StockSHAKERS

Economists see tepid recovery deep into 2011
The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire, according to an Associated Press survey of leading economists.

The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before. As a result, the economists think the Federal Reserve will keep interest rates near zero until at least next spring.

Yet despite their expectation of slower growth, a majority of the 42 economists surveyed believe the recovery remains on track, raising hopes that the economy can avoid falling back into a “double-dip” recession.

The AP survey compiles forecasts of leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation. Among their forecasts:

•Economic growth the rest of this year and early next year will weaken, to less than 3 percent. From January through May, the economy grew at roughly a 3.5 percent pace.
•The unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.
•State budget shortfalls pose a “significant” or “severe” risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.
The weak economy leaves Democrats and Republicans on Capitol Hill vulnerable as they head into the November midterm elections. Democrats, who now control both chambers, have the most to lose. The gloomier outlook is also a liability for President Barack Obama.

The economists have turned more pessimistic since the recovery hit turbulence in May. Europe’s debt crisis sent tremors through Wall Street, causing stocks to tumble and raising doubts about the durability of the rebound.
Since then, businesses have been slow to step up hiring. Americans’ confidence in the economy has declined, leading shoppers to reduce spending. And the housing market has weakened further with the end of a homebuyer tax credit that had buoyed sales earlier this year.

Consumers aren’t leading this rebound, as they usually do, despite ultra-low borrowing costs. Their spending growth will weaken in the second half of this year and strengthen only slightly next year, a majority of economists said. They think shoppers’ reluctance to spend more money poses a “significant” or “severe” risk to the recovery.

“It seems like we hit an air pocket in consumer spending,” said survey participant Richard DeKaser, president of Woodley Park Research.

Kasey Doshier, a graphic designer in Chicago, said the recession taught her to rein in her spending. The key moment came early last year, when her employer cut her pay 15 percent to avoid layoffs.

“I just lived paycheck to paycheck and had a good time,” said Doshier, 32. “It’s kind of scary to think that I am a paycheck away from being homeless.”

Doshier’s pay has been reinstated, but she’s still watching her money. Dinner and drinks with friends are gone. Now she goes to free street festivals and the city pool. She explores Chicago neighborhoods by taking her dog on long “adventure walks.”

The tight job market, scant pay raises and drooping home values are forcing others, too, to spend less and save more. Americans saved 4.2 percent of their disposable income last year. That was the highest level since 1998. Economists expect roughly the same level of saving this year and next.

That’s why growth of less than 3 percent is forecast into 2011. And weak growth helps explain why unemployment is likely to stay high. It takes about 3 percent growth just to create enough jobs to keep pace with the population increase.

Growth would have to equal 5 percent for a full year to drive the unemployment rate down by 1 percentage point. Neither the economists in the AP survey nor the Obama administration expects that to happen.

The Fed’s outlook has turned bleaker, too. It’s why Chairman Ben Bernanke and his colleagues are weighing new steps to invigorate the economy if the recovery shows signs of backsliding. They are also expected to hold interest rates at record lows longer than economists thought three months ago.

A survey the Fed released Wednesday showed the economy facing a bumpy path back to health. The pace of economic activity remained modest in most of the country.

Most economists surveyed said the Fed would being raising short-term rates no sooner than next spring. In the last survey, most had thought it could happen as soon as late this year.
At the same time, state budget shortfalls have emerged as a major threat in the economists’ view. State and local governments cut their spending in the first three months of this year at a 3.8 percent pace. That was the biggest cutback since the second quarter of 1981, just before the economy entered a severe recession.

When states and localities tighten spending by trimming services and jobs, the cutbacks ripple through the broader economy, causing individuals to spend less, too. The drop in state and local government spending shaved about half a percentage point off the U.S. gross domestic product in the first three months of this year.

Nearly two-thirds of the economists view the states’ budget crises as a significant or severe threat to the rebound.

Despite such risks, 55 percent of the economists described the recovery as “on track” as of the middle of the year. The rest said it was “faltering.”

“There’s a risk that the loss of momentum will snowball and feed on itself, but I think in the end the recovery will stay on track,” predicted another survey participant, James O’Sullivan, global chief economist at MF Global.

Should You Adjust Your 401(k) Now?
Increasingly, economists and stock market pundits are sounding the alarm over an imminent bear market.
• Economist Nouriel Roubini predicts that the Dow Jones Industrial Average will fall by 20%.
• Reuters financial blogger Felix Salmon offers a similar warning, telling investors that unless you’re a large institution, get out of the stock market right now. “Stocks are dangerous things to own,” writes Salmon. “We are entering an era of massive volatility. You, as an individual investor, just simply don’t have the risk appetite to be able to deal with that kind of volatility.”
• Economist and Dow Theory Letters author Richard Russell says this in a May 18 note about the stock market: “Do your friends a favor. Tell them to ‘batten down the hatches’ because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, ‘How the dickens does Russell know — who told him?’ Tell them the stock market told him.”

Bad market mojo or not, it’s up to you to decide whether to move your 401(k) money out of the stock market and into the so-called safe haven of bonds. But consider these factors before you bail on the stock market and move into bonds.

What’s ‘Job One?’

Your overall goal is to protect your 401(k) nest egg — to a point. If you’re younger and have 20-30 years until retirement, you can likely absorb a big stock market hit. Historically, stocks have proven very elastic. They snap back significantly after big market declines (just like stocks did in 2009, when the Dow Jones Industrial Average snapped back by 50%; that after a 2008 performance where the DJIA fell by 35%). If you jump into bonds now, you could miss the rebound when stocks start climbing again.

Are You Experienced?

According to Hewitt Associates, only 16% of all U.S. 401(k) investors actually made a funds transfer in 2009. If the other 84% of 401(k) investors were in bonds, they missed out on a big year in the stock market. Hewitt has a reason for that “staying the course” mentality among 401(k) participants. “While it’s encouraging that most workers stayed the course throughout the market’s roller coaster fluctuations, most did so simply because they were disengaged with the retirement saving process or too paralyzed with fear and confusion to touch their 401(k) plans,” says Pamela Hess, Hewitt’s director of retirement research. “If employees continue to ignore their 401(k) plans, they’re hurting themselves by letting the market dictate their retirement strategy.”

What’s Your ‘Risk’ Factor?

There’s no law that says you have to sit idly by and watch your 401(k) proceeds erode due to a declining stock market. Let’s face facts: Stocks are riskier than bonds. If you can accept the historically lower returns from bonds, and it helps you sleep better at night, allocating more fixed-income products into your 401(k) may work for you. Your returns may be lower over the long-term, but so will your blood pressure.

Focus on Target-Date Funds

A Fidelity Investment study shows that investors who use target-date funds (often called “life cycle funds”) tend to see better performance from their 401(k) investments. Target-date funds automatically reset your 401(k)’s asset allocation based upon pre-determined criteria specific to your retirement needs. Most target-date fund strategies are based on age. So if you feel uncomfortable moving your money around on your own (but still want to avoid big stock market plunges) a target-date approach may take that weight off your shoulders — and still get you out of potentially big market messes.

More for Your Money

If you do opt to remain in stocks, one advantage you’ll get no matter what happens is you’ll be buying fund shares at lower prices (if the stock market continues to tumble). It’s simple economics — you buy low when prices are low, thus accumulating more 401(k) fund shares in the process. That said, you have to keep contributing to your 401(k) to reap the benefits of what stock market gurus call “dollar-cost averaging.”

Look for ‘Stable Value’

If you do move to bonds, consider stable value funds (which are mostly composed of fixed-income investments). Such funds offer a guaranteed minimum return and thus a little shelter from any stock market tsunamis — and they’re increasingly being used by 401(k) investors. During the last stock market meltdown of 2008 and early 2009, Prudential Investments reported that 26% of all its fund account assets came from stable asset funds in the second quarter of 2008. But by the first quarter of 2009, that number rose to 44%. As the stock market resumed strength, that number once again fell to 37% as more investors left fixed-income funds for stock funds.

When it comes to moving your 401(k) money out of stocks and into bonds, there are no crystal balls that tell you what’s going to happen.

Statistically, though, investors who keep their money in equities and ride out stock market storms usually make out better than those who hop from stocks to bonds when the financial weather gets rough.

Overall, it’s a personal choice and it’s yours to make. But use the tips above to increase your chances of making the right call.

Fidelity sets performance fee for Anthony Bolton trust

The Anthony Bolton-led Fidelity China Special Situations PLC will carry a performance fee equal to 15% of any increase in its NAV over MSCI China Index, subject to a hurdle rate of 2%.
But Fidelity has confirmed that if the trust underperforms the hurdle rate in any year, this shortfall must be made good before any further performance fee becomes payable.
The maximum performance fee payable in any year will be equal to 1.5% of NAV. The trust will also carry an annual charge of 1.5% of total net assets.
As previously reported, Fidelity is targeting an initial capital raising of £630m before the public offer closes on the trust on 5 April.
Investors will be able to apply for shares from 26 February. Shares in the company will be issued at £1 and made available through a public offer for subscription in the UK and a placing in certain overseas jurisdictions.

More on Bolton and the Fund…
http://ftalphaville.ft.com/blog/tag/fidelity/

Stockshakers opinion is that Bolton has proven to be one of the brightest minds i nthe investing world. The real test is now starting.
Stockshakers wish Mr. Bolton the best in this journey and will follow along for the ride.
The Fund has started the funding process in London as of February 26th.
The U.S. access is YTBD.
Stockshakers will keep you updated as more information becomes available.
For more information on the fund: https://www.fidelity.co.uk/investor/research-funds/in-focus/china-special-situations/gateway.page

Fidelity China Special Situations PLC

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Fidelity targets 630 mln stg for Bolton China fund

Fund firm Fidelity International said on Tuesday it plans to raise about 630 million pounds ($982 million) in an initial fund raising for the new China fund to be run by its investment figurehead Anthony Bolton.

The figure tallies with industry expectations for the fund, which Bolton has said would seek to avoid capacity issues by limiting fund raising.

Bolton surprised the industry and colleagues alike when he announced he would put off retirement for a period to run a Chinese equity fund. He will move to Hong Kong next month for at least two years. [ID:nGEE5AP13R]

The company said in a statement it would launch the closed-ended investment company, Fidelity China Special Situations PLC, with an application to list on the main market of the London Stock Exchange.

Shares in the fund will be issued at 1 pound each and made available through a public offer for subscription in the UK and a placing in certain overseas jurisdictions, it said.

The launch coincides with a troubled period for Fidelity’s Hong Kong operations. Late last month, it suspended two portfolio managers, Kevin Chang and Wilson Wong, over a breach of the company’s code of ethics. [ID:nTOE60P0B7]

The offer will open on Feb. 26 and close on April 5.

Some commentators have said Bolton’s move comes at a time when China is filling a speculative bubble and is vulnerable to a sharp correction.

In the statement on Tuesday, he played down the risk.

“As for a bubble, I think it is much too soon to be talking in these terms. The Chinese market began its recent rise in November 2008 and, in my experience, bubbles take several years to develop, not a little over one,” he said. ($1=.6415 Pound)

Fund manage Anthony Bolton last week launched a China fund

An eminent British fund manager, Anthony Bolton, last week launched a fund aimed at putting $1bn into Chinese stocks. He has left retirement for the purpose: China, he explained, is in an “investment sweet spot”, with incomes per head rising and consumption accelerating.

Doubtless, Mr Bolton knows what he is doing. But less experienced hands should beware of an implicit fallacy. The long run evidence shows there is no correlation between economic growth and investment returns.

If that sounds counter-intuitive, remember it is not the opportunity that matters, but the price attached to it. As Adam Smith put it more than two centuries ago, “the chance of gain is by every man more or less overvalued”.

That is, we tend to pay more for growth than it is worth. That applies both to growth stocks and growth economies. And I suspect  though it is harder to prove that it also applies to investment by corporations.

The latest Credit Suisse annual study from the academic trio of Dimson, Marsh and Staunton (DMS) gives us 110 years of evidence on this. Among 19 countries covered, the long run correlation between real growth in gross domestic product and real equity returns is in fact slightly negative. The country with the lowest growth, South Africa, had the second highest average equity returns. Italy, with half the growth rate, produced nearly four times the returns.

As for emerging economies, live indices have been around only since the late 1980s. But the study backdates them to 1975, since when emerging markets have returned 1 per cent less per annum on average than developed markets.

But everything depends on the starting date. Since the indices went live, emerging markets have outperformed by 1 per cent. In the past decade they have outperformed by 10 per cent. This looks suspiciously like an emerging fad, prompted by the existence of the indices themselves. In the last decade, we have had Goldman Sachs’ doctrine of the supremacy of the Brics Brazil, Russia, India and China. It is not impossible that all four will achieve developed market status, but it would certainly be unusual. The DMS study simulates emerging and developed markets since 1900, based on per capita GDP.

In that time, five of 38 countries graduated from emerging to developed status, among them Greece and Portugal. Two more, Argentina and Chile, slipped from developed to emerging.

In the past 30 years, it gets worse. Besides Greece and Portugal, only two countries Israel and South Korea moved up a grade. Many more were downgraded from emerging to so called “frontier” status.

This is a handy reminder of the futility of long range forecasting. That said, how to explain the underwhelming performance of emerging equities, besides a simple propensity to overpay for growth?

One strong possibility is that stock markets fail to capture growth adequately. In an entrepreneurial economy, growth is what happens at the grass roots. By the time companies come to the market, the best is over  an idea supported by remarkably slow-growing or even shrinking real dividends in almost all countries over time.

Another possibility raised by Smithers & Co is that investors expect countries with fast rising GDP per head to have strengthening currencies. So it makes sense to pay high multiples of earnings at today’s exchange rate, since a rising currency will make good the difference.

If investors do in fact think that, they should be careful. According to Professor Dimson, of the 19 countries in his 110 year study, none has shown average currency movements over the period of more than 1 per cent per annum either way after inflation. Another suggestion from Mr Smithers brings me to a question raised at the outset  whether corporate managers, like investors, overpay for growth. Fast growing economies, he says, should have faster depreciation rates, presumably because any given piece of plant or equipment will be obsolete more quickly. It is doubtful, he adds, whether accounting practice recognises this properly.

More generally, companies may be tempted by the lure of high growth to pitch their prices low when first entering a market. Thereafter, their profits will rise rapidly with GDP. But if their starting point is too low, they are making the same mistake as portfolio investors who buy stocks too high. The end result in both cases is a disappointing long term return.

Does this mean you should steer clear of emerging markets? Not at all. In non crisis times they offer diversification, which is worth something in itself. But if you are invested in emerging markets to begin with, you should of course buy some old style, low growth developed market stocks on just the same grounds

Fund of the decade posts a 1,524% return
The best-performing funds over the past 10 years have capitalized on emerging markets in Eastern Europe and Russia.

In light of the news that we’re ending the worst decade ever for stocks, maybe it’s a good time to look at the best-performing fund in that period.

A Stockholm-based equity fund has produced a 1,524% return over the past decade, EFinancialNews.com reports. How? By betting heavily on emerging-market stocks.

The East Capital Ryssland fund specializes in Eastern Europe and Russia, according to EFinancialNews. If you had handed $10,000 to this fund in 2000, you’d have about $152,400 by now.

Here are the other funds in the top five, according to data from Morningstar:

2: Russian HQ Rysslandsfond, with a 962% return

3: FIM Russia, a Finnish fund with a 906% return

4: Baring Russia, with an 839% return

5: Odin Maritime, a shipping specialist run out of Norway, with an 832% return.

You’d think an Asian fund would have been on that list, but the top Chinese equity fund, Invesco PRC, achieved only a 466% return in the period, EFinancialNews reports.