offices for noncore services.
    1. Offices are relatively large with an average of 13 employees.
    2. Europeans are more likely than Americans to use concierge services that provide everything in one shop, but are looking to outsource more specialized services.
  • ASIA
    1. Family offices in Asia are smaller than those in the US and Europe.
    2. Over 80% of families' wealth is tied into their primary operating company. They will often use people in their business for personal financial dealings.
    3. Because family offices in Asia are still in the beginning stages, the focus should be on hiring quality staff and building.

In both the US and Europe, wealth is often tied to a business that is not necessarily the primary source of wealth. A major focus for wealth managers should be educating and engaging the next generation, along with finding the best resources.


Podcast: How Your Memories Cost You Money

Speaker Series: How Memories Cost You Money

If history repeats itself, why not change our actions? Surely this would prevent us from making the same mistakes over and over again—right?

Ken Fisher, author of Markets Never Forget (But People Do) and the "Portfolio Strategy" column in Forbes, says that our bad memories are to blame. Citing events and patterns from the not-so-distant past, Fisher believes the answer to America's latest financial woes can be found if we just look at our history.

What we forget:

  • Our memories fail to recognize the repetitive patterns of events we live through.
  • The 1990 recession, which strongly compares to the 2008 financial crisis, is rarely analyzed in public commentary.
  • In Republican presidential election years, returns are great; but in inaugural years, they are negative. Returns are negative in Democratic election years, but great in inaugural years.
  • Republicans and Democrats never look at their own weaknesses in terms of cycle history.



Investing in High-Tech in Russia, Part I: From Italy with Love...for Russia

In June 2011, I attended the 18th annual conference of the Multinational Finance Society. My hotel, located in a prosperous section of Rome, did not have hot water running, and the air conditioning didn’t work—conditions that seemed incongruous with the surroundings. But I was pleased to discover that the TV had 20 international channels, including five Russian ones, two Chinese, and several Arabic. I found the most interesting channel to be Bloomberg Europe, where I caught a conversation about investment in Russia.

Discussions about investment in Russia usually center on oil and gas, but the leader of the Bloomberg panel shifted the subject to high tech. While “Russian high tech” seems like an oxymoron thanks to our mainstream media, the perceptions of Russian high tech, and of Russian markets in general, are very different from reality.

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Blogs for the Buyside: Boiling Frogs

Blogs for the Buyside

There is an old parable about a boiling frog. If one is put directly into boiling water, the frog will perceive the danger and jump out. But if put in room-temperature water that is gradually heated, the frog won’t perceive the change in temperature and will just stay in the water until its death.

It is a common way to explain to people that they need to monitor gradual changes as well as severe ones. does a great job tracking the stories that seemingly got dropped off your Bloomberg scroll but still can burn your portfolio.

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Limericks Économiques: Day of LIBOR Reckoning

Limericks Économiques

Though collusion on rate executions
Was the norm in finance institutions,
When the tide quickly turned
Many bank traders learned
They would naturally face prosecutions.

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Book Review: Every Nation for Itself


The daily headlines of financial stress and possible disaster in the eurozone are a graphic scene of a breakdown in the European countries' ability to come together in a solution. Some see the same type of political paralysis and institutional dysfunction in the failure of the US Congress to address our fiscal debt challenge. The full parameters and impact of this increasingly fragmented world is spelled out in Ian Bremmer's new book, Every Nation for Itself: Winners and Losers in a G-Zero World.

The "G-Zero World" that Bremmer describes is "a world order in which no single country or durable alliance of countries can meet the challenge of global leadership." The G7 and G20 groups are viewed as ineffective. We are in a period of uncertain transition, in which "for the first time in several decades, we live in a world without global leadership." The result is more volatility, uncertainty, turbulence, anxiety, and risk for investors.

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Recent Research: Highlights from June 2012

"Some Like It Hot: The Role of Very Active Mandates across Equity Segments in a Core-Satellite Structure"
The Journal of Investing (Summer 2012)

Frank Nielsen, Giacomo Fachinotti, and Xiaowei Kang

This article reviews the active management opportunity in different market segments, and discusses the role of very active mandates across segments in a core–satellite portfolio structure. Research based on manager performance data over the last 10 years indicates that there is little evidence that average emerging market or small-cap managers have produced higher or more persistent risk-adjusted returns relative to their developed market large-cap peers. Therefore, institutional investors may consider active and passive management as complementary strategies across all equity segments. Due to the outperformance of high active risk mandates over the analyzed period, a simulated core–satellite structure across different equity segments achieved a higher information ratio than a combination of low active risk managers. The outperformance of high active risk mandates may reflect links between higher manager skill, higher investment conviction, and/or fewer constraints. Depending on investment beliefs, institutional investors might explore such a core–satellite structure to implement the global equity allocation.

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Worldview Podcast: Not Just BRICs and Mortar

Worlview Podcast

In recent years, Brazil has been touted as one of the most promising and fastest growing emerging markets for investors. Although growth has recently slowed down, events such as the 2014 World Cup and 2016 Olympics still on the horizon may recharge the market. Geoffrey Pazzanese, Vice President of Federated Global Investment Management, gives an overview of Brazil's current and potential investment opportunities.

Notable facts about Brazil:

  • With the upcoming 2014 World Cup, Brazil will increase its investment in civil infrastructure, transportation, and stadiums.
  • Public housing is one of Brazil's largest investments at R$ 1 trillion (BRL).
  • The poverty level is at 26%, in line with India and higher than Mexico.
  • By 2014, the poverty rate as a percentage of the share of population is expected to be below 10%. (In 2003, it was 30%).
  • The recent rise in the middle class has increased consumer spending on items like white goods, cars, clothes, and homes.
  • Ease of doing business in Brazil is relatively poor because of heavy bureaucracy and a shortage of lawyers to help cut through the red tape. This is a major hindrance of growth.



Book Review: Breakout Nations

Breakout-NationsInvestors have been drawn to the rapid growth and what some see as "economic miracles" among countries described as the emerging markets. A potentially profitable strategy is to spot the next country growth stock in advance, and to cash out of those countries before their growth peaks. As head of Emerging Market Equities at Morgan Stanley, author Ruchir Sharma is well-qualified to help investors in this process.

What makes Breakout Nations: In Pursuit of the Next Economic Miracles so fascinating is the author's experiences visiting and investing in so many of the emerging markets. He is well-versed in all the relevant economic statistics and financial trends. In addition, he is a writer who knows how to grab the reader's attention and keep the reader engrossed. Most importantly, Sharma challenges the popular consensus on many countries, and presents many observations and conclusions that emerging market investors must consider.

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Emerging Markets Warrant an Overweight Position in Investor Portfolios, Says David Hale

CFA Institute

Economist David Hale told delegates at the 65th CFA Institute Annual Conference that steady increases in exports and capital spending, combined with favorable demographics, will allow emerging market countries to continue to grow their economies at rates superior to those found in the more developed economies of “old industrial countries.” Given the comparatively strong growth outlook, he argued, emerging markets warrant an overweight position in investor portfolios.

In building his case, Hale noted that emerging markets have doubled their collective share of global GDP, exports, and capital spending over the past two decades, with China playing a key role in this growth. China displaced Germany two years ago as the world’s largest exporter of tradeable goods, amassing foreign exchange reserves of $3.3 trillion today (versus $3.4 trillion for all developed countries combined).

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Update on Brazil: March 2012

When Worldview last addressed Brazil in the autumn of 2010, the country was on the eve of presidential elections and had been enjoying a year and a half of outstanding post-crisis investment returns and celebrations in the press. The world had rediscovered Brazil and concluded it was a haven from the economic carnage that had ripped through developed world economies. Even among emerging markets, Brazil’s economic and financial performance looked spectacular.

Our piece suggested that while the long-term dynamic in Brazil still looked good, asset prices had likely gotten ahead of themselves and were no longer as attractive as before. The risks we identified had to do with the then presidential candidates lacking charisma, the temptation to over-rely on Petrobras “pre-salt” rents, euphoric animal spirits that could lead to imprudent fixed investments, and a rush of financial capital back to the developed world once signs of a recovery began to look stronger. Some of these risks have diminished, others have taken place, and still others remain.

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Book Review: The End of Cheap China


Cheap goods from China have benefited millions of Americans, increasing their standard of living, vastly attributing to low inflation. Low-cost production is something we have come to accept, moreover, to expect. But as Shaun Rein's new book, The End of Cheap China: Economic and Cultural Trends that will Disrupt the World concludes, this is about to change.

Higher labor costs, shortages of skilled workers, rising commodity and real estate prices are combining to change this happy world for American consumers. It is also changing and disrupting how American companies view and use China. The biggest change according to Rein is that, "Instead of the market to produce in, China has become the market to sell into. China is increasingly becoming the country driven by the "optimistic consumer class."

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Video: Cultural Differences between the US and China in Business

Having a general understanding of cultures outside your own is more important than ever when competing in an increasingly global marketplace. Jie Xiu, of Troutman Sanders LPP's Corporate Group, discusses the misunderstandings that commonly arise in business dealings between China and the US due to cultural differences.

Points to consider:

  • Chinese contracts are often much shorter than US contracts because the language is very general compared with English.
  • In China, good intention is assumed without the expectation of specifying it in words. A US contract, with its specific language and lengthy clauses, may be perceived by the Chinese as a lack of trust.
  • Business in China is done on a more personal level, while in the US, it is more formal. Friendship must always come before doing business.




Video: US Financial Sectors and Europe

Glenn Reynolds, CEO of credit research firm, CreditSights, Inc., presents his outlook on US economic and financial sectors. Despite the general discourse, US banks and  the corporate field are in relatively good shape compared to previous projections. Rather than lack of ability, uncertainty is the main barrier to progress. Continued growth is unfortunately heavily dependent on the unstable economic situation in Europe. Overall, Reynolds believes US markets should be able to survive any hurdles that lie ahead.


Book Review: Startup Asia


China is now the second largest venture market. India is third. Vietnam is quickly expanding. Now more than ever, rather than starting an entrepreneurship in the West, the newest generation of entrepreneurs are looking to the East. Many of the same venture investors that formed the original Silicon Valley are repeating these successful enterprises in Asia. Startup Asia: Top Strategies for Cashing in on Asia's Innovation Boom tells the dramatic story of how business start-ups have developed and boomed in Asia.

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What's Really Going on with US-Listed Chinese Stocks?

In this report, we analyze the technical position of every US-listed Chinese stock with a market cap above $5 billion. Of these, nine are based in mainland China, three in Taiwan and two in Hong Kong. By far the best looking chart is China Petroleum and Chemical while PetroChina shares are stuck at resistance. The worst stock, from a technical perspective is the telecom provider in Taiwan, Chunghwa Telecom.

From a value investing perspective, we believe that the best time to invest in a market sector is when sentiment is extremely biased against it. Presently, in our view, US-listed Chinese stocks appear to be one of the most reviled investment sectors, and not without some cause. A series of frauds uncovered by diligent short-sellers, and halfhearted support in reforming fraudulent practices by Chinese regulators have undermined confidence in Chinese stocks. The most widely cited index of US listed Chinese stocks, the USX China Index, is off 42% from its October 2007 high but has more than doubled from its November 2008 low.

We believe that Chinese stocks, having fallen out of favor, will gain newfound interest by investors. Later today, [Ed. Note: This paper is dated February 14, 2012.] Chinese Vice President Xi Jinping will be visiting the White House. Xi is expected to become the Premier or head of the government later this year and the media are expecting that this visit will lead to a “reset” of US-China relations. There are concerns about a slowdown in the Chinese economy as global commodities prices rise, real estate prices weaken and some manufacturing at the margin is returning to the US. But the Chinese economy is still largely tied to the financial health of its largest customer—the US consumer—who appears to regaining his health after a long illness. So despite the concerns, there is a bull case to be made for the Chinese economy as well.


We do not have a view as to whether Chinese stocks now represent a good fundamental value or how pervasive the fraud issues are. However, the key premise of technical analysis is that the charts represent “the wisdom of the crowds” or, in other words, the many market participants ranging from savvy short-sellers like Muddy Waters, large sell-side and buy-side firms globally, individual investors and corporate insiders collectively bring all their knowledge to bear in the setting of share prices, and those with the most conviction, and presumably best knowledge, have the most impact on price given the higher volumes they trade. So, stock prices tend to correctly reflect underlying fundamental value. So in this report we look at what the technicals are saying about US-listed Chinese stocks.

We begin with an overview of the major Chinese markets. Our focus is on mainland China, but it is impossible to analyze this market without considering the interrelated Hong Kong and Taiwan markets. The main stock exchange in China is the Shanghai Stock Exchange which trades two classes of stocks – A shares which are traded in Renimbi, and are limited to Chinese citizens and Qualified Foreign Institutional Investors, and B shares which are traded in dollars and available to global investors. The Shanghai Stock Exchange is 23% off its 52-week high and just 10% above its low having bottomed in January, so this may represent an interesting entry point for investors. In Hong Kong, the Hang Seng Index bottomed in September and has gained 29%. In Taiwan, the stock exchange is 19% off its high, having bottomed in December. The USX China Index of US-listed Chinese stocks also bottomed in October and is up 25% off its low. So investors are seeing something they like again in Chinese stocks. Overall, most stocks are at inflection points of breaking out to the upside. A positive catalyst such as a good visit by Xi or a Greek settlement could push these stocks significantly higher. But, in our view, it is definitely time to be looking east again.

–Barry M. Sine, CFA, CMT

This an exerpt from a white paper entitled, "What's Really Going on with US–Listed Chinese Stocks ?" by Barry Sine, CFA, CMT, Managing Director and Director of Research at Drexel-Hamilton. Click here to download the full report.


A Tale of Two Overhangs: The Nexus of Financial Sector and Sovereign Credit Risks


There has emerged in the Western economies a strong nexus between the credit risks of financial sectors and their sovereigns. We argue that this phenomenon can be understood in the context of two debt overhang problems: one affecting the financial sector due to its under-capitalization following the crisis of 2007–08; the second, affecting the non-financial sector, whose incentives are crowded out by high sovereign debt and anticipated future taxes. While the desire to resolve the financial sector overhang may make bailouts tempting, they raise the risk of exacerbating the overhang related to sovereign debt. Conversely, reduction of growth prospects due to sovereign debt overhang can make the financial sector riskier as it is highly exposed to sovereign debt both through direct holdings and indirectly through implicit government guarantees. We provide evidence on this important nexus, based on our ongoing research that exploits data on European bank and sovereign credit risks.

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Recent Research: Highlights from February 2012

"Measuring and Modeling Execution Cost and Risk"
The Journal of Portfolio Management (Winter 2012)
Robert Engle, Robert Ferstenberg, and Jeffrey Russell

Financial markets are considered to be liquid if a large quantity can be traded quickly and with minimal price impact. Although the idea of a liquid market involves both a cost as well as a time component, most measures of execution costs tend to focus on only a single number that reflects average costs and do not explicitly account for the temporal dimension of liquidity. In practice, trading takes time because larger orders are often broken up into smaller transactions or because of price limits. Recent work shows that the time taken to transact introduces a risk component in execution costs. In this setting, the decision can be viewed as a risk–reward trade-off faced by the investor who can solve for a mean-variance utility-maximizing trading strategy. Engle, Ferstenberg, and Russell introduce an econometric method to jointly model the expected cost and risk of the trade, thereby characterizing the mean-variance tradeoffs associated with different trading approaches, given market and order characteristics. They apply their methodology to a novel dataset and show that the risk component is a nontrivial part of the transaction decision.

Continue reading "Recent Research: Highlights from February 2012" »


How and Where Should You Invest in Emerging Markets?

As the new year failed to ring in a solution to the debt crisis that has transfixed the eurozone, investors are left wondering whether now is the time to place their bets on potentially risky growth opportunities or to keep their assets in safe havens. Beyond Europe’s sovereign credit issues, other factors such as massive debt overhang, the threat of double-dip recessions, and ongoing money printing by central banks in the developed world call into question the traditional definition of “safe.” In this environment, some money managers are asking whether investing in emerging economies may, in fact, be safer than committing assets to developed markets.

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Majority of US Finance Professionals Expect the Global Economy to Stagnate or Deteriorate

EfinancialCareersIs it time to stop thinking globally, and to start focusing locally? That’s more or less the consensus among more than 3,700 professional accountants who believe not only has international trade continued to dry up, but that the global economy will continue to erode while those industries that focus domestically will inspire greater confidence.

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Regaining Investor Confidence for US-Listed Chinese Companies

A number of high profile scandals such as Longtop Financial Technologies and Sino-Forest have given Chinese companies a bad name among US investors. Portfolio managers who previously held extensive investments in US-listed Chinese equities now avoid the sector and some of the previously largest underwriters of US-listed Chinese equities have exited this market.

Between 2006 and 2010, a total of 339 Chinese companies listed on the major US stock markets, 106 on NYSE and 233 on NASDAQ. During this period of high interest in investing in Chinese companies, few anticipated the coming scandals and delistings.

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The Hero or the Villain of the Euro

For more than two years, we have witnessed the demise of several European countries, starting with Greece’s shocking assertion in early 2009 that its deficit to GDP was more than double what had been presumed. Most investors and analysts were still not concerned since all major European countries enjoyed high investment grade ratings from the financial market’s watchdog—the major rating agencies. And, the traditional metrics for measuring sovereign debt performance, essentially all top-down macroeconomic indicators, were only just starting to signal a deteriorating scenario. The world’s financial community then began to systematically assess the health of several peripheral southern European countries (the so-called PIIGS [Portugal, Italy, Ireland, Greece and Spain]) leading to a spike in those nations’ required rates of returns on their Government’s debt. Finally, those lofty investment grade ratings began to tumble in 2010 and eventually the European Central Bank and its leading contributing countries were forced to set up rescue packages, first for Greece, then Ireland, now Portugal (still a work in progress).

Continue reading "The Hero or the Villain of the Euro" »


Book Review: A Contest for Supremacy


The announcement that the United States will base 2,500 troops in Australia is a public recognition of the contest between China and the US for power in the Pacific, where the US has long been dominant. For China, the troop deployment increases fears of encirclement. For the US, it reflects fears of being pushed out or neutralized in this key geography. For an in-depth analysis of what will be an increasing contest, Aaron L. Friedberg's new book is a superb resource. Friedberg, a former fellow at the Smithsonian Institution’s Woodrow Wilson International Center for Scholars, the Norwegian Nobel Institute, and Harvard University’s Center for International, took part in a “review of China's economic performance, political stability, strategic intensions, and military power" during the Clinton administration. This review was the start of the research that produced A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia.

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How Bond Plays Work in a Market of Global Systemic Uncertainty

We recently spoke with Glenn Reynolds, CEO of CreditSights, who offered us some straight talk on how global credit market risk is impacting the broad capital markets. Reynolds will be a speaker at the upcoming NYSSA conference, Market Forecast: Turbulent Times, to be held on January 5.

Here he explains why he recommends a blended strategy of investing in high-yield corporate bonds as an equity surrogate and investment grade bonds as a defensive play to navigate what is likely to be continuing systemic market uncertainties.

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The State of China’s Economy and US-Listed Chinese Companies

Ten years ago, when you read The Wall Street Journal, you barely noticed articles about Chinese public companies. Today, when you click your iPad app, WSJ.Com, China-related news generates daily headlines. On Oct 24 2011, the New York Society of Security Analysts (NYSSA) joined with China Council for International Investment Promotion (CCIIP) to host “2011 Chinese Companies Listed on US Market Development Forum”, which provided an opportunity for US investors to have an open dialogue with several Chinese companies. Not surprisingly, this forum drew a lot of attention from an audience that including both private and institutional investors. When analyzing the complex interdependent relationship between the fast-growing Chinese economy and the globally dominant US economy, one must understand three key points.

Continue reading "The State of China’s Economy and US-Listed Chinese Companies " »


Russia: Some BRICs Are Different

Russia has always been different from the rest of the world. Even 20 years after the end of the Soviet Union and the Cold War, this author still finds it a little strange to find Russia grouped with other BRICs, or most emerging market countries. The others—China, India, and Brazil—all have very large portions of their populations struggling with poverty, and are characterized by historically limited, but now improving, access to technology. Not Russia.

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Worldview Podcast: The Global Exchange of Workers

Worldview PodcastRichard G. Lipstein is a veteran executive search consultant and a member of Boyden’s global financial services practice, as well as currently serving as the chairman of the Career Development Committee at NYSSA. He provides insight into an interesting side-effect of globalization: the global exchange of workers.

If you want to watch the webcast of this entire event or any other NYSSA program, visit NYSSA's On-Demand website.


Worldview Podcast: Growth Rate of Emerging Markets

Worldview PodcastThej Gurumurthy, the cofounder and COO of Syven Global Services, a research and analytics firm, points out the truth that comes with the modern, globalizing world: to succeed in business you have to be willing to look beyond US borders. Emerging markets (e.g. China, India, and even Russia) offer growth rates multiple times that of the US. 

If you want to watch the webcast of this entire event or any other NYSSA program, visit NYSSA's On-Demand website.


Worldview Podcast: Expecting the Unexpected

Worldview PodcastThej Gurumurthy, the cofounder and COO of Syven Global Services, a research and analytics firm, shares a personal anecdote regarding the unforeseen pitfalls of doing business in our globalizing world. Corruption, he suggests, is an unfortunate fact of life in many places, and as difficult as it may be to understand and navigate these cultural differences, anyone doing business outside of their comfort zone must be prepared to deal with anything.

If you want to watch the webcast of this entire event or any other NYSSA program, visit NYSSA's On-Demand website.


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