Investors’ Flights to Safety Can’t Hide the Danger

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During a relatively calm stretch early in the year, the stock market rallied. But then the financial and political problems of the euro zone made headlines. At the same time, the outlook for the global economy dimmed.

Stock markets around the world began to stumble. Investors reduced the level of risk in their portfolios and started to pour their cash into all the usual places, with United States Treasuries near the top of just about everyone’s list. A bond rally was in full swing again.

“When people are worried, all roads lead to Treasuries, and that just doesn’t seem likely to change anytime soon,” said Kathy A. Jones, fixed-income strategist at Charles Schwab.

Even in an election year in the United States, with fiscal policy in a state of disarray and with a budget deficit of more than $1 trillion, Treasuries remain in great demand. Last week, prices rose, and 10-year yields fell as low as 1.84 percent.

German government bonds have been another consistent favorite for risk-averse investors over the last few years. Last week, despite pressure on Germany to shoulder more of the euro zone’s debt burden, they were, if anything, even more highly prized than Treasuries. Yields on 10-year bunds, as they are called, touched 1.49 percent during the week. And in Britain, where the government has been slashing costs, long-term bond yields fell to 1.88 percent — the lowest since the Bank of England started collecting data in 1703, according to The Financial Times.

"We are living in very unusual times," said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

JPMorgan Chase’s disclosure on Thursday night that it had lost an estimated $2 billion in a portfolio of credit investments put pressure on financial stocks on Friday, contributing to the global equity sell-off and to the bond market’s momentum. But this month’s elections in the euro zone were perhaps the most immediate cause of last week’s flight to safety.

In Greece, voters repudiated the government that had negotiated its bailout, placing the country’s future in the euro zone in doubt. In the French presidential election, voters embraced François Hollande, the Socialist candidate, who demanded an end to single-minded budget-cutting for its own sake and called for a new “growth compact” for Europe.

“Obviously,” Ms. Jones said, “the people have spoken in Europe and they don’t like austerity.” Bond investors tend to like austerity, however, because it may increase the likelihood that debt will be repaid. While traders flocked to Germany and Britain for sovereign bonds, they drove down prices of bonds perceived as riskier, like Spain’s; yields on its bonds moved above the critical 6 percent level for a time last week.

CONCERN about a “soft patch of economic data,” including a slowdown in China and a disappointing United States employment report, also weighed on investors, said Scott Minerd, chief investment officer at Guggenheim Partners. He says the long-term trend for government bond yields is “undoubtedly upward,” but adds that its emergence has been delayed by the protracted economic malaise.

“Right now, if the economy slows down further, bond yields could go even lower,” he said, suggesting that the Federal Reserve would be likely to intervene again in an effort to stimulate the economy.

Sovereign bond yields have traditionally defined the “risk-free rate” used to value a vast array of financial assets and investments, but after the traumas of the last few years, these yields are so low that such valuations are very hard to make, said Aswath Damodaran, a finance professor at New York University. “I think the main factor holding long-term rates down now is very weak global economic growth, and I don’t see that changing soon,” he said. One indication that the world had truly recovered from the financial crisis would be a rise in 10-year Treasury yields to 4 percent, he said, but he did not see that prospect as imminent.

David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, has been writing bearish reports on the equity markets and the global economy for many months. He said in an interview that the debilitating effects of “global debt deleveraging” would continue for the foreseeable future. The economic recovery in the United States is precarious, he said, and “gridlock in Washington at this moment is not contributing to a solution of the country’s problems.”

He cited Ben S. Bernanke, the Federal Reserve chairman, who has warned that unless Congress and the White House take action later this year, the United States could hurtle over a “massive fiscal cliff.” That’s a reference to the impending Dec. 31 expiration of the tax cuts of President George W. Bush, and to the start of billions of dollars of across-the-board spending reductions passed in last year’s deal to raise the debt ceiling. Combining the tax increase and spending cuts would ensure a recession, Mr. Rosenberg said.

Government action to forestall these effects is urgent, Mr. El-Erian said. “It’s only a matter of weeks before the markets begin to really focus on that ‘fiscal cliff,’ ” he said. “It hasn’t really been priced into the market.”

If these fiscal issues aren’t resolved, he said, there will probably be far greater market volatility than we have seen recently, with major declines in stocks and a further rally in bonds. Investors would want to have “some dry powder” — cash on hand — to avoid excessive losses and to take advantage of opportunities that arise, he said.

We can’t derive too much comfort from the repetition of patterns in the markets, he said, noting the adage that while history doesn’t repeat itself, it rhymes. “At some point,” Mr. El-Erian said, “it will stop rhyming.”

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Another may, another decline of the stock market? Perhaps not

It is understandable, if may meet investors with apprehension.

After all, there are equities in a market near the bear that has pushed stocks lower by more than 19% a year. That came after a very promising start for the year, a model who is also produced in 2010. And this year until April, the index Standard & poor 500-stock returned almost 12%.

Will be economic concerns may dash of early signs of optimism once more this year?

Michael j. Cuggino, President of the permanent family of the portfolio of the Fund, sees troubling Parallels. This winter, he said, "you have the feeling that"boy, we are finally out of the forest. " And then all of a sudden you start seeing softer economic signs. »

Those are still another set of concerns from Europe - including the financial crisis and that Britain has slipped into recession the Spain - with high oil prices and a hand of work still-low of the market at home. In April, there is a net gain of only 115,000 jobs, much less than had been forecast.

But many strategists believe that enough has changed that other severe withdrawal is not a fait accompli. "The fundamental point of view, there are a number of differences," said Brad Sorensen, Director of the sector analysis and the market at the Schwab Center for financial research.

Take the price of the gasoline. In the first four months of the year, national action began to sink in May that soaring pump prices, weighing on the consumer already poorly. In early May 2011, a gallon of unleaded regular averaged $3.96, according to the Energy Information Administration. Which has increased 37 percent from the same period in 2010. So far this year, gas remains uncomfortably high, but at $3.83 a gallon on average fuel is actually less expensive that it was a year ago.

This is a critical point. Ned Davis Research analysis showed that the rate of change in price of gas is an important influence on the attitudes of the investors. Researchers there found that only when the pump prices jump more than 30% over a period of 12 months no actions tend to lose ground. And when the fuel prices have fallen over a period of one year, the s. & P. 500 averaged 12.8% of earnings.

Mr. Sorensen added that there were another big difference this year. Although oil prices are on the rise since January 1, it is not the price of many other products. Since the end of the year, have been the price of corn on the dish, wheat fell slightly and natural gas sank more than 23%.

Why is it important? In 2011, global fears about inflation, especially around the high cost of food in emerging markets, has led central banks around the world to increase interest rates. This year, the policy makers in many of these areas - including China and the India and even in Europe, the European Central Bank - have been lowering rates to boost growth. Last week, the Reserve Bank of Australia reduced rate of half a percentage point, citing the weakness of the economy and mild inflationary pressures.

"This significantly change the image of recent years," said Mr. Sorensen.

"Jeffrey n. Kleintop, senior strategist market of LPL Financial, said the Central Bank rate cuts" should help to mitigate the fears of global recession evident in the two years of spring slides. »

Of course, with treasuries 10 years producing little 1.88% today, down 3.7% in May 2010 and 3.29% a year ago, the bond market could be signalling that the economy remains troubled. But James w. Paulsen, strategist main Wells Capital management investment, note that the by-product of these low yields - falling borrowing rates - help consumers in the short term.

He notes, for example, that in May 2011 and may 2010, the average 30-year fixed rate mortgage were about 5 percent. Today, they are below 4%, which should stimulate the refinancing. In addition, household debt service ratio, which measures the debt payments as a percentage of disposable personal income, keeps declining. According to the Federal Reserve, debt payments accounted for approximately 13.4% of income available in early 2009. Which fell to 12.3% in the first quarter of 2010, 11.2% in early 2011 and 10.9% late last year.

During this time, the image of the profits of the business seems much brighter that he has also recently that there a month. In April, Wall Street analysts were forecasting growth flat profit of less than 1% for companies in the s. & P. 500 in the first quarter. But with autour 85percent of these companies having reported their results, forecasts of the consensus for the growth of earnings have increased 7.2%.

Finally, there is another factor that could buoy the market in spring and summer. Brian d. Singer, head of strategies global macro to William Blair, noted that in 2010, the threat of the possible expiration of the Bush reduced year-end tax could have accelerated activity that would have normally taken in 2011. That may have further weakened the economy last year, he said.

With these same defined new tax cuts expires at the end of this year, this could still accelerate 2013 activity in this year, Mr. Singer said, the economy in 2012. He said that this is one more reason to think that "it y more differences than similarities between this year and 2011.".

Paul j. Lim is the editor of money magazine. Email: fund@nytimes.com.

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Central banks are calm markets, despite Europe woes

EUROPE is to hit another rough patch. But this time, disorders have just rattled world financial markets. It is a huge change.

Even if the United States events precipitated some of the more acute stages of the financial crisis of 2007-8 - the collapse of Lehman Brothers is a good example - the crisis in Europe was the pivot on which world markets have rotated in recent years.

""We have seen on the global markets for trade in unison to a surprising degree,"said Stacy Williams, a strategist HSBC in London, in a telephone conversation last week." "" Concerns about the risk of a collapse in Europe were the main factor of the phenomenon - risk, risk offshore. "Global markets are closely synchronized, it said, and they are still moving up and down mainly in response to the assessment of risk in the short term.

For the moment, however, they did not respond significantly to the events in Europe, one way or another. It is as if traders may decide to add to their bet or head for the exits. For the moment, at least, the markets are moving laterally.

It is not as if the European economy is suddenly thriving. To the contrary. The Government in London statistics released last week, for example, suggest that the austerity of the United Kingdom program has helped plunge the country into recession. Although there are pockets of prosperity, the economy of the European Union as a contract in the fourth quarter of 2011, according to Eurostat. Many forecasters believe that an economic crisis in the region is in progress.

Economic pain and fiscal austerity led to the fall of the Dutch Government, last week and threaten the chances of Nicolas Sarkozy, President of the France, in the runoff at the end of next week against François Hollande, the Socialist candidate. Yields of sovereign bonds in Spain, located in the heart of the crisis of the euro area, test the level of 6%, a sign of serious trouble. Rescue plans are already underway in Greece, Ireland and Portugal, while the Italy remains in a precarious state.

But how the markets have reacted to all this? With a sigh and a collective shrug. Inventories rose week last in London, Paris and Frankfurt, and with the help of reassuring comments from the Federal Reserve, they did in New York as well.

Larry Kantor, head of research for Barclays, said the Central Bank European is in large part responsible for the benign market response of most recent problems of Europe. By March, he said, the Central Bank injected 1,153 500 billion euros, 1.52 billion dollars in the European banking system, and a large part of this money was used to buy sovereign debt, lowering yields and reduce the pressure on jagged Governments and the whole of the economy of the region.

"In November, there is the risk of a real credit freeze,", said Mr. Kantor. "" Lack of bank loans really"in the eurozone in recession," said. "Injection by the E.C.B. was very important, and it is really much of this scenario disaster off the table."

He said that Europe could fight resolve his financial problems for years, but the "pragmatic approach" of the ECB in its new President, Mario Draghi, has given the markets much comfort.

"In the short term," at least, he said, "many of the tail risk has been removed."

None of which is to minimize the fundamental problems to come to Europe, where friction is growing on the wisdom of the dominant orthodoxy of fiscal austerity is to reduce government debt loads.

In France, Mr. Holland including promotes a more Keynesian solution, involving Government stimulus to promote growth and Government revenue. Mr Draghi, who was firmly in the camp of austerity, last week shifted his rhetoric, calling for a "Compact growth" in parallel with the budgetary Treaty of the European Union, which limits budget deficits and the national debt.

"We must intensify our reflections on the long-term European vision actively as we have in the past to other defining moments in the history of our Union," Mr. Draghi said members of the European Parliament in Brussels. But he indicated that he was contemplating "structural reforms", intend to make economies more competitive, rather than more of the Government spending. This is an approach that also promotes the German Chancellor, Angela Merkel.

Of course, the United States must cope with similar problems, but its economy, although really robust steps, now is growing faster than most of Europe. Gross domestic product increased at an annual rate of 2.2% in the first quarter, according to the Department of Commerce of the published figures Friday. Is that Wall Street had anticipated.

The economy is low enough that the Fed Wednesday policy makers reiterated their commitment to maintaining short-term interest rates, now close to zero, at "exceptionally low levels" for an extended period. They embark on the new programs unorthodox to stimulate the economy, but according to calculations by Barclays, various quantitative expansion efforts the Fed has expanded its balance sheet by $ 2.35 billion.

The balance sheet operations, low interest rates, had an extremely stimulating effect, amounting to the equivalent theoretical rate of interest reference Fed about negative 4 per cent, according to Thomas Lam, Economist at OSK - DMG to Singapore group.

Clearly, the Fed policy makers remain on high alert, even if their assessment of the domestic economy was slightly more optimistic than their previous forecast in January. On average, they predicted last week that G.D.P. would increase from 2.65% in 2012, an increase in the percentage of 0.2 of a point of their estimate of January. The rate of inflation will remain below the target of 2% for the year the Fed, they thought, and the unemployment rate slightly, drop to 7.9% of its current 8.2 per cent, according to Fed figures compiled by UBS Investment Research.

"" In a press conference Wednesday, Ben s. Bernanke, the Fed Chairman, said the Central Bank"did not hesitate" to take other measures to support the economy. Mr. Kantor said markets could display this promise as "a sort of extension of the Bernanke put"-a guarantee of intervention should data deteriorate considerably - which should give traders some consolation.

With election campaigns in the United States as well as in Europe, major new economic initiatives are unlikely for now, if they amount to fiscal austerity or stimulus. If markets remain calm in the meantime, it may be mainly through the influence of the central banks.

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For frontier markets for the next big thing in investment

Emerging markets portfolio managers specialize in the search for the next big thing. But after the conversion of many economies in Asia and Latin America during the two decades and strong yields and dominant popularity of their markets, which are left to find?

What stock markets in Africa, the countries of the Middle East and Asia, as well as to the Viet Nam, in Bangladesh and Sri Lanka? Investment advisers who focus on developing countries argue that many of these so-called border, especially in Africa, markets offer opportunities similar to markets emerging of previous generations.

"Africa will be the next great growth story that has largely unknown," said Larry Seruma, Manager of the Nile Pan Africa Fund, a mutual fund U.S. holding shares in companies that are based in the region or that are of important cases. "It can supplant the Brazil, China and the Russia if its potential is realized," he said.

It is a big if, and consider problems of Africa he only seem larger. There is misery, disease and hunger, aggravated by the other scourges that limit opportunities for Africans to improve their conditions of life: political instability, inadequate education and in some cases long military conflict.

But the case for the region and border markets elsewhere are precisely that they only set on the path of economic and social progress and still have a long way to go. It is the same journey made by the major emerging economies of today. There are barely four decades since Chinese farms were decollectivized, for example, and less than two decades the Brazilian inflation was running at more than 40 per cent per month.

"Frontier markets are often in a State of economic development much earlier than the major emerging markets and may have only recently opened to foreign investment," said Mark Mobius, one of the pioneers of investment in developing countries, who heads operations in emerging markets in Franklin Templeton, the fund company. "This helps explain their high growth potential." New markets were generally more space to grow, and the research of acute potential growth in global instability encouraged many investors to expand their horizons. »

A recent report by Citigroup has identified 11 economies should show exceptional growth in the century, including two of the usual suspects, China and the India. Most of the others are frontier markets - Bangladesh, Iraq, Mongolia, Nigeria, Sri Lanka and Viet Nam - otherwise minor emerging markets that managers of the border sometimes Portfolios invest in, as Egypt and the Philippines.

Calls to invest in places as they expect that they become future markets. Today and yesterday, it is another story. The MSCI index markets lost border approximately two-thirds of its value in the global collapse of 2008 and 2009.

This is a little more global harm than the index of MSCI emerging and mature markets, but where frontier markets are really suffering in comparison is in the period since then. The resumption of border markets was much less deep, leaving the index at least half of its 2008 high, while the other two indices have recovered almost all of their lost ground.

Pradipta Chakrabortty, a manager of Harding Loevner New Frontier market fund, attributed the weakness, especially in Africa, of the political unrest of the revolts of Arab spring and a series of economic and financial difficulties, steps over there, but to the North.

"Africa has many capital from Europe," he said. "It all started in 2010 flowing into frontier markets, but recovery is suppressed in the egg of the sovereign debt crisis".

Mr. Chakrabortty pointed out, however, that some investors deep pockets continue to funnel money markets of the border. Chinese companies make huge purchases of industrial and agricultural assets in places such as Africa and the Viet Nam.

Whenever investors decide to join them, there are three themes that fund managers expect returns of drive for the coming years: the growth of a consumer society of middle class, with all services and products which are its attributes; production and export of natural resources. and the development of infrastructure, including transport and communication networks necessary to the success of companies involved in the other two themes.

Mr. Chakrabortty is some of the best opportunities of these days in Africa and the Middle East and the Viet Nam and Bangladesh, where labour is cheaper than elsewhere in Asia. His portfolio is invested strongly focused on consumption of stocks such as Safaricom, a provider of telephone services Kenya and Equity Bank, also in the Kenya. Other selections include Squire Pharmaceuticals in Bangladesh and First Bank of Nigeria.

Mr. Mobius sees encouraging prospects for the border of the markets almost everywhere. He was "optimistic about the potential for growth in the long term in many countries" in Africa and said that "we must not forget countries of Latin America, such as the Colombia and Peru, the countries of Europe, such as the Romania and countries in Asia such as the Viet Nam, Pakistan and Sri Lanka."

Mr. Seruma focuses on Africa, but he does not feel the need to invest it to capture the promise of the continent. Its portfolio includes funds such as oil in Africa, who discovered the Kenya reservations, but have a shares listed on the Canada and Tullow Oil, which is registered in Britain and has assets of energy in Ghana and Uganda.

The Fund also has hybrids developed border as East African Breweries, which is half owned by the conglomerate global beverage Diageo and the Nestlé Nigeria. Among stocks African pure love are Guaranty Trust Bank in Nigeria and Flour Mills of Nigeria, a producer of basic food.

"As more capital gets employees" markets follows, "you will see the return to catch up with the rest of the world", Mr. Seruma predicted. For how long it will take to become a big thing, it is uncertain. "We must focus on the history of long-term growth", he said "" and be a patient investor.""

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