Patience Remains Sound Policy for Long-Term Investing

Tuesday, 29 Jan 2013 10:36 AM

By Hans Parisis

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On Monday, Mark Carney, current governor of the Bank of Canada and the next governor of the Bank of England, speaking in Zurich, Switzerland, in his capacity as chairman of the Financial Stability Board, warned that while markets have improved and banks have become healthier in recent years, the global financial system is far from stable yet and tail risks remain.

Interestingly, last week, at the World Economic Forum in Davos, Switzerland, Carney also said the job for central banks of fixing financial markets is by no means over and what does or doesn’t happen over the next two years will be crucial.

It remains a worrisome fact that bank/financial reforms, like the ones on derivatives and those that the G20 leaders pledged four years ago at the height of the crisis, still haven’t been implemented yet. This situation has once again been underlined by the case of the Banca Monte dei Paschi di Siena, which is the world’s oldest bank (founded in 1472) and Italy's third largest bank that had to be rescued on Saturday with $5.24 billion in emergency loans provided by the Bank of Italy.

Long-term investors should note that among the tail risks Carney referred to is part of the situation to which the International Monetary Fund (IMF) referred to back in October 2012 when it stated European banks could be obliged in 2013 to sell as much as $4.5 trillion in assets if policymakers fall short of pledges to stem definitively the fiscal crisis.

It’s no secret that “real” and adequate capital buffers for the banks are still insufficient. As a long-term investor, you should always keep in mind that if there is a downside risk, you should try to deal with it as if there is a 100 percent chance it will occur. Never fall into the trap of complacency, which apparently is the case today. Now, how things this year and beyond will turn out remains still an open question.

Globally, the biggest economical/financial risks remain concentrated in the eurozone, where European Central Bank President Mario Draghi said last week that, because of further fiscal consolidation in the eurozone, sustainable growth still should remain off the table as long as that consolidation goes on and because of that, recessionary conditions would probably persist.

Nevertheless, he said he hoped that could change somewhat for the better during the second half of this year. In the meantime, the euro is still remaining in over-valued territory compared with the exchange rates of its most important trading partners (e.g., dollar, pound sterling, yen and renminbi).

In its 16th Annual Global CEO Survey, PricewaterhouseCoopers reported that the confidence of global CEOs in the potential growth of their companies has fallen for the second year in a row to 36 percent for 2013, down from 40 percent in 2012 and 48 percent in 2011. Interestingly, Latin American CEOs reported a rise in confidence, North American and the Asia/Pacific region CEOs registered double-digit declines in confidence and Western Europe CEOs were the least confident, with only 22 percent expecting growth. The global CEOS certainly don’t share recent signs of optimism as reflected in various markets.

I don’t think it’s an overstatement to say that, so far, there are no signs whatsoever the eurozone is turning the corner and is finally starting to “grow” out of its numerous structural deep-rooted problems.

Long-term investors should keep in mind that deficits are OK if they are used for investments to make the future better, but deficits are not OK if they are used to fund growth, as this is unsustainable in aging societies and is certainly now the case not only in the eurozone, but also in the United States, China and Japan.

Subpar growth now seems to have become the new norm of growth in the developed world, which is, fortunately, not the case for most of the developing world. Last week, the IMF pared again its global growth forecast to 3.5 percent, down from 3.6 percent in October, and stated it expected negative growth in the eurozone for a second year in an a row.

Please keep in mind that, historically speaking, 3 percent global growth is recessionary territory for the IMF.

In my opinion, it’s still way too early for long-term investors to start taking on risk. No doubt, there will come times when risks will be not as high as they are today.

That being said, to me, whatever period we are in, high risk should never represent more than 20 percent of a safely balanced long-term portfolio. Of course, everybody has to decide for themselves the risk levels they are able and willing to take on.

In the foreseeable future, an important risk factor is that central banks will have to start cutting their easy money flows. No, not next week, but I have no doubt these actions will not support the actual artificially backed inflated prices in various markets.

Never forget, long-term investing is not trading, which means risks can be taken on at a reasonable proportional rate of the portfolio.

My preference remains only buying on dips and, if possible, on corrections, while always trying not to think you are going to miss that last high-speed train of the last chance for the best buy. Being patient should remain, in my opinion, sound policy for long-term investing.

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