Investing in New Realities: Commodities, Disruptive Megatrends, and State Capitalism

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Journals

The sixth annual CFA Institute Middle East Investment Conference will challenge participants to re-consider new investing realities by engaging with the latest thinking on global economics, geopolitics, demographics, frontier markets, innovative investment techniques and disruptive industry trends. Not only will policymakers, industry experts, and key market participants discuss issues relevant to professional investors in the region, but delegates at the event will also hear Nouriel Roubini, Amlan Roy, and Philippa Malmgren in special sessions discussing geopolitics and demographics.

In advance of the conference, we have prepared a reading list from previous CFA Institute events. These insights from renowned academics and influential practitioners offer a preview of the on-site discussions that will identify new opportunities open to MENA investors who are willing to investigate, evaluate, and seize them.

Despite, or perhaps because of, the recent collapse in oil prices, commodities remain an important part of an asset manager’s portfolio. Russell Read, CFA, contends that regarding  commodities as an asset class represents a significant new opportunity for many investors.

For Chris Pitts, the Future of Wealth Management depends on navigating six disruptive megatrends: emerging markets, competition for natural resources, state-directed capitalism, demographic change, social and behavioral change, and technological change. Jerome Booth in Emerging Markets in an Upside-Down World ties together investor misunderstandings and prejudices about emerging markets and developed markets. Finally, and well worth considering are the views of Noel Archard, CFA, on utilizing ETFs in active management and Kristin J. Ceva, CFA, on investing in emerging market debt.

Of the US economy, consider Amir Sufi’s viewpoint that the past several years have actually been a period of secular stagnation, masked by easy access to credit which distorted economic reality: “The bottom line is that the US economy is struggling,” says Sufi. Yet another gloomy viewpoint was recently voiced by Ann Pettifor. “Flawed economic theories can severely distort investment priorities and fail in the analysis and prediction of crises,” says Pettifor. “The people and organizations the world depends on for sound economic advice do not seem to be providing that advice”.

  • Commodities and Their Roles for MENA Investors by Russell Read, CFA. Commodities investing and trading has thrived since essentially the dawn of civilization. But the investment role of commodities in a portfolio has evolved substantially in recent decades. Commodities strategies can play a major and multidimensional role in a diversified portfolio of stocks, bonds, and private market investments by repositioning risks, providing meaningful diversification, and adding value.
  • The Future of Wealth Management by Chris Pitts. Wealth management firms need to prepare for six strategic megatrends: emerging markets, competition for natural resources, state-directed capitalism, demographic change, social and behavioral change, and technological change. These long-term megatrends are changing the shape of the asset management industry, even as firms are struggling with shorter-term themes of fiscal pressure and political and regulatory change.
  • Emerging Markets in an Upside-Down World by Jerome Booth. Investment in emerging markets is all about prejudice. Investors are particularly confused about the concepts of risk and uncertainty with regard to emerging markets. But what is happening in the United States cannot be fully understood without an understanding of international monetary economics. We need to bring global macroeconomics and a more entrepreneurial approach back into asset allocation.
  • Opportunities in Emerging Market Debt by Kristin J. Ceva, CFA. Emerging market debt as an asset class has grown significantly over the past two decades. Relative to developed markets, higher growth rates, favorable trends in debt sustainability and fiscal dynamics, and supportive valuation and technicals provide a compelling investment thesis for the asset class. But there are risks, with the two major risks being the emerging markets’ electoral cycles and a sustained rise in US Treasury rates.
  • Utilizing ETFs in Active Equity Strategies by Noel C. Archard, CFA. The reasons investors use exchange-traded funds (ETFs), rather than other alternative instruments, as part of their active equity strategies are increasing. In North America and Europe, ETFs are becoming popular in managed portfolios and for portfolio cash management. Institutional inertia is being replaced by an appreciation of the low-cost opportunities of using ETFs.
  • House of Debt by Amir Sufi. Many claim that the anemic economic recovery since the Great Recession is because of the severity of the downturn, but others believe that the US economy has been in a period of secular stagnation for several years, masked by easy access to credit that has distorted economic reality. Various causes of the stagnation include the substitution of capital for labor, the increased productivity of capital, reduced capital expenditures relative to market capitalization, and most importantly, greater income inequality. A potential consequence of the income inequality is that the wealthy do not spend as large a proportion of their income, which puts stress on financial stability and economic growth.
  • Central Banking, State Capitalism, and the Future of the Monetary System by Ann Pettifor. The role of commercial and central banks in the process of providing credit may seem to be clearly understood by economists, bankers, and policymakers. But there are common misunderstandings about money creation, equilibrium, public money, central banks, and interest rates. The outlook for the global monetary system is not overly optimistic in the absence of overcoming these misunderstandings and altering the philosophies of bankers.

You can join us in Kuwait to re-consider new investing realities.

To keep up with information from this event, consider subscribing to the Middle East Investment Conference blog.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/temmuzcan

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Little Market Reaction in a World of Risk

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Nouriel Roubini

Geopolitical risks have claimed the world’s attention over the past few years, and even as some recede, others have emerged to take their place. According to Nouriel Roubini, co-founder and chairman of Roubini Global Economics, the market reactions to these new risks range from complacent to downright bubbly.

Roubini believes that one of the more serious geopolitical risks today is the challenge of sustaining a peaceful rise for China’s economy. An expanded naval presence is necessary to support China’s economic aspirations, “but what China considers a defensive imperative could be perceived as aggressive and expansionist by its neighbors,” he writes. Meanwhile, Asia is seeing the rise of more nationalistic political leaders in a region where there has been, and continues to be, little cooperation among countries. Roubini feels that these tensions define China, and Asia in general, as a “global ground zero.”

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Financial Warfare: The Threat May Be Enough to Keep the Peace, but There’s No Room for Complacency

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James Rickards

As investment professionals gathered at the 2014 CFA Institute Middle East Investment Conference in Jordan — against a backdrop of ongoing civil war in neighboring Syria and unfolding events in Ukraine — James Rickards, partner at Tangent Capital Partners and author of the book Currency Wars: The Making of the Next Global Crisis, left them in no doubt that in order to prosper today, investors must acknowledge that varying degrees of economic warfare are an integral part of the global markets.

Rickards invited the audience to consider two somewhat controversial thoughts as part of their strategy development. First, they could one day find themselves in a scenario in which the US dollar is no longer unilaterally held as the global reserve currency, and second, in today’s technology-driven world, tensions between traditional allies and shifting alliances can quickly escalate into economic “incidents,” with knock-on effects for investors that may have previously been unthinkable.  Read More

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SMEs Are Crucial to Economic Development in the Middle East

By
Saygin Yalcin

The 2016 CFA Institute Middle East Investment Conference will take place in Bahrain on 13 April 2016, bringing together international thought leaders, policymakers, industry experts and key market participants from across the region to consider MENA’s Role in the Global Economy.

Small- and medium-sized enterprises (SMEs) arguably hold the key to the economic development of the Middle East region. In Jordan, they make up 98% of businesses, accounting for 60% of the labor force and up to 50% of GDP. These statistics are broadly representative of the wider region and illustrate that SMEs matter a great deal to the economic and investment outlook. These firms generate employment for a growing youth population, provide export earnings and economic diversification, and are instrumental in efforts for alleviating poverty.

At the 2014 CFA Institute Middle East Investment Conference, two entrepreneurs, one from Jordan and another operating in the United Arab Emirates (UAE), spoke about the importance of SMEs in creating jobs and wealth, as well as the challenges faced by smaller firms. The first speaker, Saygin Yalcin, a German entrepreneur of Turkish descent, shared his experience of starting the Middle East’s first online car-buying service, SellAnyCar.com. The second speaker, Emile Cubeisy, spoke more widely about entrepreneurship in Jordan, based on his work as managing partner of Silicon Badia, which invests in technology companies in Jordan, the Middle East, and the United States, working to connect entrepreneurs, investors, and companies from these regions. Both speakers described the critical importance of SMEs and the need for an efficient ecosystem that nurtures them. Read More

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GIC’s Russell Read, CFA, on the Alpha and Beta of Commodities Investing

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Russell Read, CFA

At this year’s Middle East Investment Conference, Russell Read, CFA, had a tough task. The chief investment officer and deputy chief executive of the Gulf Investment Corporation (GIC) was called on to explain the complex world of commodities investing and its role in generating portfolio returns. But as the man who helped introduce the first commodity-based mutual find in 1997, attendees couldn’t have asked for a more seasoned professional to explain the role of these often impenetrable instruments.

Commodities may be tough to understand, but they are one of the oldest traded financial instruments. The Dojima Rice Exchange dates to 1730. The Chicago Mercantile Exchange Board was founded in 1858. Most students of finance are in fact reasonably aware of the two main tools for trading commodities: futures contracts, which are exchange traded with minimal counterparty risk, and forward contracts, which are traded over the counter and involve counterparty risk specific to each instrument. Read More

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Islamic Finance Should Contribute More to Sustainable Economic Development: Volker Nienhaus

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Volker-Nienhaus

The 2016 CFA Institute Middle East Investment Conference will take place in Bahrain on 13 April 2016, bringing together international thought leaders, policymakers, industry experts and key market participants from across the region to consider MENA’s Role in the Global Economy.

There is much potential for Islamic finance to promote sustainable economic development through such approaches as widening access to finance (including microfinance), financing infrastructure projects, and expanding the reach of takaful (Islamic insurance). This was the view expressed by the economist Volker Nienhaus while speaking at the 2014 CFA Institute Middle East Investment Conference. Nienhaus, who has a long-standing interest and experience in Islamic finance, emphasized that, unlike conventional finance, the Islamic finance industry is faith-based finance, and it is not expected to be purely commercial but to also serve a social purpose.

Delegates’ Poll

At the start of Nienhaus’s session, CFA Institute conducted an electronic poll of the conference delegates. We asked them which of the approaches to be covered by Nienhaus represented the best opportunity for Islamic finance to contribute to sustainable economic development. Of the nearly 300 people present, 156 participated in the instant poll, and they voted in favor of financing infrastructure (44%), followed by widening access to finance (35%).
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An Important Report on Middle Eastern High-Net-Worth Individuals

By
Khaled Sifri

At the 2014 CFA Institute Middle East Investment Conference, Khaled Sifri, CEO, Emirates Investment Bank, provided unique transparency into Gulf Cooperation Council (GCC) high-net-worth individuals. His understanding came from his organization’s recent survey and recently published report on the topic. Emirates Investment Bank conducted its survey throughout the GCC in December 2013 and again in January 2014 to assess the views of high-net-worth individuals and their sentiments about investing and about banking relationships.

Key findings of the report include:

  • High-net-worth individuals (HNWIs) have more optimism about the economic and investment prospects of the Gulf region than they do for the globe over the next five years.
  • Overwhelmingly, HNWIs are more focused on capital appreciation than on capital preservation.
  • Any future wealth accumulation by HNWIs is primarily to be invested in their personally owned businesses and secondarily in investment real estate.
  • A slight majority of HNWIs prefer a local bank to have not only personal banking services but also investment banking advisory services to help manage their wealth.

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A President’s View of the Art of Negotiation

By
Jamil Mahuad

The 2016 CFA Institute Middle East Investment Conference will take place in Bahrain on 13 April 2016, bringing together international thought leaders, policymakers, industry experts and key market participants from across the region to consider MENA’s Role in the Global Economy.

It isn’t often that you get a chance to listen to a former president discuss the art of negotiation, and it is rarer still that you learn negotiating secrets from a leader whose peace treaty helped to end an intractable conflict and garnered him a Nobel Peace Prize nomination. Such was the case at the 2014 CFA Institute Middle East Investment Conference, where Jamil Mahuad, former president of Ecuador, and co-negotiator of a peace treaty with his nation’s enemy, Peru, shared words of wisdom.

In laying the foundations for negotiation, you must first know what negotiation is. Mahuad stated that negotiation is a process, taking place between two parties, in which both parties agree to a method to search for an agreement. That method is dialogue.

Interestingly, the former president reminded the audience that they must first negotiate with themselves. That is, those interested in negotiating an end to a conflict must first know what they want and for what changes they are negotiating. Otherwise, discussions are likely to fail. Read More

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Modern Finance Is Seeing Historic Levels of Speculation

By
Adrian Bell

Why study financial history? For historical context that helps to make sense of the current world.

Not surprisingly, the 2008–2009 global financial crisis sent many financial professionals looking to history for a sense of appropriate context and perspective to understand the magnitude of such a catastrophic financial shock. This, in turn, sparked a general interest in financial history but with few professional sources to turn to. At the 2014 Middle East Investment Conference, professor Adrian R. Bell, head of the ICMA Centre at the University of Reading’s Henley Business School, considered the question of whether  modern finance existed in the Middle Ages.

Bell hesitated, but nonetheless conceded, that finance seems to be as old as the agricultural revolution in Mesopotamia more than 3,000 years ago. It was then that forward contracts carved into cuneiform tablets — one for barley (at an interest rate of 33.33%) and the other for silver (at an interest rate of 20%) — were entered into between a person and a god (at least the god’s intermediary, a priest). Put another way, finance seems to be an inevitable consequence of human activity, and its invention was predetermined. Read More

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Investment Professionals in MENA Expect Growth in 2014

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Dubai skyline

Investment professionals in the Middle East and North Africa (MENA) expect the local economies to grow and think that Saudi Arabia, the United Arab Emirates, and Qatar present the best growth potential and investment opportunities in 2014.

These are the salient findings from a recent survey by CFA Institute. It is the fourth consecutive year that CFA Institute has surveyed its charterholders and members in the MENA region in the run-up to the Middle East Investment Conference. Of the 1,818 finance professionals in 12 countries that were surveyed, 98 responded, for an overall response rate of 5% and a margin of error of ±9.6%. Interestingly, the findings this year are quite similar to the findings last year.

Local economic expansion expected in 2014. Eighty percent of respondents expect their local economies to expand in 2014; 76% expect their businesses to expand; and 67% expect the global economy to expand. In terms of countries with the strongest economic growth and best investment opportunities, Saudi Arabia, the United Arab Emirates, and Qatar came on top, whereas Bahrain, Jordan, Lebanon, and Oman were placed at the bottom. Read More

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