Stephen’s Posterous

World raw sugar futures shot to new highs on August 3, 2009. The widening global deficit for sugar and production concerns in India and Brazil adds fuel to the market's bullish fire.

India's unpredictable monsoon season along with Brazilian production concerns are expected to keep  pressure on ICE sugar futures, according to Barclays Capital Analyst Nicholas Snowdon. Forecasts calling for dry weather the next two weeks in India's main growing region will likely keep the sugar bull alive and kicking.

Front-month October sugar raced to a new 3 1/2-year high of $19.43 cents a pound, while March 2010 sugar secured a new all-time high of 20.44 cents on strong buying interest.

Sugar's gains are underpinned by a 3% advance in crude oil futures and early strength in the major commodity indexes, with a weak dollar also supportive for the commodity sector. Brazil's sugar production has been hurt by heavy rain in July 2009 and lower sucrose levels in the cane. Mr. Snowdon's current target on March 2010 sugar is 22 cents a pound.

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Deborah Fuhr is the managing director and global head of ETF research at Barclays Global Investors, one of the world's leading ETF organizations. Ms. Fuhr is considered one of the top analysts in her field. Ms. Fuhr recently shared a Q&A with Barrons.com.

When asked about how ETF's compare with managed funds, Ms. Fuhr responded that according to a new five-year Standard & Poor's study in the U.S., 71% of active managers benchmarked to the S&P didn't beat the benchmark again. She also says that with mutual funds, you are not able to get a price until the end of the day when the NAV is calculated.

ETF's are still growing at a rapid pace according to Ms. Fuhr. Ine the U.S. retail investors account for 40% of ETFs with the rest being institutional investors. Outside the U.S., the customers tend to be mostly institutional. When asked what ETFs would offer the most opportunity in terms of profiting when the global economy improves, Ms. Fuhr said that fixed-icome ETF's may be a good place to look.

Ms. Fuhr says:

As an example, people are looking at government bonds because last year, if you think about what segments of the market actually did well, it was government bonds from developed countries and gold. So you see people looking at government index exposure. You see some people looking at credit. Some people are looking at infrastructure. Some are looking at clean tech and alternative energy.

With the rally the other day in India, you saw many people looking at products that allow them to implement exposure to India. We've also seen the interest in Taiwan. You've seen interest in emerging Asia because many of the strategists on the Street have said that emerging Asia should recover faster than other segments of the markets. So I think the benefit of an ETF is that it is an easy way to express whatever [your] view is.

Picking the right stock is a challenge when trying to choose the right investment. And selecting a fund, according to Ms. Fuhr, may also be a challenge when 71% of active funds missed the benchmark. The solution, according to Ms. Fuhr, an ETF that tracks a benckmark.

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The Financial Times reported that caffeine addicts may face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.

“We are in a dangerous situation,” Andrea Illy, chief executive of Italy’s leading coffee ­company, told the Financial Times, warning that prices could “explode” due to supply shortages. International coffee prices hit a seven-month high on the week of May 4, 2009, rising to $1.28 per pound, up 22 per cent from their December 2008 low, in New York trading.

The spot price of Colombian coffee, which commands a premium, jumped to almost $2.20 a pound, a 12-year high, due to supply constraints. The crop in Colombia was damaged by heavy rains and the scarcity of supplies from the country is now “absolute”, says Néstor Osorio, head of the International Coffee Organisation.

The Financial Times also reported that sugar prices in New York and London also rose the week of May 4, 2009, to their highest in almost three years. White sugar prices rose above $450 a tonne, a 52 per cent gain from mid-December 2008, as traders bet that India, the world’s largest consumer, will require hefty imports to compensate for the failure of the local crop.

Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices. The International Sugar Organisation predicts a second consecutive market deficit in 2009-10.

The Wall Street Journal reported that orange-juice futures rose 1.6% on May 11 2009, taking prices to a six-month high on worries over drought in Florida, disease concerns and chart-influenced buying. Frozen concentrated orange juice for July 2009 delivery on ICE Futures U.S. in New York rose 1.45 cents to settle at 92.30 cents a pound.

While Florida's rainy season normally begins in June, the three-year drought has virtually depleted soil moisture in interior growing areas, forcing producers to irrigate extensively. Trees are beginning to show signs of leaf wilt in the hot afternoon sun, state agriculture officials said.

Traders also are worried over the spread of the fatal citrus greening, a bacterial disease that kills the trees in about two to three years and is found in every commercial citrus growing county in the state. The disease was discovered in Florida in 2005 and is spread by a citrus psyllid insect. It is often difficult to detect and an infected tree mightn't show symptoms for several years.

FCOJ futures have rallied since March, after values had fallen to near 70 cents a pound. Since then, there have been signs that retail demand for orange juice may have bottomed, Mr. Smith said. Total orange juice sales in the four-week period to April 11 increased 1.9% from the comparable year-ago level, as average prices fell 5.3%, data from A.C. Nielsen showed.

It may be time to stock up on coffee, sugar, and orange juice from Costco Wholesale. The increase in the cost of coffee may also affect margins at Starbucks since the company may not be able to increase prices. Recently, the company revealed a new price plan as reported in the Wall Street Journal, with some items costing more while others are costing less.

From FT.com

Crude oil prices have drifted below $50 a barrel this year as the global recession has dented energy demand in the world’s biggest importers. As stockpiles build up, producers have cut capital expenditure on exploration and new production facilities.

But this could be sowing the seeds of the next bubble, some analysts say. Any failure to gear up output to meet the needs of a recovering economy, could create a gap between supply and demand similar to that which drove crude prices to $150 less than a year ago.

Francisco Blanch, head of global commodities research at Banc of America Securities-Merrill Lynch, answers readers’ questions on the impact of recession and recovery on oil prices.

Where will we see the increasing utilisation of alternative energy sources (such as electric powered cars) bring the price of oil to a permanent low, or will the continuous drainage of oil to a point where the resource is fast running out keep prices elevated?

This is the trillion dollar question. In my opinion, $50/bbl oil is not high enough to encourage a massive shift out of oil towards alternative energy. As an example, most biofuels plants around the world will lose money with oil prices below $60/bbl, while wind farms do not really make much sense in a low oil price world.

Will policymakers focus on energy efficiency when oil is a cheaper alternative and other political issues are more pressing?

We believe that continued upward pressure on energy prices will be needed to focus policy on energy efficiency. Limited spare capacity, strong underlying trend demand and the need for efficiency improvements all suggest that energy prices may have to increase again in the coming years relative to other prices in the economy. Our long-term WTI crude oil price forecast is $72/bbl in real terms.

In the midst of a global recession (depression?) with oil demand so low, one would expect prices to be low and remain low, and yet there still seems to be massive volatility in the price on a day to day and week to week basis. Why is this?

Fundamentally, price volatility in the commodity markets is linked to inventories. Commodity stocks, in effect, serve as a cushion to adjust supply and demand shocks in the physical market. In commodities such as oil and natural gas, where there storage constraints are a feature of the physical market, high levels of inventories can result in high levels of volatility.

Thus, we should not be surprised that the massive demand shock resulting from the global economic meltdown has pushed up oil price volatility. Similarly, low inventory levels can also drive volatility up in oil markets, as we saw last summer.

Technically, commodity price volatility is linked to volatility in other markets including equities, rates, credit or FX. I like to say that volatility is contagious. What will happen to oil price volatility going forward? In the second half of this year, we believe that the oil market will tighten and move from a very large surplus into a deficit, as demand stabilises and Opec maintains low output levels.

A tighter balance should mean that oil inventories could start drawing down in the coming months towards their 10 year average. In turn, a shift towards average inventory levels could help bring oil price volatility lower.

In 10 months, oil prices have decreased around 65 per cent. Do you see the recession as the one and only reason for this decrease?

Yes, we believe supply and demand fundamentals, and changes in the money supply and the velocity of money have been the key drivers of oil prices in the last five years. Industrial production across a broad range of developed and emerging economies came down very sharply in the fourth quarter last year and first quarter of 2009.

In the case of Japan, industrial output is now at the same level it was back in 1983, while German and American industrial activity has taken a step back of almost 10 years. These dramatic swings in economic activity are enough, in my judgement, to create such a large swing in prices.

Opec decided at its last meeting not to reduce output. After this decision, and coupled with poor demand and a move away from carbon fuels, can we seriously expect prices of $150+ ever again?

My simple answer to your question is yes, but a more important question perhaps is when. Due to their high exposure to the business cycle, oil prices have been seriously beaten by the current crises and are unlikely to stage a recovery until there are convincing signs that the global economy has turned the corner.

By then, another set of consecutive years of underinvestment in production capacity, coupled with a massive government debt overhang, will end up exacerbating the very same problems that created the most recent spike in energy prices, in my opinion. This situation could develop as soon as 2011 or 2012 and as late as 2015.

Another important factor that could push oil prices to $150/bbl in two to three years could be the tsunami of monetary and fiscal policy measures aiming to offset the recent private sector credit contraction. In our view, it is still uncertain how governments will be able to service the increased debt. In a world of fiat currencies and large government debts, higher inflation is not an unlikely scenario and a run-up in nominal commodity prices could develop.

In addition, with emerging markets poised to grow at a faster rate than OECD economies in the next decade and limited spare productive capacity, commodity markets could be among the first to experience inflationary pressures.

Is for example extraction of oil from the Alberta tar sands developments operationally economic at $50/barrel? What oil price is required to sanction capital expenditure on further tar sands projects?

It is important to differentiate between operational costs to maintain existing facilities and operational and incentive prices for new investments in productive capacity.

The current price level of $50/bbl will keep the existing tar sands projects in Alberta operational, but will not encourage new investment into the sector. As recently as 2008, our equity analysts estimated that new tar sands projects would only make sense financially at $90/bbl. Fortunately, improved labour productivity, lower steel and component pricing, and an end to the cost inflation environment of the 2006-2008 oil sands boom period are bringing incentive prices lower.

For oil sands projects, our equity analysts estimate that a cost reduction of 25 per cent in new projects is achievable over the next few years. If achieved, this could drive the required oil price to generate acceptable returns from $90/bbl back down to the $70-75/bbl range.

Our calculations suggest that the oil industry’s marginal source of supply will fall to US$70-75/bbl. However, we still expect to see continued price volatility around marginal costs particularly in periods of significant positive or negative divergence from trend levels of growth.

How much of the $150 per barrel oil do you feel was the result of institutional investors buying oil futures instead of, for example, asset backed securities as the crisis unfolded? If the impact of such speculation was significant then do you believe that speculators will continue to play a large role in a potential future oil bubble? Or have we learned our lessons for now?

The influx of investment in commodities sparked an intense and politically charged debate last year on whether speculation somehow caused the price of commodities to become disconnected from the fundamentals of supply and demand. Having analysed the available data in detail, we believe there is simply no evidence for that assertion.

Instead, we can find a clear link from sharp changes in monetary policy to abrupt commodity price movements. Looking back thirty years, our analysis concludes that a 1 per cent reduction in real interest rates results in a 17.5 per cent increase in spot commodity prices 10 months later. Our estimate thus suggests that loose monetary policy played a much more important role than speculators in the commodity price rally in the first half of 2008.

If the prospect of a future price bubble is so obvious why are not speculators already driving up the price, which in turn would encourage investment in oil exploration, extraction and refining?

The short answer is that long-dated oil prices are already on the rise. ICE Brent crude oil contracts for delivery in December 2017 closed last Friday at $78.71/bbl, a 60 per cent premium to current spot prices. The oil futures curve is currently pricing in nominal price appreciation of around 6 per cent per annum for the next 8 years.

I would like to clarify, however, that long-dated oil prices are not just driven by ”speculators”. Key participants in the oil markets include consumers, refiners, producers, inflation hedgers and speculators, defined here as investors that have the ability to go long or short any given contract to take advantage of market conditions). At the moment, a number of consumers have re-entered the market to take advantage of relatively low prices to hedge forward consumption.

Is it possible for the world to exceed more than 90 million barrels of oil production per day? If not, what alternatives is Merrill Lynch investing in to fill the demand gap of 10, 15, 20 years from now?

Perhaps 90 million barrels a day is a reachable target, but the chance of world oil production ever exceeding 95 million barrels a day is very low, in my view. On our estimates, if global GDP grows by 3.6 per cent every year over the next decade, annual energy demand will increase by 4 million b/d of energy in oil equivalent terms.

For oil, this figure could mean an annual net increase in global demand of 1 million b/d. Given the natural limits to supply, policymakers will have to shift their attention to energy efficiency. I can not really comment on what Merrill Lynch is investing, but I certainly see the need to increase global energy supply by 1.7 per cent per annum and global energy efficiency by 1.8 per cent per annum every year over the next decade.

What does that mean for investors? I think sectors such as energy productivity, alternative fuels, renewable electricity generation, but also conventional fuels such as coal or natural gas, will all provide very good opportunities over the next decade as we struggle to fill the ”demand gap” left by oil.

Is the persistent contango structure of the future oil market a sign of increasing dislocations in the oil market or is it just the result of normal market expectations? When do you think the curve will go back to its prevailing backwardation structure?

The persistent contango structure is primarily a function of the extremely high level of inventories, and the ongoing supply/demand imbalance. Keep in mind, however, that the second quarter of the year is the seasonally low point in demand. Thus, we should see a sequential improvement in global oil demand based both on seasonal factors as well as on a slight improvement in underlying economic demand.

In my opinion, with the oil market turning more balanced and Opec keeping over 3.5 million b/d off the market, inventories are heading for a draw in the second half of 2009. Thus, we believe that oil prices will likely continue to strengthen in the next six months.

However, long-dated prices are unlikely to follow suit, as the demand recovery will likely be very shallow in 2010. In a market with abundant spare capacity and a tightening balance, the pronounced crude contango should lead to a flatter curve or even to backwardation. Thus, we believe that the term structure of WTI crude oil prices will continue to flatten from here.

Given that some oil resources are uneconomic to exploit at current prices, what price does oil need to reach for post recession demand to be met?

We believe that two forces will need to be at work over the next decade to prevent further oil price spikes: (1) increased investment into the oil sector and (2) increased energy efficiency and substitution. Thus, oil prices need to be high enough to encourage a relatively slow oil demand growth path going forward and oil prices need to be high enough to encourage investment in marginal sources of supply, which we believe are Canadian oil sands and biofuels.

Keep in mind that commodity production utilisation rates are still high compared to other sectors, so any rebound in economic activity will likely have an impact on commodity prices before it hits other parts of the economy.

Low spare capacity availability on a relative basis, strong underlying trend demand and the need for energy efficiency all suggest that WTI crude oil prices may have to average $72/bbl in the long-term in real terms. In turn, a high oil price will keep energy’s share of global GDP above historical averages.

Did Peak Oil get it wrong and now it’s Peak Demand?

No doubt, global industrial production and economic activity has fallen sharply, with OECD economies contracting at an unprecedented rate in recent quarters. However, this extraordinary ”demand vacuum” created by the collapse of the credit bubble could be filled up quickly by demand for durables in Emerging Markets, in our opinion. We estimate that about 1.7 billion consumers sit on an annual GDP per head of $5,000 to $20,000, mostly in Emerging Markets and mostly unlevered.

This bracket of income is a sweet spot for the consumption of durable goods and for taking on leverage, as appetite for washing machines, freezers or cars rises rapidly when per capita income hits $5,000. As a reference point, Americans had a real GDP per capita of $12,000 in 1980 as the multi-decade long credit bubble began, while Portugal did not cross the GDP per capita mark of $10,000 until 1990.

Thus, as a higher consumption of durables comes with a substantial increase in energy use, supply constraints could soon resurface. As a reference point, global energy demand in oil equivalent terms increased by 6 million b/d in 2007. For China, India and other Emerging Markets to drive and fly, we need all the oil we can get, or a viable alternative to the existing transportation technology.

Given that the fall of oil prices have revealed that countries like Russia and Venezuela have failed to diversify their economies outside of commodities; do you see any oil producing economies making progress to diversify their economy in this climate?

Broadly speaking, I think commodity producers have been more cautious with their spending in the past business cycle than during the oil and commodity boom of the 1970s. In Latin America, Mexico, Brazil or Chile are good examples of oil price hedging, economic diversification, and precautionary savings ahead of the commodity price downturn.

In the Middle East, emerging trading centres in the United Arab Emirates or Qatar could well gain increasing traction in sectors such as finance with global taxation on the rise, partly thanks to heavy investment in infrastructure. Similarly, a broad range of commodity producers sit on large Sovereign Wealth Funds that should allow them to endure the oil price downturn.

There is a long-lasting dispute on the impact of speculation on oil prices. Has the relation between fundamental (physical) and financial (speculative) factors changed after the financial crisis, and are oil bourses (ICE, Nymex) gaining influence compared to OTC deals?

In our view, a global misallocation of capital sits at the heart of the current economic crisis. In simple terms, capital markets failed in recent years and channelled too much money into real estate, too little into energy. Having analysed the available data in detail a few months ago, we found no link between speculative activity and systematic price increases in commodity markets.

As part of a general growth in derivatives across all asset classes trading volumes and open interest in commodity derivatives surely increased, but only some commodities experienced significant price swings in the last two years. What has changed after the credit crisis?

Naturally, listed products are gaining ground across all asset classes, not just commodities, as regulators and market participants press for greater transparency and lower credit risk. Still, activity in the over-the-counter market continues unabated because it offers a customized angle that listed markets can’t provide. Having said that, market participants will now choose to clear trades on the exchange to limit counterparty credit risk, when possible.

Opec regularly states that they require an oil price around 70$/bbl to sustain projects. Where do you see Opec production cost at the moment and do you have an estimate of how many projects have already been postponed or cancelled?

Opec production cutbacks have been very significant. From a peak of 30.3 million b/d in July last year, Opec-11 crude oil production has come down to about 26 million b/d, helping create a floor to global crude oil prices. However, actual oil production costs for most Opec members are substantially lower than $70/bbl, perhaps as low as $10-20/bbl.

Similarly, social oil costs for Opec, or the oil price required to balance the member governments’ budgets, differ by country. For Saudi Arabia, Kuwait, Qatar or the Emirates, we estimate that $50/bbl would suffice to roughly bring government budgets into balance, while members such as Iran or Venezuela probably require higher prices of $70/bbl to break even. Then again, we are talking about social costs, not production costs or incentive prices for new supply.

Having said that, new investments in Canadian oil sands and biofuels production require a $70/bbl price tag, but these projects sit mostly outside Opec. So far, over half of all planned oil sands-related projects in Canada have been delayed or cancelled, while many biofuels producers have cut back on their investment plans.

With collapsing global oil prices and the rapidly increasing cost of funding, we expect delays on expensive development projects like Canadian oil sands to continue. Within Opec, we have also seen significant cutbacks in capital expenditures, as financial resources are being diverted to other sectors of the economy.

Currently there is well over 100 million bbls of crude and 25 millions barrels of products in floating storage. This, combined with record shore stocks will surely provide a buffer until production increases to meet any increase in demand and therefore prevent a price bubble?

I agree that there are very low chances of an oil price spike in the next 12 to 18 months, but I also believe the market could start to tighten again in 2011. Remember that 125 million barrels in floating storage is only 1.5 days of global oil demand, so this cushion is not as large as it seems if economic activity ticks up.

However, given the shallow demand recovery ahead, the high inventory levels, and the increased spare capacity in refining and crude oil supply within Opec, I do not see much upside to oil prices until the end of next year.

Our current forecast for WTI crude oil prices in 2010 is $62/bbl. Beyond next year, the limited growth prospects in rich OECD economies stand in stark contrast to the middle income emerging economies.

As I have pointed out in another question, we estimate that 1.7 billion consumers sit on annual GDP per head of $5k to $20k, a sweet spot for the consumption of durables and for taking on leverage. Thus, the medium-term energy demand prospects are a lot brighter as EM economies start to recover.

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There have been many pseudo reserve currencies through the ages. Now, the governor of the People’s Bank of China has called for a new global currency “disconnected from individual nations”.

Russia, too, wants to move away from a world dominated by the dollar. Kazakh president Nursultan Nazarbayev suggests such a currency could be called the acmetal, an amalgam of “acme” and “capital”.

But is there a case for one? In theory, yes. Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies. The reserve currency status of the dollar helped to create nasty global imbalances, one of the main culprits of the current downturn.

As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.

Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration.

Unsurprisingly, huge budget deficits and the Federal Reserve’s leap into quantitative easing have foreigners fretting over the longer term health of the dollar.

Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power.

China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency. Find a single investor in this crisis that has panicked out of dollars into roubles. Of course, if China one day emerges as the dominant economic and military power, the status quo will change. Until then, investors cannot be rushed.

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The effects of the recession and tightened credit markets have made themselves well known in the United States, but the slowdown is having a profound effect on economies overseas as well. Iain Clark, chief investment officer for Henderson Global Investors, admits it is a tricky time for investors to make stock bets in Europe and Asia.

But the London-based fund manager does have some stock-picking tips to share. It is difficult to judge when any economy will recover from the current downturn, and many have been wrong in the past. But by focusing on companies that aren't beholden to the credit markets and have staying power, investors can wait out the storm, according to Clark.

Below are some excerpts from his interview with Barrons.com about Henderson's International Opportunities Fund (ticker: HFOAX).

Barrons.com: You have investments in Europe and some in Asia as well. How should investors approach these economies, as there are fears they will suffer from a prolonged recession?

Iain Clark: Our strategy is to focus on two things: quality companies with sound balance sheets. When I say sound balance sheets, I don't just mean with lots of cash. Companies can have a bit of debt, but it must be fairly modest and must be longer term because if you have to refinance debt in the next year or two, I think you are still going to have a major problem.

It doesn't necessarily mean traditionally defensive stocks. We don't know how deep this recession might get. It may still get a little bit deeper. But these companies are still going to be around in one year or three years, they seem reasonably safe from that point of view. We are focused on soundly financed [companies that are], generally, the quality end of the spectrum.

Q: Obviously you are taking a company-by-company approach to this. But do you have a larger sense of what economies might bounce back first?

A: It's very difficult to make that judgment right now. Our focus is on individual stocks, and the overall balance of the fund is more from the particular stocks that we own. I am sort of happy with the China story, but elsewhere I think it's very difficult to tell.

The U.K. is an interesting case because the government and the central bank are being a lot more proactive in trying to get out of the recession. But the U.K. probably had a bigger set of problems in the first place. We have quite high debt levels in comparison to Europe and, obviously, we have probably more banking problems than the rest of Europe. So I think it's very difficult to tell in that situation whether we are going to come out of the recession ahead of France or Germany.

Germany is very dependent upon exports. Exports have been heading down very rapidly for the last few months, but the domestic economy is probably sort of OK. Unemployment will start to rise before too long, but not too badly. At the same time [unlike the U.K.], Germany is not really doing much to help the economy, just little bits and pieces here and there.

So while the problems of Europe are not as bad as the U.K., equally the European governments and central banks are doing rather less to try to get out of it. I wouldn't put any bets on who comes out of this first, but my personal view is that the U.K. will be first, it will be a bit more entrepreneurial than the rest of Europe.

Q: You mentioned you were optimistic about China?

A: The situation in China is quite simple except you are dealing with very big numbers. We know that exports are collapsing, and that's quite a large part of the economy. But what we also know is that their authoritarian government is spending huge amounts of money, we say about 6% or 7% of the gross national product, which is bound to have an impact.

Take infrastructure spending in the power-generation area, for example: They already have a six-to-seven-year plan in place, so when they decide that they are going to spend money, they just bring all of that forward. They tell the banks to lend and, within a few days, the money starts flowing and the business starts getting done.

If you are in the U.K. or the U.S., you have to spend three to six months running around the politicians, trying to get support for a large spending package. You have to work out what it is actually going to be spent on. Then the banks have to do a bit of lending, and maybe one to two years later something starts to happen. So there's a huge difference in China in terms of the speed of execution.

They were running a small budget surplus before they went into this [recession], and their total debt as a percentage of GNP is very low compared to a lot of other countries, so they do have the financial firepower to introduce these major measures. Virtually no one else has that sort of combination.

If you look at India, there's no question that they need lots of infrastructure spending. But they don't have the total financial firepower that China has. India is still a democracy, and so they can't just decide to do something.

I am still slightly hesitant because I think China has been quite a popular play already. But the stock market, as you may recall, fell incredibly sharply last year. A stock that we have been happy to add to over the course of this year is China Mobile (CHL). Again, this is not an unknown stock, but it is the No. 1 player by miles in China. We think this company still looks pretty cheap and has plenty of opportunities for growth.

Q: Are there any other companies that you'd like to mention that fit your quality and balance-sheet criteria?

A: Germany's Fresenius Medical Care (FMS) is the biggest player in kidney dialysis; it benefits from the increasing [rates] of diabetes and other illnesses. The medicines and treatments that it produces are more and more needed, it is growing very steadily. It has recently raised some capital in the bond markets. But it is a soundly financed company. It is not really as battered as other companies are by the fact that the economies go up and down, because demand is so constant and growing for its medical products.

Q: Thanks for your time.

Source. Subscribe to Barron's. Henderson's International Opportunities Fund.

Private equity company Blackstone Group CEO Stephen Schwarzman said on Tuesday, March 10, 2009, that up to 45 percent of the world's wealth has been destroyed by the global credit crisis.

"Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime."

But the U.S. government is committed to the preservation of financial institutions, he said, and will do whatever it takes to restart the economy. U.S. Treasury Secretary Timothy Geithner plans to unfreeze credit markets through a new program that will combine public and private capital in a fund that would buy bank toxic assets of up to $1 trillion.

"In all likelihood, that will have the private sector buy troubled assets to clean the banks out in terms of providing leverage ... so that we can get more money back into the banking system," Schwarzman said.He expects the private sector to end up making "some good money doing that," but added there were complex issues on how to price toxic assets.

Mr. Schwarzman put part of the blame for the financial crisis to credit rating agencies.

"What's pretty clear is that, if you were looking for one culprit out of the many, many, many culprits, you have to point your finger at the rating agencies," he said. Rating companies have been the focus of intense criticism for their role in granting top "AAA" ratings for complex bonds that later plummeted in value, resulting in subsequent rating cuts, in many cases to junk status.

"Once you bought into ... the Triple A paper and it turned out to be paper that was in many situations going to end up defaulting, then you really had the makings of a global problem," he said. Mr. Schwarzman said problems were then exacerbated by mark-to- market accounting rules. Those rules ask banks and other financial institutions to price assets at a value related to how they would be sold in the open market.

Blackstone reported a quarterly loss in February 2009 after writing down the value of its portfolio and eliminated its fourth-quarter dividend. Asked where was a good place to invest, Schwarzman said it made sense to buy cyclical names, which are less exposed to the economic cycles.

Mr. Schwarzman said investors also may find value in debt products, including "senior layers of certain securitizations," where investors can see 15 percent to 20 percent returns, he said. Geographically, he said there were "pockets of strength" in China, which is committed to getting to an 8 percent growth level, and in India, where the economy is slowing but banks are in good shape.

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From Aparup Sengupta in Mumbai, India

On my way home from Worli to Thane, a good one-hour ride, my fellow car passengers and I frequently buy peanuts when we stop at a traffic signal to combat the late-evening hunger before we munch on our late-night unhealthy dinners.

One vendor stands out for a simple reason: Rather than dishing out the usual five portions in cone-shaped packets made of used newspapers, he dishes out six for all of the passengers in the car. He probably gives me the same amount, but adds 20% more helpings for the same price to take care of all the passengers. He is now much sought after and, needless to say, sells far more peanuts on that corner than others do.

Therein lies a lesson for these difficult times, when trouble – an everyday phenomenon for management – threatens to become disproportionate and turn into tragedy. To navigate these times requires a questioning of all habits and assumptions.

It requires a change from what customers "bought" traditionally to "what they need" or something that addresses their pain immediately. We need to find what it is we can do to address those challenges – handing out six bags of peanuts instead of five to satisfy everyone in the car.

Companies that have done that grew in the most difficult times. Others committed the greatest mistake possible: Cutting back on everything – fewer peanuts in five bags – and stifling innovation that otherwise would have blossomed into greater profits or lower costs.

It is time for an end to "steady-state" learning that is the basis for so much of management practice during growing times. Instead, troubled times are the best for new learning that leads to higher returns on initiatives and spurs the search for alternatives, something that can be lost in good times when companies build models on systems that they know and that have worked in the past.

So trouble can be good, as long as the energy it stimulates is directed toward finding new approaches that bring in disruptions that boost margins and give greater competitive flexibility. It needs to focus on an approach that says "I want to win" rather than says "these are bad times."

Where can those new approaches come from? I don't know how the peanut vendor figured it out. But as a corporate leader, the answer is most definitely not just from the in-house "re-engineering guru." They need to come from the rank and file.

A prime example: One busy day, an Aegis employee walked up and said: "Can we work in shifts?" That small idea saved space, shortened turnaround time, and provided a new order for many who started going home on time, improving their quality of life.

Growth is largely a personal journey to win. Therefore difficult times and challenges can enable people to grow disproportionately, like the passionate yet unassuming and slender peanut vendor, perhaps a "Slumdog" who could probably teach at Stanford on how to introduce innovations that make millions.

Mr. Sengupta is the Managing Director and Global CEO, Aegis Ltd.

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Several consumer goods companies can claim a similar reach but few would be able to trumpet Coca-Cola’s ability to “bring simple moments of pleasure” to customers 1.6 billion times a day, at least not with a straight face.

And the benefits that such breadth brings were evident again yesterday: out of the eight large US listed food and beverage companies to report fourth-quarter earnings so far, Coke was only the second to show continued growth in volumes. The news prompted both a pop for shares in Coke and its peers.

Everything is relative, though. Coke merely beat lowered analysts’ expectations. A decline in sales for the fourth quarter thanks to currency movements indicates one of the challenges ahead for the coming year. At the same time, falling volumes in North America reflect the well-established shift in consumer behaviour away from colas and their carbonated friends. As with most consumer-related categories, optimists must now assume that no manufacturer or large retailer is pushed into starting a US price war.

Even so, Coke continues to pursue market share in emerging countries, particularly China, India and the Philippines. Comments from spirits maker Diageo support the view that such markets offer enduring growth.

The risk remains that expansion ends abruptly: the economic slowdown in Russia and eastern Europe prompted two profit warnings from bottler Coca-Cola Hellenic Bottling last year. But continued attempts to improve efficiency offer some comfort. Coke aims to find $500 million of cost savings by 2011 – equivalent to 6 per cent of current operating profit – which it intends to reinvest in order to keep growth fizzing along fairly nicely.

That does not quite leave Coke in the realm of reliable utilities. But a  4 per cent yield and 16 times earnings multiple puts it squarely in the basket of steady, defensive companies. In these markets, there are few such simple pleasures available.

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Emerging economies are usually the first to drop when international capital flows dry up. This year, they will be lucky to attract $165bn, the Institute for International Finance estimates,one fifth of the level in 2007. Yet no generalised collapse has yet happened – not even in Latin America, the region traditionally most dependent on external capital. At first glance this looks odd.

Take Brazil and India, the globe’s ninth and 12th biggest economies, according to the International Monetary Fund’s latest estimates. While the developed world is expected to shrink by 2 per cent this year, the IMF reckons Brazil will grow by 2 per cent, and India by 5 per cent. Why? One answer is that they have stable banks, relatively closed economies, and large internal markets. This has insulated them from much of the global turmoil.

The contrast with East Asia is stark. Singapore’s economy shrank at an annualised 17 per cent rate at the end of last year, South Korea by some 20 per cent. Yet this is not for lack of capital. Asian economies, after all, are global creditors. Their economies have shrunk instead because they are heavily oriented towards collapsing international trade. Meanwhile, their local markets are undeveloped and weak. Asia’s challenge is how to best deploy its accumulated surpluses to boost domestic demand.

The biggest sufferer from falling capital flows, though, has been emerging Europe. The region alone accounted for almost 50 per cent of the emerging world’s foreign capital demand in 2007. Worse, almost half of that was from western banks, which now have problems of their own. That alone suggests the region will struggle to attract the $117bn it needs this year. Much of the region had embraced globalisation with gusto. Now it is experiencing how fickle international capital flows can be. It is a cold welcome to the emerging debtors’ club.

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