Thursday, March 24, 2011

How to Outsmart Global Crises

Drama is everywhere.

We have the unfolding crisis in the Middle East (Libya, Egypt, Iran and Saudi Arabia), the ongoing sovereign debt worries from countries in the European Union (Greece, Spain and Portugal), and now Japan faces its worse crisis since World War II. The United States still struggles as it emerges from the worst downturn since the Great Depression.

There is no shortage of challenges facing the world today and many investors are frozen waiting for clarity in these times of uncertainty. The problem is, in all likelihood, the world will not settle down any time soon and we will surely continue to see geopolitical shifts and unrest plaguing the investment world.

So what are investors to do?

How is an investor to make these decisions given how fast changing the global environment is moving?

  1. First, recognize that volatility is not going away anytime soon; it is the new reality. Fluctuation based on headlines is here to stay.
  2. Second, assess whether the crisis is short- or long-term in nature. As always, time horizon is a a crucial assessment factor.
  3. Lastly, analyze how great the impact of the condition. Determine how fundamentals will be affected.
Here are a few current headlines that are impacting investors today. These comments are representative of the type of analysis that will serve you well as you make your own decisions. Whether you agree or not is not the point; assess and decide not based on emotion but your own rational thought. That's the lesson here.

While Japan certainly is struggling in the short term under great burdens, it is our view that the long-term impact from the earthquake, tsunami, and radiation crisis will likely be muted and overwhelmed by a massive reconstruction effort.

Rating agency Moody's notes that while risks to the Japanese economy have clearly risen, it still expects the economy to resume growth in the second half the year. Moody's forecasts that reconstruction efforts will lift overall growth by 2.3%. Bet on a recovery in Japan and on companies like Toyota and Sony to bounce back.

The European Union's challenges with debt appear long term in nature and are likely a significant structural problem that will impact EU GDP growth for a significant period of time. European companies like Nokia will face headwinds as core markets struggle under huge debt.

The United States is not without it's problems. Recent housing reports suggest that housing prices are now at a nine-year low with some communities suffering an even greater downturn. For example, it is estimated that 20% of all properties in Florida are currently vacant which certainly does dampen optimism that a housing rebound is imminent. We don't believe housing will rebound for years and this will likely weigh on the US GDP growth.

Civil unrest in Libya and Egypt are causing great uncertainty today, but these conflicts are not the real issue. The core concern is the world's reliance on a depleting resource, oil. The world's dependence on oil is a long-term problem and will need to be resolved through some alternative means.

There is growing pessimism about the future of nuclear energy given Japan's reactor problems and, for that reason, natural gas might be the next best resort. Companies like Chevron will benefit from current oil pricing conditions as will natural gas producers like Chesapeake Energy.

This is a small selection of the drama playing out each day in the news. Simply look at the headlines and you will read about countless challenges impacting investors. Many will react with emotion; the wise will react with careful and balanced thought.

Investing based on geopolitical uncertainty requires taking a stand and making reasoned judgments about where you think the future is headed. Investing when uncertainty is in the minds of most investors is usually where money is to be made; a willingness to live with ambiguity can prove profitable.

Take action and don't wait for a calm world. Assess, contemplate, decide and act. Don't wait; the world won't be calming down anytime soon.

Michael Yoshikami, President & Chief Investment Strategist, YCMNET Advisors
http://www.cnbc.com/id/42230895

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