Portfolio Construction - Part 2

The second factor likely to challenge the view that hyper-growth is here to stay in Asia - the region’s persistent reliance on external demand as a major driver of economic growth - should be considered. This is less of a story for India, with its relatively small trade sector, and more a story for the rest of Asia. The Japanese economy is still currently export-dependent rather than self-sufficient and although it is slowly improving it’s unlikely to be able to step immediately to the plate and fill the gap.
What is there in a widespread and sever western recession that would suddenly make Japanese consumers step up to the plate (this is probably the number 3 baseball loving nation in the world!) and start spending? US imports might suddenly be much cheaper which may give a short term buying boost but nowhere enough to combat the damage caused to brittle Japanese consumer confidence caused by watching the economic pain suffered by the west.
What’s more, China is even more vulnerable. Its export sector, which rose to nearly 37% of GDP in 2006, surged at a 41% y-o-y rate in the first two months of 2007. Moreover - and this is an absolutely critical point in the decoupling debate - the United States is China’s largest export market, accounting for 21% of RMB-based exports. As the US economy now slows, the biggest piece of China’s export dynamic is at risk. So, too, are the large external sectors of China’s pan-Asian supply chain - especially Taiwan, Korea, and, as mentioned above, Japan. Lacking in self-sustaining support from private consumption, the Asian growth dynamic remains highly vulnerable to an external shock.
Much of Asia remains vulnerable to a US-centric external shock. Furthermore the region’s two most powerful growth stories - China and India - are now both very focused on matters of internal sustainability. I haven’t yet heard any counter arguments as to how, in light of these two factors, growth prospects in China and India can be sustained. Therefore the global economy is likely to be a good deal weaker than the decoupling crowd would lead you to believe.
So equity exposure needs to be downside protected (long short with flexible bias, structured notes, market neutral) or based around active focused stock-picking. Further exposure to the Chinese, Indian and Vietnamese economies is better effected through structured exposure to those commodities whose demand will be least affected by a dramatic downturn.
Whether the Chinese economy slows or not, the stadia and other facilities for the upcoming Olympics need to be completed and the materials for these still need to be delivered, the 250 million Chinese who will relocate to urban areas over the coming years will still require the infrastructure to allow that - in a slow down, premium housing prices may weaken but new low-cost properties will still be in demand. Signs of RMB strength versus the USD will undoubtedly face resistance from Beijing.
For a long time, whenever we expressed concerns about the state of western residential property markets, particularly in the US and the UK, we heard all sorts of reasons why it was impossible for there to be a correction of any kind - any release of air from the biggest asset bubble that has ever occurred in the entire history of this planet. Now that this correction has indisputably started, we’re hearing all sorts of reason why it can’t sustain and also why it can’t have any wider impact.
Gerard Minack who invariably looks at the same statistics as us, spots many issues that we miss and expresses those issues that we’ve spotted in a way that we wish that we had, has taken a fresh look at this. He has tried to determine whether the bleak picture painted by the latest housing stats, which will undoubtedly have an impact on US economic growth, will also lead to a contraction in consumer spending and an ultimate recession. US housing has not yet bottomed. The monthly data is pretty volatile of late because of the unseasonable weather - but the trend series for both new home sales and starts continue to fall.
Not only did sales fall short of forecasts for February, but there were substantial revisions down to prior data: December was revised to 1047K from 1123K and January to 882K from 937K (all at seasonally adjusted annual rates). Equally important, there has been also been an up tick in the inventory of new homes for sale. The combination of falling sales and rising inventory pushed the inventory/sales ratio to 8.1, a new cycle high, and the highest level since 1991. The fall-out from sub-prime will hit this already weak market. It’s worth noting that the sharp increase in home foreclosures over the past year has more than matched the decline in new home starts. Put another way, the rise in forced sales (albeit of existing homes), has roughly matched the decline in new homes being built.
The resilience of existing home sales now looks very incongruous. It therefore seems likely that this is related to the warm weather, and is therefore presumably likely to weaken in coming months.
All of this points to residential construction continuing to be a sizeable drag on GDP. On a rolling four-quarter basis, residential construction’s share of GDP has fallen by 1%, but may have a further 1% decline to go. It certainly now seems unlikely that the recent improvement in the homebuilders’ index will accurately signal a turn in construction activity. Note that previously the NAHB index also gave a false prematurely signalled turn in construction activity in the 1991 recession.
Despite the weakness in residential construction, and the likely flow-through to employment data, the critical uncertainty is not the direct impact of the housing downturn, but the extent of spillover to consumer spending.
The housing recession has slowed the US economy to near stall speed. For this to happen, any further external shock that causes a reduction in consumer spending will threaten recession.
Needless to say, the US-based analysts working in the same organisation don’t see this risk as clearly as Minack does from his Sydney base. If you want to know what’s going on in the US right now, the last place that you can get a clear response not affected by emotional and psychological bias is Wall Street. To some extent that has always been the case. The people whose jobs most depend on a positive outlook for the US economy are generally the last ones to heed the warning signs.
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

Inspiration and Larry Dale Gordon

It is a while since I mentioned Larry Dale Gordon in this column, so forgive me if you think we should only ever deal with each famous photographer one time only. But here I go again!
Have you a favorite photographer? No? Well, you should! Everyone should have a photographer whose work stimulates you to greater heights. For me, I have many whose work I enjoy - Norman Parkinson and Helmut Newton rate high, but the one photographer who inspires me not only with his images, but also with his words, is Larry Dale Gordon.
Now when I say that your favorite photographer’s work should inspire you, that does not mean that you should rush out and slavishly copy their work. Don’t laugh, I have seen it done so many times in camera club level photographers who have been most upset when I mark them down for copying, rather than being creative.
When I say “inspire” I mean that you look at the work and say to yourself, “How did he/she do that?” You should look at the end result and work out how you can use that technique, to produce your own shot. Half the fun in photography is working out “how to” with the other half being the enjoyment of looking at the final image.
So why does Larry Dale Gordon inspire me? There are many reasons. First off, he is a self trained photographer, who believes that the way to learn is to do it. I relate to that. Let me quote you from one of his books, “I learned photography through experience; by putting film through the camera, peering through the lenses, trial and error, and pondering every facet of light. It’s the only way. If you think there is another way, or a faster way, write a book telling how and you will make considerably more money than by being a photographer.” These are very wise words!
I’ve have tried to see just what it is about Larry Dale Gordon’s pictures that appeal so much to me and I’ve come up with two basic concepts. Simplicity and Color.
Look at the photograph I have used to illustrate this week’s article. A classic. Taken right here on Jomtien Beach after I noticed a boat owner repainting his craft for another season. The red-lead paint predominating over everything else, and the interesting shape of the propeller alluding to what this almost abstract photograph is about. It is also back-lit, if you look at the keel of the boat.
Now before you rip out down to beach at sunset and try and duplicate this shot, read the third paragraph again! Let’s not make slavish copies! But instead, let’s look at how we can accomplish the effect of a color monochromatic picture and even a silhouette. This can actually be done any time of day, but to make it easier for you, pick your favorite beach or riverside at a time when the sun can be behind your subject - be that people or things. Now you need a tricky filter, called a “tobacco” filter. On that bright sunny day, with the light behind your subject(s) hold this brown/orange filter over the lens and pop the shutter. Stick it on Auto if you will, the camera will do the rest. Even experiment with different colors to get strangely wonderful or weirdly dreadful results.
The only point to really remember is to get the light behind the subject. A couple of weeks ago, I mentioned Norman Parkinson, another great exponent of ‘contre jour’ (backlighting). By using this technique you can produce all the effects used by both these photographers - but you have to go out and try first. Remember that the way to learn is to “do” it, and with today’s digitals you will know straight away if you have produced the effect you want. So what’s stopping you? Try a little Larry Dale Gordon and Norman Parkinson (and Harry Flashman) for yourself this weekend.

Modern Medicine: by Dr. Iain Corness, Consultant

Are “natural” therapies effective?

Before all the alternative practitioners get their poison pens dipped in hemlock (a very natural plant extract) ready to rebut, let me state at the outset that I am a conventionally trained western medical practitioner. I would not know an Echinacea if I tripped over one. So if that is the case, why would I devote valuable column space to something I know nothing about? The reason is EBM.
Regular readers of this column will know that I have mentioned the acronym EBM many times. This stands for “Evidence Based Medicine” and is a key factor in modern medicine. It just means we test until we have the evidence that any drug or treatment really does work. This all takes time, as the evidence cannot just hang on one person who got better. It requires huge series, across the globe. And even then, we can get it wrong.
Aches and pains in the joints and muscles are some of the commonest afflictions. Who has not twisted and ankle? Who has not noticed a certain ache in the knees after exercise? And who has not seen that as one gets older, there appears to be more aches and pains that flit from joint to joint with alarming alacrity?
Like all medical conditions where we cannot give the patient the “wonder drug” there is then a tendency for patients to try something else, anything else, hoping for the relief that conventional medicine has not promised or delivered. For the musculoskeletal conditions, the “alternatives” are multiple, from magnets to mussels from New Zealand. But do they work?
The problem with the non-pharmaceutical mainline pills and potions industry is in unbiased scientific testing. The tablets that the mainstream pharmaceutical companies produce are rigorously and vigorously tested. Not only do the drug companies have to show that their pills actually work, but they also have to show what side effects they can produce and whether or not they interact with other pills and potions to make explosive mixtures. The “alternative” lot have not had the same degree of scientific scrutiny.
There are those who will claim that because the pills come from plants, that the ingredients are then “natural” and therefore OK for us humans. This is poppycock. Extracts of plants and herbs are chemicals - and some chemicals can kill, that is why wild animals can die after eating the wrong bushes. So can you! Hemlock’s a good start.
So let us look at a few of the alternative treatments and analyze just whether they are indeed efficacious. Willow Bark is one that is used for arthritis, because it was imagined that since the tree grew in damp environments, and arthritis was thought to be caused by “damp” then treatment with the bark was “logical”. The herbalists got the right answer, however, no matter how wrong the reasons! Willow bark does have an effect because it contains salicylates - more commonly known as aspirin! Other “natural” sources include poplar tree bark, black cohosh (a North American plant), pansies, violets and meadowsweet. Aspirin works!
Have you heard of Devil’s Claw? This South African plant has been studied to see if it has any anti-inflammatory action in arthritis. The small studies that have been done show no effect, but it is an analgesic (pain killer), so those people with arthritis do feel better when they take it. In fact, demand is now outstripping supply - but they would do just as well with a strip of paracetamol tablets. And cheaper too!
Another of the well touted treatments for arthritis is the green lipped mussel. According to the pundits, this form of treatment has had numerous clinical trials, and the same number of clinical failures. However, I believe they are quite nice steamed with ginger and shallots!
One other niggling problem with the “natural” therapies is that for musculoskeletal problems, most of which are of a long standing chronic nature, even less scientific work has been done to see what happens when you take these medications for a protracted period of time. Until long term safety has been ascertained, I would counsel caution, and beware mixing pharmaceutical drugs and over the counter “alternatives”!

Learn to Live to Learn: with Andrew Watson

But somewhere, Good Work was being done…

What joy fills my heart when I encounter examples of ‘best practice’! I was fortunate indeed to work in what became a really tremendous school in Jerusalem and whilst dodging the bullets (literally), I spent some of my happiest days there. The school demonstrated traits consistent with what Hargreaves (1995) calls ‘traditionalist’ organisational culture, characterised by a quite formal, protected environment, some social cohesion and high social control.
In the political maelstrom of Jerusalem, under the banner of a Faith school, the school was a reasonably effective and efficient organisation. However, when a new Principal was appointed (from within), the transformation was extraordinary. If previously there had been a ‘strategy of compliance’ this was now replaced with a ‘strategy of integrity’ (Paine, 1994). A shared vision was communicated and individuals were encouraged to use their initiative, whilst pursuing common goals.
In order for this to happen, the school had to be imbued with a positive mental attitude towards positive change within the school (which arrived in the shape of the IB Diploma Programme) and negative change outside the school (which arrived in the shape of the resumption of the ‘Intifada’). Under such pressure, the school could easily have folded but for the absolute sense of voluntary compliance which characterised the relationship between leader and staff. Hard choices were made compassionately. The leader oozed integrity and truly believed in his vision. As Handy (1990) rightly states, “Effective leaders have integrity.”
Being ambitious and energetic, the Principal attracted his ilk and a strong ‘task culture’ was established. He had mantras such as “Stop and Smell the Roses” (enjoy life), “Two men looked through prison bars, one saw mud, the other stars” (maintain a positive mental attitude at all times) and “If you can’t be good, be excellent!” (aim high). He adopted the position of ‘senior sceptic’ and took daily pleasure in celebrating individual and group achievements in the school, no matter how small. He was always in school. At the centre of his world, he kept integrity, ethics, values, faith but most of all, genuine and oft expressed love.
The new leader’s first act was to create a representative Board with a constitution, comprising owners, staff, parents and community. The main strength of the Board was the variety and wealth of experience, expertise and knowledge of its members. It was close to what education gurus Caldwell and Spinks (1988) refer to as ‘ideal’. The Board understood the parameters of its role very well and were happy to let the Principal ‘get on’ with his job.
Regarding the relationship between Head and Board, George Walker (2004) writes of the myth of harmony reigning between Principal and Board, suggesting that it is mutually disadvantageous if it exists. He envisages a win-win situation where ‘creative tension’, via mutual trust, overcomes temporary disagreements (which should not be avoided), to ensure long-term success.
This epitomised the approach of the leader in Jerusalem, which could be described as ‘objective-driven’, although he also made a point of being open, honest and transparent at all times, a necessary trait that is so sadly, obviously and crudely lacking in so many other organisations. In South East Asia, sole proprietors and profiteers abound and often desire hands-on experience in schools, especially over financial matters.
A few years ago, a well known English Public school and its Thai sister parted company, unable to accommodate each other’s views. For the Thai owner, it seemed proper to profit from his enterprise (and why not, you might ask?). But for this particular ‘farang’ Head of school, whose expertise has been specifically targeted to run the organisation, ‘profit’ was anathema. This mutual lack of understanding of the different but complementary roles of the board and the head of school goes to the heart of school management problems.
The Jerusalem leader created a ‘moving culture’ that was learning enriched, where goals were collaborative and approaches shared. This resulted in positive mental attitudes among teachers which rendered previously insurmountable organisational obstacles, negotiable. Collaboration, as opposed to competition, was encouraged between staff, students and other schools. We developed a holistic focus and began looking out and beyond as well as within, ‘acting locally, thinking globally’, a mantra I have adopted as my own.
The cumulative effect of the impact of the new leader was that structurally, symbolically and culturally, the school had begun to operate as an organic whole. After the Principal left, the school divided into a series of ‘disparate sub-systems’ which were not bound by the same level of clarity in communication that had previously characterised the school. Nonetheless, the school never sunk to the ‘Balkanised’ depths of what might be termed ‘Ugly’ schools, where small groups compete against one another and cliques are encouraged or indeed led by a weak leader, who surrounds his or herself with cronies. A clique system, built on self serving, self-preserving short-termism, leads to poor continuity and glaring inconsistencies. Petit issues become the mortars of conflict.
The differences between ‘Good’ and the ‘Ugly’ schools cannot be more compelling, the antithesis more complete. ‘Ugly’ schools are not so much stuck, as inert, fossilized and anomic (Hargreaves, 1995). Such schools are equally bereft of social cohesion and social control, rendering themselves insecure, alienated and at risk. There is an overriding sense of what Handy calls, ‘person culture’, where employees feel only nominally associated with the school and any ‘extra’ roles are regarded as a chore, rather than a privilege. How many staff willingly undertake weekend work? Schools like this have ‘closed climates’ (Halpin, 1966) and are (at first almost imperceptibly) suffocating and stagnating.
Sometimes, much needed growth in numbers occurs for obscure reasons, but it is fascinating if unsurprising to observe that in these circumstances, when the organisational culture remains the same, so does the nature of the problems.
Burnes (1996) suggests a feature of failing schools is where a certain culture has become so embedded and powerful that it resists change. In the ‘Ugly’ school (Fullan & Hargreaves 1998), “Any collegiality is superficial, partial and counter-productive”. It is certainly an interesting phenomenon that when the thin veneer of institutionally endorsed slackness is uncovered, the illusion of collegiate cohesion can be washed away overnight.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww@garden rayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust.org.uk email: [email protected]
Next week: “Some educational conversations”