Client Affairs

A Rising Tide Erodes Risk

Clark Winter Citigroup Wealth Management Chief Global Investment Strategist New York 13 October 2005

A Rising Tide Erodes Risk

Autumn is conference time in New York, and this year is no different. The United Nations General Assembly met here while former US President...

Autumn is conference time in New York, and this year is no different. The United Nations General Assembly met here while former US President Bill Clinton launched his Global Initiative conference and The Citigroup Private Bank held its quarterly Asset Management Committee (AMC) meeting. Interestingly, all three events dealt, in their own ways, with perceptions of risk and the challenges of deploying assets most efficiently. The AMC noted that there still seems to be little appetite for US equities. Yet the craving for the shelter afforded by bonds appears unabated around the globe. Investors are quite optimistic that their fixed-income investments will not default any time soon. How else to explain why Greece, whose national debt exceeds 112 per cent of gross domestic product, can issue 20-year euro bonds yielding 3.65 per cent, 10 basis points below US short-term interest rates, or why Taiwan can issue 30-year local-currency bonds, whose yield, at 2.46 per cent, is a huge 129 basis points below US rates. At the same time, these nations and many others also are issuing dollar-denominated bonds whose London Interbank Bid Rate quotes have been slightly below US Treasury yields since the end of 2002. One might argue that Greece’s rates are derived from the tacit protection of the European Central Bank or that Taiwan’s rates stem from its huge $155.27 billion in foreign exchange reserves. But how do you explain the appetite for Czech 15-year koruna notes, which are priced about 25 basis points below the Fed rate? Because of pension liabilities, investors in general are looking for guaranteed yield. What’s more, investors in these nations are staying home, further demonstrating their confidence in domestic markets. Yet as risk-averse investors find comfort in the relative safety of the global bond market, the perceptions of risk presented at both the General Assembly and President Clinton’s conference suggested that there are no safe havens. The risk to global stability posed by the increasing divide between the haves and the have-nots was a particularly worrisome issue raised at both meetings. Most attendees agreed that the world is falling behind in its effort to halve poverty by 2015, as outlined in the UN Millennium Development Goals of 2000. Moreover, the potential for global unrest has escalated in the past five years amid the war in Iraq, the nuclear aspirations of North Korea and Iran, and the uncertain behavior of opaque oil-producing nations. All the while, poverty-inspired terrorism remains a growing threat. Against this backdrop, world leaders are grappling with the problem of how to encourage and facilitate the distribution of wealth most efficiently. Employing and housing a growing global population can absorb enormous amounts of capital. Nevertheless, undistributed corporate profits in the US have been growing at a 20.6 per cent yearly clip since 2000. As the money piles up, prudent companies increasingly target their investment to high-growth nations, such as India and China, which are being flooded with capital at the expense of underdeveloped nations. On one hand, the worldwide appetite for bonds is telling us that investors want less risk; on the other, world leaders are telling us that the failure to improve the plight of the needy is increasing the level of risk for us all. A generation ago, investing in small, risky Asian nations such as Thailand and Malaysia paid off handsomely. As we heard at the conferences, we must help underprivileged markets advance on many fronts to ease the risks to global stability. Perhaps then investors, buoyed by the rising tide of progress, will entrust new locales with their capital.

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