Wednesday, 25 January 2012

Investor protection. Davos. Consensus building

Yesterday’s January PMI from Germany and the euro-zone confirmed our views – held since September, for those who care – that the European recession is likely to end within a couple of months, and Germany may avoid recession altogether (recession defined as two consecutive quarters of negative growth). Today’s IFO indicator from Germany will show whether we are moving further in that direction.

In the UK, a new consumer protection watchdog wants to protect “irrational investors” from dangerous financial products, as such investors cannot be relied upon to find out what is in their own interest. Well, given the amount of brainpower the financial sector has poured into making their products completely impenetrable, it would be about time. At the same time the UK government is finally flexing its muscle when it comes to greedy bank chiefs. Equipped with a clearly conservative government, UK is establishing itself as the leader in how to change the ground rules for the financial sector.

Before you shake your head at those poor private investors who now have to be protected from their own ignorance, a fresh study commissioned by Financial Times from Yale and Maastricht universities shows that there is no conclusive evidence that Private Equity creates value for the investors. It is, however, established beyond any doubt that substantial wealth is created for the owners of the Private Equity firms. New compulsory reading for pension fund managers, I guess.

Probably it is with Private Equity as it is with hedge funds. The early movers have earned fabulous returns, primarily because of their ability to fly under the radar and outside of prudential regulation. With huge money to be made, more people and more investors move in, and after a while the average return falls towards market returns. The only thing that proves a remarkably resilience is the ability of the investment managers to shroud themselves in a cloak of invincibility and keep their own remuneration up.

FT reports that US pension funds have had an average 4.5% return on their investments in PE over the past decade. But management fees have been on average 4%. Add all the other fees and received by the PE firms.

For once, this year’s World Economic Forum in Davos seems to be a place where serious things are discussed. In the running-up to the conference, Lagarde of IMF and even Zoellick of the World bank joined forces with 4 other leaders of international institutions issued a statement about the international economic situation.

Despite the more urbane wording, it was another rebuke to the German belief that austerity-based programmes can save the world in the short term. Zoellick – a man of impeccable conservative credentials, then went on to explain that Germany has to transform herself from a participant in Europe to a political leader. It means to resume responsibility for all of the area, and not, NOT, think of their own domestic situation first. Interesting, and very much in line with former Chancellor Helmut Schmidts insightful comments from 2010.

It is equally interesting to see that some of the leading consensus-makers, UBS and Citi, are now joining Origo in pointing out that a risk-on rally is ongoing. Citi even jokes that ECB has created “artificial life”. Whatever! It probably means that they had not seen it coming. I do not care as long as it works. Now we wait for all the other major banks to join.

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