THE BLOG

Why Global Investors Should Beware

09/25/2012 03:26 pm ET | Updated Nov 25, 2012
  • Daniel Wagner CEO of Country Risk Solutions / co-author of the book "Global Risk Agility and Decision Making".

In spite of everything that occurred over the past four years, many in the global financial industry appear content to continue to beat a well-worn drum, wanting investors to believe that 'technical' factors and historical stock market performance are all that is required to predict the future behavior of stock markets -- as if everything else in the world is dynamic and ever-changing, but what drives stock market performance is predictable. This demonstrates a willful and perhaps purposeful ignorance of what is happening in the world. Investors should be concerned about the plethora of external factors that could impact the global investment climate in the coming months.

It is of course no news to anyone that the global economy remains on a precipice, based on a combination of debt-infused anemic growth in the developed world, slowing growth in the emerging and developing world, and sharply lower global trade figures this year. Yet global stock markets seem content to continue to overemphasize any shred of good economic news, while underemphasizing bad news and longer-term trends. This makes little sense in a world where local events have global impact -- and yet, it continues, as if nothing has changed over the past decade.

This propensity to brush off bad news has the potential to have truly significant impact on global stock markets, but so far the markets have gotten away with it because government economic stimulus packages around the world have largely had their desired short-term effect, creating an illusion that everything is just fine to the average investor, and masking over the lingering structural deficiencies that plague so many economies.

Lost in this morass of self-delusion is the cold hard reality that 2013 presents some great challenges for the world. The pending climax between Iran and Israel tops the list. Regardless of who wins the U.S. presidential election, there seems to be a good chance that either Israel or the U.S. will indeed proceed with an attack on Iran, given that both countries have repeatedly stated that Iran will not be allowed to obtain a nuclear weapon. In the absence of Iran suddenly losing in pursuing its nuclear program (which will not happen), what else would stop it, and what other option would either Israel or the U.S. choose?

Prime Minister Netanyahu's recent focus on adopting 'red lines' has been heard loud and clear by the US Congress.

Late last week, the U.S. Senate voted 90-1 in favor of expressing the "sense of the Congress," a non-binding position that "strongly supports U.S. policy to prevent Iran from acquiring a nuclear weapons capability, and rejects any U.S. policy that would rely on efforts to contain a nuclear weapons-capable Iran." Mr. Romney has said this is the essence of his position. My guess is that soon enough, Mr. Obama will be saying the same thing. A number of pundits have stated that if an attack is to occur, 2013 is likely to be the year. I think they are right.

Iran's Brigadier General Hajizadeh stated over the weekend that Iran would consider a pre-emptive strike on Israel, if it believed an Israeli or U.S. attack were imminent. Some might believe all this to be just a ratcheting up of bellicose rhetoric, but it is hard to believe. Ahmadinejad has said nothing will stop Iran from its pursuit of a 'peaceful' nuclear capability, Netanyahu firmly believes Israel faces an existential threat as a result, and it is clear that sanctions are not working. At some point in time -- likely very soon -- words may turn to action, and unlike when Iraq and Syria's nuclear sites were attacked by Israel, Iran and its proxies throughout the region have the ability and will to strike back.

On the economic front, the U.S. faces its 'fiscal cliff' at the end of this year -- presenting lawmakers with the option of either increasing taxes and implementing spending cuts, which would negatively impact growth and possibly force the U.S. economy back into recession (some would say we're still in one), or canceling some or all of these tax increases and spending cuts, which would increase the deficit and increase the likelihood that the U.S. will face an economic crisis similar to what is occurring in Europe. The next U.S. president and Congress really have no choice but to tackle this issue head on, and most any direction they turn is likely to negatively impact the U.S. economy and stock market.

Then there is Europe, which continues to limp along in the belief that the sun really will come out tomorrow. In spite of massive ongoing stimulus spending by the ECB and national governments, European growth remains barely positive, and the various stimulus measures are having rather limited positive impact. More money is being thrown into a black hole in the belief that fundamental structural reform -- the only thing that has a hope of turning it all around -- can be avoided.

The rest of the world is slowing down, too. China's manufacturing index has now experienced 11 consecutive months of decline. Export levels are falling in many countries; in the second quarter of this year, Britain and India experienced a 4 percent decline in exports, while Russia and South Africa were down more than 8 percent. Since last year, imports into the EU have fallen by 4.5 percent. Container volumes from Asia to Europe plunged by more than 13 percent in the first seven months of this year. The trend is clear.

So, why is so little of this translating into pessimism or even realism, instead of unbridled optimism in so many stock markets? The simple answer appears to be that the talking heads in the financial news media have a vested interest in making it seem as if no tsunami warning has been issued, and the viewing public doesn't appear to know the difference, or care. If, for example, as they suggest, U.S. companies are 'lean and mean' and the U.S. economy is doing just fine, then why have some of America's best known business titans dumped so much stock? Earlier this year, George Soros sold nearly all his positions in U.S. banks, Warren Buffett reduced his stake in U.S. consumer product makers by more than 20 percent, and John Paulson dramatically reduced his holdings in U.S. equities.

They appear to realize that a major correction is well overdue, whether the market realizes it or not. The global economy has slowed down noticeably, Europe's troubles are no better than they were a year ago, the U.S. fiscal cliff is looming, and war between Israel and Iran seems increasingly likely. Investors should be cautious in the coming months. A perfect storm is brewing.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management firm, and author of Managing Country Risk.