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Erik van Dijk
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Hi! I am Erik L. van Dijk, principal at LMG Emerge. LMG Emerge is an internationally-operating institutional investment consultant with offices in the Netherlands and at Mauritius. Our clients are pension plans and other institutional investors, family offices and HNW individuals. In close... More
My company:
LMG Emerge
My blog:
LMG Emerge - New Economies
My book:
Asset Pricing and Risk in Emerging and Frontier Markets
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  • Balancing Act - Beggars can't be Choosers

    Introduction : Maximum Debt Levels in the USA

    The financial world continues to be in what we could label a situation of 'Red Alert'. In the US Republicans and Democrats try to avoid that the US will become one big Minnesota (although politicians in that state did finally reach an agreement concerning the new budget) with Obama's challenge now being to ensure that maximum acceptable debt levels will be increased on the one hand, and - an even tougher challenge - making sure that these maximum levels will remain maximum levels for quite some time to come. In other words: start working toward a reduction of debt levels. And of course: the second part of the challenge is the more complicated one.

     

    LT Chart of US Debt Ceiling - Looks like Credit Card Debt of a Shopping Addict!


    With rating agencies considering to reduce the credit rating of the global leader from AAA to a far lower level, the US is already struggling. But when taking the value of the US Dollar as a refereeing judge it looks as if financial markets are still more or less OK with what is going on.

    Reason probably being that the US understands that it does at the moment need the support of those with the big pockets, read: China and sovereign wealth funds in the Middle East. If you increase debt levels to new record levels, you better gain support from those who have the fullest pockets. Obama's talks with the Dalai Lama made it clear that the US president understands this simple business concept.


    PIGS in Europe


    But what about Europe? Nervousness remains in Europe, with a totally different approach so it seems. Greece, Portugal, Ireland and to a lesser extent Spain, Italy and maybe even Belgium are countries with external debt to GDP ratios that are troublesome or even disastrous (Greece). This is not just bad news for the Euro, but it should also be bad news for those who invested in these international securities. These countries were never of the same credit quality as German or Dutch or Swiss government bonds. It is the same old situation: lower rating or higher risk (and with ratings often not as good as they should be, this is not the same!) translates into higher interest rates. Those who go after these rates should know that sometimes this 'excess interest rate return' won't happen because of default.


    In the old days with those countries having separate currencies, these defaults did not happen directly but indirectly. Instead of a default the Ministries of Finance would simply print more of the local currency, with the latter depreciating. But: in Eurozone we are now talking about a situation in which the local currency is international currency as well. Result: the borrowing countries cannot simply do that. And that means that they have but one choice: restructure the economy and/or go into default.


    If we take Greece as the leading example (it is indeed also the show case that does get most international attention, because the catastrophe is worst there), then it becomes clear that we see on the one hand a lame restructuring effort with Greece expecting that international lenders will in the end take the bulk of suffering. The international financial community in Europe (ministers of Finance, ECB, Central Banks, Financial Sector) and abroad (NYSE:IMF) seems to forget what the Americans understand perfectly well: in the end it is best to involve the have's when trying to find solutions for the have not's.


    Financial Ruins are no Tourist Attractions: So don't talk and watch, but do something


    Balancing and How to accept the New Reality

     

    China did already indicate that - as part of their international diversification policy for the reserve position - they will not necessarily let the Euro fail (if only for the sake of creating a better international power balance that isn't too dependent on the US Dollar!) but so far European leaders and IMF (with the exception of Germany beggars themselves, with struggling economies) have chosen to go for a DIY strategy. United we stand together: but without money.


    Well, in that case the only way out is either loans that are almost perpetual with very low interest rates (and therefore effectively pose a subsidy to the weak financial countries!) or a restructuring that includes a default with lenders not getting everything back. Some Ministers of Finance (including the one here in the Netherlands) try to score points nationally by talking tough language, but of course they do realize that a tougher stand implies that it is their own lenders who will take a substantial part of the loss. And those lenders are - yep - the same banks that were to a large extent saved or even bought by Western governments during the Global Financial Crisis.


    The bottom-line remains: Beggars can't be choosers. There was and is no credit shortage. It is just that flows went from Europe and the US into Emerging Countries and Gold and Switzerland (the latter two as example of flight into safe havens due to the onging nervousness, with the latter also caused by the imbalance that western leaders are now cultivating).


    But still: we can listen for hours to TV, read opinion articles for hours and the only thing we do not hear is the story above. The beggars want to continue their belief that the world hasn't change, only to realize far to late that it did!

     

    Beggars can't be Choosers: Looks as if this time the biggest Beggars will be best off!

     

     

    Jul 21 5:06 AM | Link | Comment!
  • Gender Diversity 'Free Lunch' Factor in Bottom-Up Investment Selection?

    The New 'Free Lunch' Diversification

    Nobel Prize Laureate dr Harry Markowitz (Nobel Prize 1990) taught us that diversification can create value by reducing risk levels more than that returns will suffer when combining different investments ranging from high-return, high-risk to lower-return, less-risk. And yep, if you click on the link to Markowitz in Wikipedia, one of the articiles in Selected Publications is joint work with your author, LMG's co-principal Erik L van Dijk.

    This 'free lunch' is a reality of life most-of-the-time, but not always. Markets are also moving dynamically, with new asset classes and countries gaining in importance and others going into oblivion. At the same token the process of 'Globalization' will have an impact on diversification, because Globalization will increase correlations between asset classes and countries, thereby making the potential gains from diversification smaller.

    But research has indicated that there is another type of diversification with potentially untapped, and maybe even larger potential benefits.

    Dutch newspaper De Telegraaf reported on Karmijn Capital

    a firm led by 3 women with decades of experience in Private Equity and with a very interesting strategy. As one of their prime filters when selecting their investments they look for firms with above-average female boardroom presence. Required: a female CEO and/or 25-75 percent female board representation. Just another effort by feminists to discriminate positively?

    Nope!


    Women in the Boardroom? Facts show that it does make sense!

    McKinsey research has indicated that gender diverse companies generate 10% higher returns on equity and 48% higher earnings before interest and taxes (EBIT). Companies with more women in the board outperform those with less women by very high margins, both with respect to Return on Equity and Return on Investments. And even when we look at negative statistics we do see a positive difference in favor of the gender diverse companies. When analyzing bankruptcy statistics, Graydon found that 14.6 percent of entrepreneurs involved in a bankruptcy were women and 85.4% were men. If we compare that with the fact that about 25 percent of entrepreneurs in the sample was female and 75 percent male, women are underrepresented by 10.4 percent in the negative category, with men overrepresented by 10.4 percent.

    Logical? We believe so. Behavioral and neurological research indicates that women are better multi-taskers and entrepreneurship is a complicated activity that involves a lot of multi-tasking. On the other hand, men are hunters, good in activities that require a lot of focus and quick decision taking. But with the bulk of management boards or entrepreneurs being male, an overfocus on these qualities could easily lead to trouble. Men do also have a tendency to overestimate their qualities when successful, whereas women's careful combination of various factors in a more realistic multi-factor setting will provide a countervailing power that - when combined - will lead to a better outcome. Other research has also indicated that when looking at stock market results, this mutlifactor/multitasking quality has also resulted in women being at least as good - if not better - than herds of their male peers.

    But still: inner circle effects, glass ceilings and the competitive strengths of men in inner-office 'combat' - in combination with cultural factors - have led to a situation in which women are underrepresented. LMG believes that the strategy of Karmijn - when applied in an objective manner without falling for a positive discrimination like trap - does hold a lot of potential, and we will carefully follow the initiative to find out if it could be of interesting to our investment clients, be they institutional or high net worth investors.


    Jul 15 8:47 AM | Link | Comment!
  • Not a Nice Story: Our Energy Vision and How it Translates into a Focus on New Markets and Investment Opportunities

    We just uploaded our SlideShare presentation on Energy Risk in Emerging Markets. Included are also a lot of tables and figures from our research that translate into analyses useful for other markets than just the Emerging or Frontier ones.


    The Energy Trends and their Investment Impact

    It is not necessarily a nice story for those in the Western world or even for China. This is a story that indirectly predicts good times for the LEAST popular Emerging Markets areas (Africa, Middle East and Russia). LEAST popular when looking to behavioral biases that is. Some countries are just more liked than others. China can top the tables in terms of executions year after year, but they remain those nice, friendly smiling nice people that we know from the restaurants in our towns and villages. Russians, Iranians, Arabs? They are the crooks! Not our LMG words, but it is too obvious that this is often how the implicit biases go. Sociologist Hofstede has done a lot of research into cultural and behavioral differences and a lot of other scholars have used his work to analyze these factors even further. See also our SlideShare presentation on the impact of Cultural and Behavioral Biases on our market picking activities in more exotic investment destinations.

    Within the Western world these trends could play out well for France. The French are actively playing the nuclear card. Why? Because they are environmental crooks? Of course not! Not because we like it, but because some of us are realistic enough to understand that this will be an essential, necessary market niche that is not just here to stay, but will continue to grow explosively as well (and yep, we are aware of the fact that using the phrase 'grow explosively' is a somewhat careless one). But then again: just like people always translate a few deaths as a result of eating the wrong vegetables into bans on food exports or imports and fear for epidemic terror or crashed airplanes into new safety measures and fear of flying even when a 10-fold number of deaths in car or bike traffic and pedestrians never translates into us reconsidering those means of transportation, we believe that nuclear energy is here to stay with those panics gradually but slowly translating into less effective or outspoken populist sentiment against it. We are just not there yet.

     

    Nuclear Plant in Belleville in France - Big Export Business for France in the Future?


    And this means that we should also not forget a Central Asian powerhouse like Kazakhstan or other smaller Frontier Markets with energy or commodity wealth. Kazakhstan was basically Alma Ata (the other big city) and a well-known speedskating stadium (Medeo) some 20 years ago. Economy? Did they have that over there? And compare that with the newly created capital Astana now.


    Astana - Newly Created Capital of Kazakhstan

     


    These trends do also translate into continued tensions in the Middle East. Arab Spring? Westerners liking Democracy there? Doesn't make sense unless it maintains a status quo that will ensure an ongoing majority allocation of oil and gas revenues to Western energy companies and indirectly the countries they represent. We do not believe that this is feasible in a world in which US-NATO political dominance is challenged by Chinese (energy needy), Russians (still powerful and with energy and other resources) and sooner or later also loaded Wealth Funds from the Middle East plus growing richness in Brazil and India. 

     

    These realities will make Africa, MENA and Russia far more interesting investment places than most people tend to think, unless we are willing to start battles to stop it. Unfortunately we are not totally sure if that will be unrealistic (see the Middle Eastern experience), just comfortable that an equalizing balance of power in the world will make it a lesser option than right now or in the past.

    What about Renewable Energy?

    Note: does this mean that LMG is a non-believer in Renewable Energy? Of course not. What we believe is that Renewable Energy will be a huge growth market, but initially mainly for the West as a kind of fancy, elite choice to opt for things that cater to energy need AND the emotional well-being of the people buying it with them being willing to pay a premium for the latter. 

    It is simply impossible for it to be a realistic full alternative for traditional primary energy sources without people willing to pay that premium AND/OR change their lifestyle. But lifestyle change is also an elite choice that one cannot demand from Emerging Countries unless well-off Westerners pay for it directly. And that is where the story ends: no Western country is in the business of providing Developing Nations with much more than they are currently doing and preferably in a form (bibles, blankets, emergency medicine) that cannot help grow the economy in the longer run (so as to maintain market dominance). Result: Renewable Energy is a good product with growth opportunities (in a similar fashion like wellness centres are) with definitely good investment opportunities in Renewable but the bulk of the Energy Market growth will be in Traditional Primary Sources for quite some time to come. 

     

    Adding things up, nuclear is here to stay. Only caveat: that 'HERE" might be more 'THERE' in some countries (Germany probably using France) than in others (FRANCE, RUSSIA, USA) who want a piece of the action.


    Windmill Park in New Zealand - Growth Market? Yes! Whole Story? No!


    Jun 04 7:50 AM | Link | Comment!
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