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7 Conclusions From the Spring Frenzy of Financial Activity

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April and May are always busy months for investors, with a robust conference calendar, events sponsored by investment firms and numerous meetings with portfolio managers and research providers. The bombardment of information can be somewhat like “binge-watching” a television series. After recent research trips to Hong Kong, San Francisco, Chicago and New York, I share seven notable conclusions from binge-watching investment content:

1. What happens in China no longer stays in China: China represents more than one-quarter of global GDP growth, and exports to China are vitally important to the economic health of many countries. Some analysts have a negative top-down outlook for China, based on worries about tightening monetary conditions, high debt and trade friction with the United States. Any significant disruption in Chinese growth could create a slowdown far beyond Chinese borders.

However, the bottom-up view from Asian investors signals a more optimistic outlook for Chinese growth.  Public and private equity investors were bullish about opportunities in China, particularly among companies that are using technology to improve productivity. They characterize digitization as a major theme throughout the Chinese economy, not just in the technology sector. The sophistication of Chinese companies is changing as well — in the words of one investor, the Chinese economy is migrating from “copied in China” to “innovated in China.”

2. “Living the Nightmare:” With the 10-year anniversary of the fall of Lehman Brothers approaching, the global financial crisis was a common topic for discussion. The soccer show “Men in Blazers” is filmed in a studio known as the “panic room,” and often features host Roger Bennett brandishing a coffee cup that says “Livin’ the nightmare.” I felt like I was reliving the nightmare while listening to veterans of the crisis share their perspective.

The encouraging news is that many of the systemic risks that caused the crisis seemingly are less of an issue today. Real estate is on more solid ground, although there are excesses in certain markets.  Financial institutions have far lower leverage, and regulators and financial institutions have far more visibility into systemic risk and counterparty risk than was the case 10 years ago.

Although investors think that systemic risk is relatively low, like winter in “Game of Thrones,” recession is coming for the U.S. economy. However, given economic momentum and fiscal stimulus, the next recession may not materialize until 2020 or beyond. The U.S. budget deficit, expected to reach $1 trillion by 2020, may limit policy flexibility during the next recession.

3. Lessons from the financial crisis: Steve Eisman, made famous by the book and movie “The Big Short,” was an entertaining but prickly speaker at the CFA Institute Annual Conference in Hong Kong. Eisman, a self-described misanthrope, seemingly channeled the notoriously cranky New England Patriots football coach Bill Belichick in his conversation with Bloomberg’s Yvonne Man.

In Eisman’s view, there was a generation of Wall Street executives “who mistook leverage for genius.” Eisman illustrated his opinion about reduced systemic risk among U.S. money-center banks with the observation that Citibank is levered 10 to 1 today, far below their 35-to-1 leverage ratio before the crisis.

According to Eisman, a major factor in the crisis was that “incentives trump ethics every time.” Nobel Prize winner Daniel Kahneman also highlighted the importance of incentives, calling the crisis a “combination of overconfidence and perverse incentives.”

4. “Meet the new boss, same as the old boss”: Discussions about geopolitics reminded me of the lyrics from the Who song, “Won’t Get Fooled Again.” North Korea’s Kim Jong Un is continuing on the path blazed by his father and grandfather, Venezuela’s Nicolás Maduro is continuing the disastrous economic policies of Hugo Chávez, and Malaysia’s 92-year-old Mahathir Mohamad is back in power. The awkward coalition of populist parties attempting to form a government in Italy and rising popularity of Jeremy Corbyn in the U.K. intensifies investor concerns about Europe’s economic prospects. Leaked documents from Italy’s populist parties raised concerns about Italy’s willingness to pay its significant debts and commitment to currency union. The latest impasse in Italy has caused credit spreads to widen between Italian and German debt and is a reminder of the populist threat to economic growth.

5. Conflict among the major powers: JPMorgan assembled a who’s who of prominent former U.S. government officials at its annual Wealth Management Symposium. While providing insight into the future of relationships with Russia, China and North Korea, the discussions were about as uplifting as binge-watching The Handmaid’s Tale.

Vladimir Putin is unlikely to leave office anytime soon, with one former official speculating that he plans to remain in power until 2030. Putin apparently blames the U.S. for the Arab Spring and for the 2011 protests in Moscow that were the largest since the fall of the Soviet Union. Putin’s “zero sum” world view makes continued friction likely.

Tensions with China over North Korea, the trade deficit and industrial policy will likely continue, particularly given the “Made in China 2025” plan to become a world leader in technology.

6. Sustainable investing is entering the mainstream: High-profile issues at companies such as BP, Wells Fargo and Equifax highlights the brand impairment and financial costs that can result when companies fall short in their environmental, social and governance standards. Despite consumer confusion about definitional differences between sustainable investing, socially responsible investing, impact investing and ESG (environmental, social and governance) investing, nearly every conference had at least one session about socially conscious investing. A growing body of research supports environment, social and governance factors as material nonfinancial indicators of risk and potential returns; improving disclosure standards and sustainability ratings provide greater transparency for investors and consumers.

7. Despite nostalgia for the bipartisan solutions from the Reagan era, bipartisan solutions aren’t likely until there is a crisis. In some ways, the explanation is simple — it’s math! President Donald Trump has an 89% approval rating among Republicans, but only an 11% approval rating among Democrats. At the congressional level, gerrymandering created a map in which 80% of congressional districts are safe for one party.

Most conference sessions were investment focused, but several speakers at the CFA conference offered insights beyond the investment arena. Kahneman characterized regret as the greatest enemy of good decision making. He also talked about how people do not like “slow” thinkers as leaders, preferring the style of people who make decisions quickly. Zhang Lei, CEO of Hillhouse Capital Management, discussed the importance to his firm of empathy, humility and sportsmanship. Zhang also talked about the importance of having “empathy for people who are different from you.”

Daniel S. Kern is chief investment officer of TFC Financial Management, an independent, fee-only financial advisory firm based in Boston.

Prior to joining TFC, Daniel was president and CIO of Advisor Partners. Previously, Daniel was managing director and portfolio manager for Charles Schwab Investment Management, managing asset allocation funds and serving as CFO of the Laudus Funds.

Daniel is a graduate of Brandeis University and earned his MBA in Finance from the University of California, Berkeley. He is a CFA Charterholder and a former president of the CFA Society of San Francisco. He also sits on the Board of Trustees for the Green Century Funds.


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