A paradigm shift
Burkhard P Varnholt, Chief
Investment Officer, Bank Sarasin & Co talks to Mayank Singh
about the rise of a new economic order and how to negotiate this
What are the big trends in a changing world order that
investors need to be aware of while making their choices?
The biggest theme for our investors is that a new world order is
emerging. Many people simplify it by describing it as the rise
of the East and the decline of the West; that might be
happening, but this is not what is driving it. What is driving
it is a combination of demographic, technological and
scientific, economic, ecological and social change. When you put
these five factors together then the real story about this
emerging world order becomes clear. It has never been so
important to understand the real idea of sustainable development
and when I say sustainable development it means preparing your
society at a national level, business level and at the
individual level for the next 1,000 years and that implies that
you just cannot cut corners. That means you cannot turn a blind
eye on factors that have an adverse impact on nature and other
social stakeholders. Countries and companies need to run in a
first class sustainable way and that is what is going to
determine whether the next decade is going to belong to India or
to China or to Brazil or Oman. Taking this a step further also
means that a new investment paradigm is emerging, because as an
investor you need to embrace the future and not run behind it,
you need to pick companies and states on the basis of the
sustainability criteria – does a company run a sustainable
business model while also factorising other fundamentals like
whether it is attractively valued etc. That’s the difference
between today and ten years ago.
Investors are told to choose from companies spreading across
countries and the same holds true for various asset classes.
Does this make investing more difficult for a lay investor?
This is one area that we have invested in for the last 20 years
providing research, advice and investment solutions for the long
term. We invest in companies that invest for the long term and
run sustainable businesses. You are right, investing was always
difficult and it was always advisable to have a good trustworthy
investment advisor; in a new order one requires a different sort
of advice. As the investment paradigm changes it is also
important that one challenges ones investment advisor on whether
he understands this paradigm and whether he can provide the
depth and breath for it.
Where should one invest in a new order as there are a lot of
contradictory views emanating. Some say that the US is
recovering slowly, Eurozone seems to be in crisis, China is
slowing down and India has its own set of problems?
The world economy is in a better shape than what people claim
that it is. The US is clearly turning around and there is no
question about that, China is not in free fall as it is just
shifting its growth model from being export-led to being
domestic driven. Foxconn has recently had to double salaries for
its 500,000 employees; now that will cause some sort of a growth
slowdown in the short term, but these 500,000 employees will
also go out and buy the iPods that they produce in the medium
term. So there are two sides to every story. Europe is following
and there is nothing new about that as that has always been the
case. When I look at the world I think that all the analysts
have been extremely bearish in the beginning of this year, but
what I see is that the world economy has never been a perfect
place. This year will be a Goldilocks year for investors because
of a combination of factors – an improvement in the economic
picture, no increase in interest rates plus you have an enormous
wall of liquidity which represents investors’ scepticism, as
they say on Wall Street every bull market has to climb the high
wall of worry. The wall of worry is the wall of money. So you
really have an ideal year in 2012 that favours risk takers and
equity investors. The year will end in solid double digit
returns for equity investors. In terms of regions, emerging
markets are cheaper than the US and they have better growth
momentum. Europe is very unloved and that makes it cheaper and
also quite attractive. Add to that the sustainability factor
when you come down to stock selection and you get a world class
What is your take on emerging markets and where do you think
countries in the GCC, China, Brazil and India are headed
Oman and the Gulf states are an attractive buying opportunity
for both domestic and international investors. The catalysts for
strong performance that I anticipate will be high oil prices and
a global recovery that translates nicely into the GCC economies
and my strong conviction is that the bottom of the real estate
market is behind us and that the supply demand imbalances are
narrowing. GCC markets have been underperformers compared to
other emerging countries but that is one of the reasons why I
find them to be attractive; they are at very cheap valuations
and the companies which are being traded are very solid, so
there are strong growth opportunities. If one were to talk about
sectors then I would pick banks across the GCC region, as they
have been the most unloved in the past year and they will
benefit most from the turnaround. Apart from this one should be
close to the oil and gas sector.
China is not in free fall; the government explained this last
year when they put out their five year plan. They are seeking to
move towards a new economic model, which has been modelled after
Scandinavian countries – one that is very inclusive, a social,
free market economy, driven by innovation rather than cheap
labour and one that will be based on domestic rather than
external demand. It should be clear to everyone that such a
shift does not come without friction. As China is facing a
period of solid political tension and as it has one of the most
powerful Central Banks in the world, the latter will use its
full authority to see that the Chinese economy does not tank. It
will slow and there will be some collateral damage, but you will
see domestic demand picking up.
Brazil is as good as it has ever been; the great potential that
Latin America enjoys is that as and when they open up their
region to intra-market trade they can multiply their
productivity. India is the most promising economy in the world
as it has the most entrepreneurial genes, if only it did not
have a government that keeps shooting itself in its foot. India
is the biggest democracy in the world but it also has more red
tape and regulation. When it can firmly deal with them, when it
gets there, India will overtake China in terms of growth and
A lot has been written about commodities and their continuing
good run. How should investors approach this market?
Commodities have only one way to go – higher for longer and it
is driven by arguments both on the supply and the demand side.
Let’s start on the supply side. The great narrative that oil
countries like Saudi Arabia and other have put out is that the
more you invest in your upstream exploration production
infrastructure, the more oil you produce. This has been more of
fiction rather than fact, because despite huge investments these
countries are producing, not more than what was being produced
10 years ago. The supply side suffers from a number of
bottlenecks in terms of availability or access and the demand
side continues to grow and it will continue to grow
exponentially, because of demographic and economic growth. Oil
prices will go to $150 and above in the next 12 months.
Investors are advised to remain invested (at least 10 per cent
of their portfolio) in a diversified commodity fund at all
times. Gold will go to $2,500 in the next two years as it has
become cheaper and thereby more attractive. Gold is not a
reflection on inflation but a reflection on fiscal
irresponsibility and that is something that will remain with us
for the next couple of years as governments in the West muddle
their way through the mess that they have got themselves into.
May - 2013
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