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.
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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.”