Case Blog

As we close out the first quarter of the new calendar and fiscal year, almost all businesses are finding that their year-over-year performance has improved significantly. The first quarter of ‘09 represented the depth of the Great Recession, when the world as we knew it unraveled before our eyes. When earnings are released for the first quarter of ‘10 we will see, without exception, improvements in all sectors of the business media, including those newspapers that survived the downturn. This will provide momentum for continued improvement as we head into spring and leave behind a difficult winter on the east coast.

Mary Claire and I returned last week to Blackhawk for the first time since early January. The Bay Area’s spring is in full bloom. Spring shipments from Napa and Sonoma are arriving, most from the ‘07 vintage. As many wine critics have reported, ‘07 represents the best vintage for most varietals in Northern California wine country since ‘97. It is time to restock the wine cellar, with many wineries actually lowering their prices to reflect the reset that has taken place in the consumer economy!

While we continue to see the U.S. and U.K. economies recover and grow, albeit at slower paces than we saw in the fourth quarter of ‘09, the eurozone remains challenged by its PIIGS.  ”Greece, along with Portugal, Ireland, Italy and Spain, are Europe’s PIIGS - euro-zone members with fragile economies and large debt loads. Fitch Ratings poured fuel on the euro fire last week by downgrading Portugal’s long-term foreign- and local-currency debt to a notch, to double A-minus, with a negative outlook, meaning another downgrade is more likely than not. The euro promptly fell to 10-month lows against the dollar before rebounding Friday.” (“Helping Hand for Greece Also Helps Hedge Funds,” Barrons, March 29, 2010)  Those of us who have business interests in the eurozone will continue to monitor the German-French brokered deal to keep Greece from defaulting. I was surprised to see Chancellor Merkel prevail on the side of fiscal discipline and the IMF being invited to join the bailout of Greece in order to preserve the Euro.

I wrote back in September of ‘07 in Global Brands, “In our global economy, even proud islands like the UK need to acknowledge that we all operate in a very interconnected world. Will the pound some day give way to the Euro?” I stand corrected; the Pound Sterling will survive and will continue to show strength versus the Euro. I was much closer to the mark in my last post, The Pound Sterling. We will continue to watch with great interest the upcoming spring election battle of Labour vs. the Tories. Closer to home and after our long health care debate, I recommend you read “Game Change: Obama and the Clintons, McCain and Palin, and the Race of a Lifetime,” by John Heilemann and Mark Halperin.

This is a guest blog post by Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

By Jason Cassidy

Our Strategic Insight Global team recently published a detailed report on the rapidly growing middle class investor in emerging markets.  The report describes the rapid growth in markets such as China and India and the need for asset managers looking to grow to find ways to enter these markets and to be sure to not underestimate the differences and potential obstacles these markets pose versus their home markets.

The report reminds me of the classic story of Kellogg trying to enter India with breakfast cereal.  The story was described to me by a good friend and business partner in Mumbai, Prakash Iyer.  There were so many potential eaters of breakfast cereal and the market was virtually un-penetrated, so Kellogg entered.  However, there was a big cultural obstacle that was missed.  There was a general preference in India for hot breakfast.  Cold cereal was a foreign concept and not very appealing.

However, with Prakash, I also saw firsthand an ultimately more successful, more culturally centered rollout with my experience at a McDonalds on the highway between the Taj Mahal and New Delhi.  (As a side note, I make it a point to try McDonalds in every country I travel to – my favorite for its irony is the outdoor McDonalds in Red Square in Moscow.  Some of my colleagues tend to dread this tradition of mine.)  The McDonalds menu in India, as some of you may have experienced, is very different from the menu you find in the U.S. or anywhere else in the world I have seen, for that matter.  For one there is no beef.  And there is a big focus on vegetarian options as well as chicken.  I tried the McAloo Tikki (potato and pea patty) and did get to have the signature fries.  They also have the same golden arches and style in the restaurants.  This struck me as a great combination of taking what you do well and integrating it with elements that make it uniquely appropriate for the country’s tastes and culture.

I generally defer to my Strategic Insight colleagues on the details and nuances of asset management around the world.  However, there is an example from China that I find particularly relevant.  From some conversations I had in China, I found that there is a general desire from investors in China to control their own investment decisions.  This is partially due to distrust of asset managers (especially for a large group of people who have had investable wealth only in the past few years of financial turmoil around the world),  There is also the desire to have the thrill and excitement of placing “bets” on specific stocks.  People enjoy going to their broker’s office, making trades, watching the stock ticker, and feeling part of the excitement.  Thus, a traditional asset manager has some cultural hurdles to overcome to build assets under management.  Trust and excitement are two key values they need to get across to the retail investors.

Overall, these cultural nuances can make or break a company’s expansion into new countries (just ask Kellogg).  Beyond the regulatory hurdles, the cultural hurdles need to be a primary driver in determining the product and service offering in a country.  Assume nothing that is a given in your home country applies to your global footprint.  Keep in mind the McAloo Tikki as you begin your global journey.<

About Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

Prior to joining Asset International, Mr. Cassidy was Vice President of website solutions for Register.com, where he oversaw sales, operations, customer service, marketing and product management with the primary focus on small business customers. Previously, as Vice President of Reed Business Information, he was actively involved in global strategy and development, including M&A initiatives and international development, and managed a portfolio of websites. Mr. Cassidy earned an M.B.A. from Duke Fuqua School of Business (2007) and an A.B. from Harvard University (1998). Originally from Boston, he and his family reside in Staten Island, New York.

With the concerns about the fiscal integrity of Greece and several other Eurozone members, the Euro has been under the most significant pressure since it was introduced as a common currency more than 8 years ago. There has been much speculation that it could fall to parity with the US dollar. Few recall that when it was introduced in 2002 and replaced national currencies, for example the German Mark, the Euro fell by approximately 15% vs. the US dollar in the first half of the year. It reached its peak of $1.599 vs. the US dollar in July of 2008. but since the global financial crisis began it has been under pressure. The Euro is the second largest reserve currency after the US dollar and the UK’s sterling is the third largest reserve currency. (Wikipedia: Euro)

In February, the world’s best-known bond trader, Bill Gross of Pimco, wrote in his monthly report: “…the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerin. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2% and lower.” For the developed countries, Gross favors fixed-income investments in Canada — its conservative banks did not participate in the housing crisis — followed by Germany. (Pimco: Investment Outlook, Ring of Fire: Red Zone Countries, February 2010) While Pimco runs the world’s largest fund, Total Return Fund, and I hold Bill Gross in high regard, I do not believe that the United Kingdom is the next Greece or that we will repeat 1992. (The Wall Street Journal reported that the “bets against the pound are the highest since 1992″ and credited Camilla Sutton, currency strategist at Scotia in Toronto. [WSJ 3/6/2010])

The Bank of England, founded in 1694, and its Governor, Mervyn King, along with Chancellor of the Exchequer Alistair Darling, understand what the sterling represents on the world stage and how important it is to defend. During the dark days of the global finance crisis they introduced quantitative easing as one tool to support their banks. I have been reading Hank Paulson’s book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System”. In it he relates a call he received from Darling during the search for an acquirer for Lehman Brothers, before its collapse into bankruptcy:

“I understand one of your possible buyers is a British bank,” I remember him saying. “I want you to know that we have some concern, because our banks are already under a lot of stress. We don’t want them to become overextended and further weakened.”

“Afterward I commented to Jim Wilkinson that Alistair seemed to be telling me that the British didn’t want their banks to catch the American disease. But because he couched this as a general concern, I didn’t see his words as the red flag that in retrospect they appear to have been.”

Barclays management team could not get the approval they needed to acquire Lehman Brothers, but did end up buying Lehman’s best assets after the bankruptcy filing. I find this supportive of my view that the Bank of England will not let the pound weaken further. (It did bounce back towards the end of this week from below $1.50 to close the week on an uptick at $1.5145.)

There is concern that the spring election between Labour & the Tories, which once seemed like a sure bet for the Tories, now appears too close to call. The Tories have squandered a 20+ point lead in the polls over the past year. They are going to have to become proactive & let the British electorate know where they stand on the issues of the day. In the final analysis, I believe that the British pound will withstand this storm better than the Euro and will reinforce the sentiment in the U.K. that they made the right decision not to join in the Eurozone common currency, which allowed them to avoid the budget restrictions imposed upon Eurozone members. I sense that both the U.S. and the U.K., with an assist by their respective deficit stimulus plans, will recover faster from the Great Recession than their Eurozone counterparts.