Economy

The writer is a financial journalist and author of ‘More: The 10,000-Year Rise of the World Economy’It has been described as the easiest free lunch in investment: diversify your portfolio and you achieve a better trade-off between risk and reward. That still seems true when it comes to the number of stocks that investors own within their domestic market. But new research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School shows it has not always been the case with international diversification.Writing in Credit Suisse’s Global Investment Returns Yearbook, the academics examine the history of international diversification since 1974, when Bruno Solnik wrote an influential paper on the subject in the Financial Analysts Journal. In particular, they focus on the experience of US investors.Many American institutions increased their overseas asset allocation significantly in recent decades; the proportion of non-domestic equities held by US pension funds rose from 1 per cent in 1980 to 18 per cent in 2019.This diversification did not pay off in terms of total return; US equities beat non-US stocks by 1.9 per cent a year between 1974 and the end of 2021. The outperformance was even greater after 1990, at 4.6 per cent a year. Nor did diversification help in terms of reducing volatility; on average non-US markets were about twice as volatile as the American market. So the Sharpe ratio, which measures the relationship between return and volatility, was significantly better for American investors who stuck to the domestic market than for those who ventured overseas.America’s strong performance means that international diversification paid off rather better for investors elsewhere. Out of 32 countries where the academics have detailed returns between 1974 and 2021, international diversification paid off (in risk-adjusted terms) in 24 of them. That figure would have risen to 28 if investors had hedged their currency exposure.But the big question is whether the future will resemble the past. The US stock market was in the doldrums in 1974, but despite some occasional shocks in the last 50 years, has been remarkably successful. It now comprises 60 per cent of the global market (as measured by the academics) and is even more dominant than the 54 per cent it held in 1974. That is a lot bigger than America’s share of the global economy which is around 24 per cent and down from 36 per cent in 1970.However, the link between a country’s economy and its stock market is much less clear than it used to be. Many of America’s biggest companies, such as Alphabet, Apple and Microsoft, are global brands that derive a significant proportion of their revenues and profits from outside the US. In a sense, the corporate sector has diversified on investors’ behalf. An investment in the American stock market is no longer simply a bet on the US consumer or on the direction of US monetary policy.Another factor that may deter American investors from diversifying is that global stock markets are much more correlated than they were before the collapse of the Bretton Woods fixed exchange-rate system in the early 1970s. Between 1946 and 1971, the LBS academics found that the average correlation between the US, UK, French and German markets was 0.11 — a modestly positive link. Between 2001 and 2021, that correlation rose to 0.88, meaning that markets moved in the same direction almost all the time.Still, geographical risk has not disappeared entirely as the collapse of the Russian market after the invasion of Ukraine has shown. This is not the first time that investors in Russia have seen their portfolios devastated. Russia was the fifth largest global stock market, by value, in 1900, but all value was wiped out after the 1917 revolution. In 1998, when the Russian government defaulted on its debt, equity investors lost 75 per cent in real terms. Germany was the third largest stock market, by value, in 1900, but investors then suffered three periods of enormous real losses, during the two world wars and the hyperinflationary period of 1922-23.While nothing that severe seems likely to happen in the US, a bet on its domestic stock market still implicitly assumes that the country’s strong position will continue. The country’s technology giants, for example, have come under attack for their monopolistic positions and their impact on social interactions and could be subject to much more regulation in future.That could dent their future profits growth or, at the very least, their valuations. The wave of international sanctions on Russia, and the trade tensions between the US and China, suggest that globalisation may be in retreat, and globalisation was generally very good news for the American corporate sector.It is a reasonable bet that American investors will gain more from international diversification over the next five decades than they did over the last five. Given the greater correlation between global markets, international diversification may no longer be a free lunch but it still seems like a sensible piece of insurance. More

The government will urge financial institutions to cut lending rates further, reduce fees and promote mid- and long-term lending to the manufacturing sector, Li said, reading his work report.China’s five major banks – Industrial and Commercial Bank of China, China Construction Bank (OTC:CICHF), Agricultural Bank of China (OTC:ACGBF) , Bank of China and Bank of Communications – each reported more than 30% lending growth to small businesses in 2021, state broadcaster CCTV said in January.CCTV said the highest growth was 53.15% by a bank it did not name.China has been making efforts to enhance financing support to micro- and small enterprises, which it sees as key contributors to stabilising employment and people’s livelihoods.The government will prioritise employment through fiscal and financial policies to enhance support for companies to keep and increase jobs, Li said. It will also set up a financial stability guarantee fund as to safeguard against systemic risks, he said. Li also said China will fully implement a registration-based IPO system this year. More

Li also singled out the integrated circuits and artificial intelligence industries as priority areas for the government to build up domestic capabilities. Li said the government, whose recent crackdowns on industries from e-commerce to private education has roiled global markets, would continue to improve “regulatory rules.””We will further the implementation of policies to ensure fair competition and take stronger action against monopolies and unfair competition to ensure a well-ordered and fair market environment,” he said, according to the report. “We will act quickly to improve regulatory rules for key industries, emerging sectors, and sectors with foreign involvement and introduce new measures to make regulation more targeted and more effective.”In supportive measures, the government said it would raise the tax deduction coverage for small and medium science and tech enterprises from 75% to 100%, and support more foreign investment in medium- and high-end manufacturing and R&D.The work report also said the government would push the large-scale rollout of 5G networks, “smart cities and digital villages”.”We will improve the governance of the digital economy and unleash the potential of data as a factor of production, to further stimulate economic development and enrich people’s lives,” said Li. More

China unveiled a growth target of about 5.5 per cent, its lowest in three decades, as Beijing seeks to buttress its economy after a sharp loss of momentum in 2021 and fallout from Russia’s invasion of Ukraine. The target reflects lower growth expectations in 2022 compared with pre-pandemic rates as Beijing maintains its strict Covid measures, enforces its “common prosperity” policy to reduce inequality and boost the Communist party’s control over business, and contends with a debt-fuelled real estate crisis.Premier Li Keqiang announced the target at the opening of the National People’s Congress, China’s annual meeting of its rubber stamp parliament in Beijing. It follows year-on-year growth of just 4 per cent in the fourth quarter of 2021 and he stressed that “achieving this goal will require arduous efforts”.Li did not directly mention Ukraine but said “evolving dynamics at home and abroad indicates that this year our country will encounter many more risks and challenges”.The budget included a sharp increase in defence spending, which rose 7.1 per cent to Rmb1.45tn ($229bn) — its fastest pace in three years — as China accelerates the modernisation of its armed forces and the US strengthens its military presence in the Asia-Pacific.Beijing’s growth target was higher than forecasts released before the outbreak of the Ukraine war, which is expected to drag on global growth and sting Chinese exporters.Bert Hofman, director of the East Asian Institute at the National University of Singapore, said the GDP target was a “surprise” given the external challenges and “quite high, under the circumstances”.“Now we have Ukraine, which will affect China. It’s hard to say how exactly. But China is a major commodities importer, there is a terms of trade effect that will take away resources from businesses and people, so they will have less to spend on domestic goods,” said Hofman, a former China country director for the World Bank. Li’s announcement was the first time since 1991 that the gross domestic product target has been set below 6 per cent, even though the Chinese economy has outperformed much of Asia in recovering from the pandemic.Economic stability is paramount in China ahead of a historic party congress in the autumn at which Xi Jinping, the country’s most powerful leader since Mao, is expected to begin an unprecedented third term as president.China targeted GDP growth of more than 6 per cent and recorded 8.1 per cent last year, owing to the weak performance in 2020 when much of the country was under lockdown for months.The world’s second-biggest economy bounced back from the early impact of the pandemic, supported by its industrial engine and strong exports. But it has struggled to maintain momentum, with the property sector under severe distress and consumer spending remaining sluggish. Raymond Yeung, chief economist for greater China at ANZ, said Beijing’s focus is shifting to “execution” of easing and credit expansion after signalling fiscal and monetary policy would be relaxed late last year.“It is not about whether the PBoC is easing. The question is how to translate this easing . . . down to the level of the banking system and to benefit the market and corporates,” Yeung said.

Stability will be tested this year as Beijing continues to deleverage China’s property sector, which accounts for about a third of economic activity but has been hit by a series of defaults among developers. Li also did not signal any relaxation of China’s coronavirus control policies.Beijing declined to set a growth target in 2020 as its economy underwent a historic contraction in the early stages of the coronavirus pandemic. Some experts warn that Beijing will need to undertake fundamental reforms to overcome systematic risks from high levels of local government and property debt, as well as its ageing society. “This is a balancing act. China knows that they cannot rely on infrastructure investment or property investment forever,” said Yeung. “It’s the shifting of the growth model that matters more than anything.”Ben Simpfendorfer, a partner at consultancy Oliver Wyman, added that “counter-cyclical policy can only do so much”. “What’s needed is more structural economic reform and a lower target will provide that breathing space,” he said.

Video: Is China’s economic model broken? More

Western allies have moved to isolate Russia’s economy and financial system since its invasion of Ukraine, including sanctioning its central bank and oligarchs who amassed fortunes and political influence under Russian President Vladimir Putin.The Bank of Italy division, known as UIF, said in a statement that all notifications from banks had to give details of the subjects involved and the value and nature of the assets, and to be sent “as soon as possible”.Its request comes after the Italian Treasury’s financial security committee met on Thursday to review what had already been done as well as the planned actions to freeze the assets, the finance ministry said in a separate statement.The Treasury added the committee had intensified activities to ensure the effectiveness of the sanctions, which apply to both real estate and financial resources.French authorities said on Thursday they had seized four cargo vessels and a luxury yacht linked to oligarchs, while in Germany a nearly $600 million palatial pleasure craft owned by Russian billionaire Alisher Usmanov, also on the EU’s sanctions list, was sitting in a Hamburg shipyard.Uzbekistan-born metals and telecoms tycoon Usmanov is well known in Italy for owning properties on the island of Sardinia.Mirko Idili, a coordinator of the CISL union in Sardinia, said sanctions and a reduced presence of rich Russians could negatively affect the island’s economy and put more than 1,000 jobs at risk. More

The U.S. economy added 678,000 jobs in February and unemployment fell to 3.8 percent, the lowest level since the pandemic took hold.Monthly change in jobs More

Lawmakers have passed legislation granting benefits and protections, but allowing Lyft and Uber to continue to treat drivers as contractors.The Washington State Senate on Friday passed a bill granting gig drivers certain benefits and protections while preventing them from being classified as employees — a longstanding priority of ride-hailing companies like Uber and Lyft.While the vote appears to pave the way for ultimate passage after a similar measure passed the state House of Representatives last week, the two bills would still have to be reconciled before being sent to the governor for approval. Gov. Jay Inslee has not said whether he intends to sign the legislation.Mike Faulk, a spokesman for Mr. Inslee, said Friday that the governor’s office usually did not “speculate on bill action,” adding, “Once legislators send it to our office, we’ll evaluate it.”The Senate legislation — the result of a compromise between the companies and at least one prominent local union, the Teamsters — was approved 40 to 8.The action follows the collapse of similar efforts in California and New York amid resistance from other unions and worker advocates, who argued that gig drivers should not have to settle for second-class status.Under the compromise, drivers would receive benefits like paid sick leave and a minimum pay rate while transporting customers. The bill would also create a process for drivers to appeal so-called deactivations, which prevent them from finding work through the companies’ apps.But the minimum wage wouldn’t cover the time they spend working without a passenger in the car — a considerable portion of most drivers’ days. And like independent contractors, they could not unionize under federal law.One especially controversial feature of the bill is that it would block local jurisdictions from regulating drivers’ rights. A similar feature helped ignite opposition that killed the prospects for such a bill in New York State last year.Looming in the background of the legislative action in Washington State was the possibility of a ballot measure that could have enacted similar changes with weaker benefits for drivers. After California passed a law in 2019 that effectively classified gig workers as employees, Uber, Lyft and other gig companies spent roughly $200 million on a ballot measure that rolled back those protections. The legislation is still being litigated after a state judge deemed it unconstitutional. More

STOCKHOLM (Reuters) -Swedish telecoms company Ericsson (BS:ERICAs), its chief executive and chief financial officer have been named as defendants in a U.S. class action lawsuit for misleading investors about the company’s dealings in Iraq, a filing to a New York court said on Friday.Ericsson is at the centre of a scandal over potential payments to the Islamic State in Iraq. On Wednesday the U.S. Department of Justice said it was in breach of a 2019 deferred prosecution agreement (DPA) for failing to fully disclose details of its operations in Iraq.The filing, by law firm Pomerantz to the District Court of Eastern District of New York, said that Ericsson among other things had misled investors by overstating the extent to which it had eliminated the use of bribes. An Ericsson spokesperson could not immediately be reached for comment but Ericsson said in a brief statement that the company and “certain (company) officers” had been named as defendants in connection with “allegedly false and misleading statements” concerning Iraq.Under the conditions of the 2019 DPA, Ericsson paid more than $1 billion to resolve a series of corruption probes, involving bribery in China, Vietnam and Djibouti, and agreed to cooperate with the department for ongoing investigations.Ericsson has lost almost a third of its market value since media reports of the alleged bribes broke in February. Ericsson said that an internal probe, which ended in 2019 but was only made public in February after media inquiries, had identified payments designed to circumvent Iraqi customs at a time when militant organisations, including Islamic State, controlled some routes. More