Note February 28,2018 – Governance To Matter:
Vitally even amid growth, current risks include deficits, debt and corporate scandal from the U.S. to Europe to Japan to China to India to Brazil and beyond. Relevant globally is the breadth of ongoing corporate tribulations in Japan. Also, ERISA emerged in the U.S. reacting to investment lapses in the go-go 1960s/70s. Social messaging and data massaging technology push with mass usage. They are espoused as early catalysts for market action. We are reminded of several realities. The use of mass data is not new but over half a century old in espionage and in econometrics, with mixed results. Espionage remains a dark art, despite probability theorists since 1948. The economics experience through many cycles since 1968 has been that mathematical formulae and statistical analyses do not alone lead to accuracy. Amid the investment rage in the late 1970s over conglomeration on their supposedly superior knowledge, we were at a seminar hosting two such, one new and feisty and the other, a century old. The representative of the feisty declared it to be driven by criteria. When asked about criteria, the representative of the classical pulled slowly on his pipe. He declared deadpan that they had standards. Both companies subsequently restructured. The feisty soon went out of business. The classicist did return to its roots but survived, with a stock price up many fold since. An investment lesson is that governance matters. It is an aspect about which to weigh central bank policy, volatility and momentum today. The mot de jour may not be criteria now but trendy instead has become momentum or being near term data driven. We favor quality and better balance, including governance even if not amenable to models.
Due to their very size, governance has come to be associated with the public sphere whether in geopolitics, governments or in central banks. In the public sphere, one salient political feature has been the rise of populist, bordering on authoritarian tendencies. In structured systems, it can be seen in many countries like China, Russia, Turkey and the Philippines in the form of more emphasis on single leader dominance of a type last seen decades ago. Democracies have not been immune in that ranged from the largest like the United States to the small like Hungary, the political emphasis has come to be on warnings about foreign hordes waiting to invade paradises. Countries like Britain, Germany and India appear somewhere in between. Long forgotten appears to be the reality that checks and balances with greater trade openings did lead to greater prosperity and harmony first within the OECD as well as from the 1990s for many countries that had toyed with many forms of authoritarianism.
Central banks in turn appear to have ditched long espoused principles ranged from money creation to debt balance. Instead amid massive and prolonged quantitative ease to various degrees, central banks have proclaimed themselves to be data driven. Further, deficits and debt to GDP as well as overall leverage continue to be gingerly skirted around instead of being overtly discussed. Recent comments from various members of the U.S. Federal Reserve as well as the February 2018 Semi-annual Monetary Policy Report to Congress (https://www.federalreserve.gov/monetarypolicy/2018-02-mpr-summary.htm) seem to be no exception. The same can be said from the Bank of England amid Brexit uncertainty, the ECB as European growth gains with leadership composition changing as well as from emerging country central banks otherwise tightening policy like the Banco Central do Brasil, Peoples’ Bank of China and the Reserve Bank of India while dealing with financial scandal of relevance. Due to the very length and size of its quantitative ease program, the Bank of Japan and its policies have been in much focus for over two decades. It continues to be the case with respect to fear of the risks that could arise from an early exit from quantitative ease resulting in pedantic growth.
Less prominence appears to be given that with the longest running massive quantitative ease, Japan has also experienced a severe case of deteriorating corporate governance and business leadership, not least compared to its 1960s/70s experience when money was more scarce. The breadth of the ongoing corporate tribulations in Japan that have been chronically surfacing is relevant globally. It has contributed to the forced sale of globally valuable assets. An abiding investment lesson is that governance matters from politics, markets and companies alike. Not amenable to models, governance is an aspect about which to weigh central bank policy, volatility and momentum. Vitally even during growth that has strengthened and quantitative ease that is still massive, current risks include deficits, debt and corporate scandal from the U.S. to Europe to Japan to China to India to Brazil and beyond. These pressures would likely only increase during slowdowns.
Even as global annual GDP growth reaches towards 4%, competition among nations and among companies remains intense. As interest rates increase and fixed income markets tighten, the size of debt accrued and the funds flow impact of financing it should be of concern for the consumer, companies and governments alike. Notable during policy induced easy money in this cycle has been the size and diversity of corporate scandal in recent times. For instance, in Japan, it has coincided with a salient number of large company corporate scandals including massive fudging in its erstwhile famed quality of production as well as loss in business leadership in segments ranged from materials processing to consumer goods to high technology. Further even a decade from bottom in the United States, companies with formal management systems supposedly emulation worthy worldwide have instead been mired in massive business write-downs unrelated to government policy change. Despite size, decades and in some cases centuries of global experience, several Healthcare and Consumer Staples companies in Europe and the United States appear to have misjudged both developing business segments and the efficacy of accepted practices in their well-known brands. As revealed in current business releases in yet another manufacturing-distribution evolution, several new and old Consumer Discretion chains have been found wanting from Scandinavia to Asia. Even ten years from bottom, several large European banks in particular have more massive write-downs and staff cuts to fathom. Meanwhile and notwithstanding faster growth, the authorities in both China and India have had multibillion dollar scandals among their Financial companies as earlier afflicted Brazil. Now flaring overall for company governance is the eruption in issues of gender equality and income distribution that have generated pushback amid visible scandals. The challenges to quality in management remain elevated.
The mot de jour may not be criteria now but trendy instead has become momentum or being near term data driven. We favor quality and better balance, including governance even if not amenable to models.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e. For disclosures, see www.subodhkumar.com .