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This story appears in the February 13, 2012 edition of Forbes magazine.
Seek equities that look like bonds.
Darkness falls across the land
The midnight hour is close at hand
Creditors crawl in search of blood
To terrorize sovereign neighborhoods
And whosoever shall be found
Without the capital for paying down
Must stand and face the Hounds of Hell
And rot inside a corpse’s shell
The foulest stench is in the air
The debts of 40,000 years …
For no mere mortal can resist
The evil of the debt-paydown Thriller.
Move up Move down
Fed Still The Bondholder's Friend
Marilyn Cohen
Contributor
Volatility Means Income Opportunities
Richard Lehmann
Contributor
Sound familiar? Those are some of the lyrics to Michael Jackson’s 1982 mega-hit “Thriller” that I have changed slightly. I was recently listening to the song, and it struck me how fitting the ghoulish monologue, read by Vincent Price, was to the thriller going on in global financial markets.
Indeed a “debt-paydown” thriller is upon us, and it will not end anytime soon. Developed-nation debt may well infect the entire world. In Kenneth *Rogoff and Carmen Reinhart’s book, This Time Is Different, the authors point out that when a nation’s sovereign debt reaches 90% of GDP, future growth rates for that economy are affected negatively by 100 to 150 basis points and structural unemployment rises for years. The euro crisis aggravates the debt problem, and the prospects of a hard landing in China make matters even worse. Without growth in the OECD countries the mercantilist economic models of emerging economies simply do not work. A slowdown in growth for the emerging economies is real and *inevitable.
What should an investor do? That depends in part on how policymakers deal with the debt. They have five *options—default, devaluation, austerity, inflation and financial repression. *Default and *devaluation are simply too dangerous. Forget them. Austerity is *already being pursued in a number of countries, like Greece and Spain. Some inflation is what many policymakers would like to see, but it’s just not very likely given the large GDP output gaps that exist.
That leaves option five, monetary policy. By keeping interest rates at near zero (or even negative) across the entire system, savings will gradually be invested in risky assets or lost to inflation. With the savings in the private sector and the debt in the public sector, the government needs to transfer those savings to its balance sheet so it can resolve its debt problem.
Who wins in a world of financial repression? Bonds that look like equities and equities that look like bonds are preferred. Forget sovereign bonds; corporations have better balance sheets and transparent financial statements. Global companies with “moats” around their businesses will prevail because they can reconfigure their production and reposition their marketing efforts to the parts of the world that are experiencing growth. Look for managements that have a history of wise capital allocation and a consistent record of cash dividend, share buybacks and debt paydowns.
In my August 2011 column I recommended three global big caps: Coca-Cola (KO), U.K. education company Pearson Plc. (PSO) and Luxembourg satellite telecom operator SES S.A. (SESG.PA). According to FORBES’ number crunchers you would have slightly underperformed the S&P 500 by holding those stocks in 2011, with a 0.8% loss from August until the end of the year. These are strong global franchises with long-term promise. Here are three additional “global champions.”
Nestlé (NSRGY.PK, 58) is a Swiss food manufacturer with over $100 billion in sales. In 2011 the company paid $6.6 billion in cash dividends and bought back $4.4 billion of stock through June 30. Cash flow is growing in the mid single digits, and this should lead to a higher dividend payout, more share buybacks and debt reduction.
Vodafone (VOD, 28) is a U.K.-based wireless carrier with $71 billion in global sales, 70% coming from Europe. Its most significant asset is a 45% stake in Verizon Wireless, which generates $1 billion of free cash per month. Recently Verizon Wireless announced a $10 billion cash dividend, which will be passed through to shareholders in a special *dividend.
Another well-run company is *Anheuser-Busch InBev (BUD, 62), a global brewer with a portfolio of nearly 300 brands. The company was created by InBev’s $52 billion acquisition of *Anheuser-Busch in 2008. In 2009 the company began paying down this acquisition-related debt, and this continues today. The company should hit its target leverage ratio of less than two times net debt/Ebitda by the middle of this year. Once this happens we expect free cash flow to be allocated to raising the dividend and implementing share *repurchases.
William W. Priest, CFA and CPA, is the chief executive and co-chief investment officer of Epoch Investment Partners, a money management firm
http://www.forbes.com/sites/investor/2012/01/25/european-thriller/
Seek equities that look like bonds.
Darkness falls across the land
The midnight hour is close at hand
Creditors crawl in search of blood
To terrorize sovereign neighborhoods
And whosoever shall be found
Without the capital for paying down
Must stand and face the Hounds of Hell
And rot inside a corpse’s shell
The foulest stench is in the air
The debts of 40,000 years …
For no mere mortal can resist
The evil of the debt-paydown Thriller.
Move up Move down
Fed Still The Bondholder's Friend
Marilyn Cohen
Contributor
Volatility Means Income Opportunities
Richard Lehmann
Contributor
Sound familiar? Those are some of the lyrics to Michael Jackson’s 1982 mega-hit “Thriller” that I have changed slightly. I was recently listening to the song, and it struck me how fitting the ghoulish monologue, read by Vincent Price, was to the thriller going on in global financial markets.
Indeed a “debt-paydown” thriller is upon us, and it will not end anytime soon. Developed-nation debt may well infect the entire world. In Kenneth *Rogoff and Carmen Reinhart’s book, This Time Is Different, the authors point out that when a nation’s sovereign debt reaches 90% of GDP, future growth rates for that economy are affected negatively by 100 to 150 basis points and structural unemployment rises for years. The euro crisis aggravates the debt problem, and the prospects of a hard landing in China make matters even worse. Without growth in the OECD countries the mercantilist economic models of emerging economies simply do not work. A slowdown in growth for the emerging economies is real and *inevitable.
What should an investor do? That depends in part on how policymakers deal with the debt. They have five *options—default, devaluation, austerity, inflation and financial repression. *Default and *devaluation are simply too dangerous. Forget them. Austerity is *already being pursued in a number of countries, like Greece and Spain. Some inflation is what many policymakers would like to see, but it’s just not very likely given the large GDP output gaps that exist.
That leaves option five, monetary policy. By keeping interest rates at near zero (or even negative) across the entire system, savings will gradually be invested in risky assets or lost to inflation. With the savings in the private sector and the debt in the public sector, the government needs to transfer those savings to its balance sheet so it can resolve its debt problem.
Who wins in a world of financial repression? Bonds that look like equities and equities that look like bonds are preferred. Forget sovereign bonds; corporations have better balance sheets and transparent financial statements. Global companies with “moats” around their businesses will prevail because they can reconfigure their production and reposition their marketing efforts to the parts of the world that are experiencing growth. Look for managements that have a history of wise capital allocation and a consistent record of cash dividend, share buybacks and debt paydowns.
In my August 2011 column I recommended three global big caps: Coca-Cola (KO), U.K. education company Pearson Plc. (PSO) and Luxembourg satellite telecom operator SES S.A. (SESG.PA). According to FORBES’ number crunchers you would have slightly underperformed the S&P 500 by holding those stocks in 2011, with a 0.8% loss from August until the end of the year. These are strong global franchises with long-term promise. Here are three additional “global champions.”
Nestlé (NSRGY.PK, 58) is a Swiss food manufacturer with over $100 billion in sales. In 2011 the company paid $6.6 billion in cash dividends and bought back $4.4 billion of stock through June 30. Cash flow is growing in the mid single digits, and this should lead to a higher dividend payout, more share buybacks and debt reduction.
Vodafone (VOD, 28) is a U.K.-based wireless carrier with $71 billion in global sales, 70% coming from Europe. Its most significant asset is a 45% stake in Verizon Wireless, which generates $1 billion of free cash per month. Recently Verizon Wireless announced a $10 billion cash dividend, which will be passed through to shareholders in a special *dividend.
Another well-run company is *Anheuser-Busch InBev (BUD, 62), a global brewer with a portfolio of nearly 300 brands. The company was created by InBev’s $52 billion acquisition of *Anheuser-Busch in 2008. In 2009 the company began paying down this acquisition-related debt, and this continues today. The company should hit its target leverage ratio of less than two times net debt/Ebitda by the middle of this year. Once this happens we expect free cash flow to be allocated to raising the dividend and implementing share *repurchases.
William W. Priest, CFA and CPA, is the chief executive and co-chief investment officer of Epoch Investment Partners, a money management firm
http://www.forbes.com/sites/investor/2012/01/25/european-thriller/
