Portfolio Construction - Part 1

There are still a lot of seemingly respected intelligent commentators out there who think that the US and global economies are in strong shape, that corporate balance sheets are healthy and that share prices are attractive. Readers of this column will know that we believe that there is plenty of evidence to the contrary and that these commentators are simply refusing to contemplate the reality of the situation. Over the coming weeks we’ll try to look at a number of these issues and to explain, in each case, our view of the best investment strategy for those impending events that in turn could, should and undoubtedly will occur.
Let’s start with the fallacy that even if growth in the US slows or a full blown recession occurs, then the global economy will tick along fine because Asia (and, according to some viewpoints, Europe also) are able to ‘take up the slack’.
Morgan Stanley’s Stephen Roach seems to us to be an oasis of reason within an organisation whose house view, while still more realistic than many on Wall Street, is still too aligned to the idea of promoting the upside of long only retail equity funds to the public at large. He is very cynical of any good news stories out there, specifically the one of the moment, that being the Asian de-coupling story - i.e. that US slowdown will be mitigated by strong Asian growth.
Convictions among Panglossian commentators are suddenly deep that both China and India will stay the course of hyper-growth. To us this seems at least part inspired by the need for it to do so for there to be a happy ending. Admittedly, so far, no downshift has materialized. The 10.7% increase in Chinese GDP in 2006 was the fastest since 1995, when the size of the economy was less than one-third what it is today and Chinese industrial output growth has re-accelerated to an 18.5% y-o-y pace over the January-February period - up from the sub-15% comparison in the final period of 2006 and only a shade slower than the 19.5% gains recorded last June.
While India’s industrial production growth is certainly not as brisk as China’s, the 10% y-o-y comparison in early 2007 remains well above the 7.25% pace that was evident in late 2005 and early 2006. Needless to say, if China and India stay their present course, the global economy would barely skip a beat in the face of a US slowdown. Collectively, China and India account for about 21% of world GDP, as measured by the IMF’s purchasing power parity framework - essentially equal to the 20% share the statisticians assign to the United States. Add in the recent acceleration in the Japanese economy - a 5.5% annualized increase in the final quarter of CY2006 for an economy that accounts for another 6% of PPP-based world GDP - and there is good reason to believe that the impact of America’s downshift could well be neutralized by the ongoing vigour of the Asian growth machine. The Asian offset, in conjunction with a modest cyclical uplift in a long sluggish European economy, is the essence of the case for global de-coupling - a world economy that has finally weaned itself from the great American growth engine. A key presumption of that conclusion is that Asia can stay its present course.
Like us, Roach has two problems with this:
1) Strong growth rates for a prolonged period in both countries means that both China and India are now having to rein in their growth to avoid fuelling systemic inflation - internal pressures have already built up within Asia’s fastest-growing economies that could be sowing the seeds for slower growth ahead.
2) China in particular is still dependant on the continued well-being of the US consumer for its growth.
In other words, don’t count on Asia’s growth machine to fill the void as the US economy slows. Policy makers in China and India are shifting toward restraint (thereby tilting growth outlook in the region’s fastest-growing economies to the downside). In particular, both the Chinese and Indian economies are now displaying worrisome signs of overheating. In China, the symptoms have manifested themselves in the form of imbalances in the mix of the real economy, widening disparities in the income distribution, and a large and growing current-account surplus - to say nothing of the negative externalities of environmental degradation and excess resource consumption.
In India, the overheating has surfaced in the form of a cyclical resurgence of inflation, with the CPI running at a 6.8% y-o-y rate in early 2007 - a sharp acceleration from the 3.8% pace of 2002-05. In both cases it would appear that the authorities are already in the process of shifting their policy arsenals toward meaningful restraint.
In China, the direction comes from the top in the form of growing concerns expressed by Premier Wen Jiabao about a Chinese economy that he has explicitly characterized as “unstable, unbalanced, uncoordinated, and unsustainable”. Since that speech there has been monetary tightening and the securities industry regulators have issued new rules that prevent companies from purchasing equities with proceeds from share sales. China should be taken seriously in its attempt to regain control over its rapidly growing economy in an effort to shift the focus from the quantity to the quality of growth. This is good news for China but could be disappointing for the decoupling camp that expects rapid Chinese economic growth to remain resistant to any downside pressures. India is similarly positioned. The Reserve Bank of India does not take overheating and cyclical inflationary pressures lightly. Indian authorities are fixated on a mounting cyclical inflation problem and appear more than willing to take a haircut on economic growth to achieve such an objective.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Buying a second-hand digital

I was asked the other day about the traps or pitfalls in buying a second-hand digital SLR camera, and when I thought about it for a while, it is not quite the same as buying a second-hand film camera.
The word to remember is ‘technology’. Just as a five year old computer is close to becoming suitable for oyster farming, because of all the advances in technology, you have the same situation with digital cameras. With film, it was basically the same technology for 30 years, but with digital technology, it’s a little different! This moves so fast that your new camera is obsolete by the time you have walked out of the shop! This also means that second-hand digitals do not hold their value, so barter hard!
With the internet, it is easy to research your second-hand camera, so do that before going further. If it was highly rated (then) it will still be a good performer, but here are some pointers.
Just about all SLR’s these days have creative control over aperture and shutter speed, so in my book, the manual control over both these variables is totally necessary. Aperture Priority and Shutter Priority do make life easier at times, but you do need a fully metered manual mode as well. Take a “high key” photo for example. Unless you can over-ride the magic electronic eye, you will not get a high key shot, because you have to flood the film with light to get that ‘blown out’ result.
Likewise, to get dark and moody images, you have to again over-ride so that you are relatively underexposing the shot. Auto anything, or shutter or aperture priority will not do this for you. This is the creative control that you must make sure is in the model you are looking at.
That creative control also allows you to shoot against the light, and balance your flash power against the ambient light to produce some wonderful images again. If you don’t get it right first time, you can go back and try again, till you know exactly what you have to do. Digital gives you ‘instant’ results.
So what should you look for when evaluating a second hand camera? Like any second hand equipment, be that cars or cameras, you want to find ones that have not been abused in their lifetime. And with cameras the big problems are being dropped or getting wet. I generally recommend that you look at the swivels where the neck strap attaches to the camera body. If these are well worn, then this is a camera that has done more than its fair share of capturing images. It has been used in its life, not carefully left in a camera bag, waiting for you to come along and give it a good home.
I recommend that you open all battery compartments and look for corrosion in there. The fumes from degenerating batteries can render any camera an invalid, especially the sensitive electronic circuit boards.
A general look at the camera body will show if there are any knocks or flattened areas to indicate that it has been dropped on to something solid, like the floor. Whilst it may be fine, I would not buy a camera that has been dropped. It is too much of a risk.
Only after all the physical inspections should you consider looking at the functioning of the camera. Try the individual shutter speeds, and you will hear the differences in the sounds as the speed increases. Any ‘catching’ and this is not the camera for you.
You should also look through the lens while altering the aperture and you should see the opening close off as you go from fully open to almost fully closed. And look for ‘snail trails’, the sign of fungus growing on the lenses, which can be difficult to eradicate.
If the camera is still looking hopeful, now is the time to try the various functions. Being digital you can instantly see if they are working. If any function is doubtful, walk away from the deal.
Finally stick with name brands - and lots of luck!

Modern Medicine: by Dr. Iain Corness, Consultant

Looking at health risks by numbers

I can assure you that every practicing doctor in the world has heard about your Uncle Harry who smoked three packs of cigarettes a day, drank two bottles of whisky by lunchtime and lived to be 104. The story of Uncle Harry is trotted out to stymie any thoughts of stopping smoking, or that too much alcohol is really too much of a good thing.
Unfortunately, the unstoppable Uncle Harry means absolutely nothing when we look at health risks from an overall point of view. Just as one swallow doesn’t make a summer, one Uncle Harry does not prove that smoking isn’t dangerous, or that too many bottles of whisky won’t cause cirrhosis. That kind of “proof” only comes after looking at large numbers of Uncle Harry’s, and that is done by a special group of people called epidemiologists.
Now the World Health Organization (WHO) has teams of epidemiologists and other health watchers looking at the spread of disease in the world. Not just Uncle Harry. They have a good idea where we’re headed, and much of that depends upon where we are.
The WHO has data to show the major influences and risks to health all over the world, and the global picture is interesting, with the number 1 global health risk being Underweight. Here is the influence of the African continent, with malnutrition and outright starvation influencing millions. Again, it is the African continent that has dominated the second major health risk - Unsafe sex. The HIV/AIDS epidemic in that region influencing the global statistics. After those two comes High Blood Pressure and Tobacco and then Alcohol at number five, and so much for Uncle Harry.
However, if you split the statistics up and examine the situation in developing countries, such as much of Asia, the picture is different. Number 1 health risk is alcohol, followed by High BP, Tobacco and being underweight.
A close look at the risks for the developed societies (that covers the Europeans, Brits, Americans, Australians) gives yet another differing list of “most likelies”. Top spot is Tobacco, followed by High BP, Alcohol, Cholesterol and being Overweight.
So, depending upon the society, the things that are waiting to get you are quite different. A WHO report states, “As a country develops and more people buy processed food rather than growing and buying raw ingredients, an increasing proportion of calories tends to be drawn from sugars added to manufactured food and from relatively cheap oils. Alongside the change in diet, changes in food production and the technology of work and leisure lead to decreases in physical exercise. The consequent epidemic of diet-related non-communicable diseases (obesity, diabetes, hypertension and cardiovascular disease) is projected to increase rapidly. For example, in India and China, a shift in diet towards higher fat and lower carbohydrate is resulting in rapid increases in overweight - among all adults in China and mainly among urban residents and high income rural residents in India.”
An interesting fact comes out of some developing nations, however, where countries have taken it upon themselves to promote a healthier way of life, despite the advent of the high living “western” style economy. Again, quoting WHO, “The Republic of Korea is an example of a country that has experienced rapid economic growth and the introduction of Western culture since the 1970s. There were large increases in the consumption of animal food products, and a fall in total cereal intake. Despite this, national efforts to retain elements of the traditional diet - very high in carbohydrates and vegetables - seem to have maintained low fat consumption and a low prevalence of obesity.
“The Republic of Korea has strong mass media campaigns to promote local foods, emphasizing their higher quality and the need to support local farmers. A unique training program is offered by the Rural Development Administration. Since the 1980s, the Rural Living Science Institute has trained thousands of extension workers to provide monthly demonstrations of cooking methods for traditional Korean foods such as rice, kimchi (pickled and fermented Chinese cabbage) and fermented soybean food.”
It’s not too late to look at your diet either! Or put that cigarette out.

Learn to Live to Learn: with Andrew Watson

What happens in the classroom?

If it is the objective of education to equip students for the outside world where they can be helpful and productive citizens of the world, then it appears to me to make sense to recognise the local, regional and global environment in which they exist and to reflect those environments in the places where learning happens and the ways in which learning happens. This includes, by the way, the architectural surroundings as much as it does the delivery of the curriculum (White, 2005).
My interpretation of IBO philosophy and curricula is not far removed from the basic tenets of Renaissance humanism and Alberti’s ‘Uomo Universale’ who proclaimed “A man can do all things if he will.” In the twenty first century, he might need to! Yet how many of us define others in a relatively narrow sense by ‘what they do’, limiting almost by definition another’s potential and probably, by association, our own? Perhaps it is merely a means of protecting our own identity and self-esteem, if for some reason we feel insignificant next to another who seems more assured, more clever, more confident? This may in some small way explain the habit of some cultures to ‘knock down’ their heroes, David Beckham being a good example. It’s easier to criticise after all isn’t it? But I digress.
If I am not surprised when someone tells me ‘they are no good at art” (to which I might respond that either they probably haven’t learned it or they haven’t spent enough time on it), I am shocked when I hear educational managers infer the same; that becoming excellent at anything is more dependent on an accident of genetics than anything that happens through education. If so, then why do we bother at all? Do they seriously believe that either Pelé’s or Daniel Barenboim’s levels of achievement are unrelated to their relentless hours of practice, the single-minded pursuit of excellence and the practical and spiritual teaching they have received? The characteristics of ‘Uomo Univesale’ for the 21st century might be bi or tri-lingualism, great athletic prowess, devotion to aesthetics and knowledge of global politics and the art of debate, united by the bond of integrity. And probably much more, which might put many people off. “How” you may ask, “are we to achieve that?” (I hope we can bypass the “Why should we achieve that?” stage for now). What is to stop us aiming for the stars? Nothing, but ourselves. Easier said than done, you might say, but the point is that it’s adopting a state of mind that is important. “Embracing the art of the possible,” I call it, which is only possible, I submit, if you can leave the shackles of apathy, prejudice, ignorance and hatred behind.
Enter into once again, the house of the IBO, home to ‘Uomo Universale’. It is the central elements of the IBO philosophy, which fuse theories of learning with delivery, which I find so exciting. In the IBO curriculum models, ways of learning and ways of knowing, along with recognition of the individuals rights and responsibilities in society, are placed quite deliberately at the centre of the (three) curricula, which are not linear, but designed in two hexagons and an octagon. The central components are intended to infiltrate, inform and enthuse the delivery of the curriculum areas. At the centre of the IBO philosophy is the acknowledgement that people see things in different ways. In “IB”, it is not so much the “what” of curriculum delivery, i.e. the content, but how knowledge relates to other aspects of curriculum planning.
In response to the idea that curriculum planning must begin with statements about the principles upon which practice is to be based, Tyler (1949) poses the question, “What educational experiences can be provided that are likely to attain these purposes?” The central components of the IBO curricula, epitomised by “Theory of Knowledge” (TOK) in the diploma, answer this question. Indeed, as a result of what he perceives to be the failure to recognise the problematic nature of human knowledge, Kelly (2004) maintains that: “Decisions concerning the knowledge content of the curriculum become the first, indeed the only, stage in curriculum planning”. Wittgenstein spoke of “question marks that don’t go deep enough”. Theory of Knowledge recognises that it is important to travel beyond the ‘first idea’ and encourages metacognitive processes based on the understanding that critical and compassionate examination of the shared assumptions about human nature are central parts of learning and the curriculum. Equally, the IBO recognise that: “Education does not begin or end in the classroom or examination hall and the most essential elements of education may exist outside of both.”
The IBO Mission Statement ends with the words, “Other people, with their differences, can also be right.” In a post-modern, post-colonial word, this statement marks a significant and conscious divergence from the idea, dominant perhaps until relatively recently (notwithstanding the (mis)use of terms like democracy and freedom in current conflicts) that it was possible and often preferable to impose one set of cultural values upon another. It does not mean that the IBO is in favour of cultural relativism, more that they envisage a world of ethical absolutes.
The IBO is an evolving non-profit organisation which embraces change, run by serious ideological professionals. Organisationally, it is a model of sustainable growth. Those unfamiliar with the IBO curricula always ask “what makes it so special?” The answer is that it combines the best of what is on offer, theoretically, pedagogically, practically and technologically, all of which spring from an ideological base. Never has the need to relate curriculum and learning disciplines with the real world of global politics been so great. It appears clear from observations of conflicts, human rights, democracy and social justice that understanding the complexities of the contemporary world and being able to promote understanding of cultural and ethnic diversity at this point of history is the great challenge for all of us. In my view, the IBO curricula represent the best chance for preparing students in the twenty first century to meet this challenge.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww@ gardenrayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust. org.uk email: info@ebtrust .org.uk
Next week: Organisational Culture?