Lloyd Blankfein, the CEO of Goldman Sachs, claimed quite famously once that he is just a banker doing ‘god’s work’. He later retracted this, saying it was a joke, but he must be right. Were it not so, would his company be rewarded so handsomely and repeatedly at that, as it has managed even through the worst years of financial crisis? Whether it is selling bundles of sub-prime mortgage assets to the investing public before anyone realises that they are toxic, or taking investment calls on bankrupt companies, their actions always end up on the right of the balance sheet.

Its investment in the Industrial and Commercial Bank of China from which they exited for good just the other day, is one such. Back in 2006, when they picked up a five per cent stake in that bank, it was the received wisdom that Chinese banks were hopelessly exposed to under-performing state-owned enterprises and by conventional yardsticks of accounting valuation, they were all practically bankrupt. Goldman thought otherwise, although it didn’t prevent them from acquiring it at bargain basement prices. They bought a 5 per cent stake in the bank at around half a dollar a piece for about $2.6 billion before the bank went public with an offer of sale in 2006, then the world's biggest offering to the investing public.

The details of transaction values are a bit hazy and the numbers put out by different news agencies are at variance with one another. One report pegged the total value of stake sale by Goldman Sachs at $5.9 billion through three tranches of off-loading with the residual stock still being reckoned as worth around $5 billion. Another report claimed that since 2006, Goldman has reported $3.5 billion in net revenue related to ICBC in its quarterly filings to the stock exchanges. No matter whichever claim one takes to be the correct picture, this much is certain. They have generated at least a 100 per cent return over a seven-year period. Not a bad record at all.

EASIER SAID THAN DONE

But, and this is the point, not everyone is so lucky. The average investor, across the globe, faces hard choices in asset allocation as between different classes of assets and economies. Whether it is investing in India or South Africa, choosing between equity and debt or between gold and copper is hard and the choices extremely difficult to make. What appears as a sound investment bet contains enough markers, each one of which could potentially turn it into a dud.

The enormity of the challenge can be gauged from the sheer size of the global pool of savings that needs to be invested in safe and profitable outlets. According to a World Bank study, by the year 2030, the world economy would have invested $26.7 trillion (2010 purchasing power) in all classes of assets and it does not anticipate any problem in finding investible surpluses to finance them ( Capital for the Future: Savings and Investments in an Inter-dependent World , World Bank 2013). True, a good chunk of such savings would be mandated by the state into designated investments and, to that extent, an asset allocation choice doesn’t exist. Thus, a quarter of the public savings lying with Indian banks must, of necessity, be invested in Indian Government securities.

A small percentage of it is impounded by the RBI, as cash reserve ratio (CRR). Other countries have their own restrictions with regard to savings mobilised within their shores. But that still leaves investors with a great deal of money on which asset allocation choices will have to be made. The risks are vast. Just the other day, the Chairman of the US Federal Reserve said something about the need to end measures of ‘fiscal stimulus’ (a steroidal injection of public money into the economy) and the global equity markets tanked.

It is not that the investing seriously believed that the US or the European Central Bank can endlessly buy up government securities without causing serious disruption to price stability in the local economy. But that doesn’t take away the fact that markets can be convulsed from time to time by hints of policy change and cause erosion in investment value just at the time that you want to exit the market. There are other uncertainties of a more fundamental nature that could mar your assumptions about the place to invest or the class of asset.

HEDGING ONE’S BETS

Take the assumption about economic growth in the world. The International Monetary Fund (IMF) predicts that private demand (a key requirement for sustaining growth in output) will remain resilient through the year ( IMF: World Economic Outlook , April 2013). But it immediately hedges it with the caveat, “across-the-board public spending cuts are expected to take a toll on the recovery” going forward. It notes quite helpfully that, “activity in the euro area will pick up very gradually”. It bases this claim on the assumption that Germany and other European nations wouldn’t be so coy about running high fiscal deficits and also that banks in the region would be a bit more venturesome in lending to businesses. Just when you thought that this was the signal to pour money into euro area, the IMF throws cold water on the belief with a qualification that output will remain subdued, actually contracting by about a quarter per cent in 2013. Why? Because it thinks that countries would continue to make “fiscal adjustments”, “financial fragmentation” and “ongoing balance sheet adjustment in the periphery economies” (read, Greece, Portugal, Cyprus).

Commentators are extremely bullish at the moment on the prospects for the Japanese economy. The expectation is that the fiscal stimulus and a weaker yen would combine to trigger a strong export demand for Japanese goods and services. But neither a weak yen boosting exports nor assumptions about inflation in the Japanese economy being contained at just two percentage points are a given. Indeed, back in the 80s, a continued strengthening of the yen was seen as actually aiding Japanese exports to the US and elsewhere. So a weak yen may just as well push cost of imports to a point where export competitiveness is undermined. So, is China the place to be in? There are worry lines there too. How much of the current growth is underpinned by exuberant lending and vastly excessive infrastructure creation? Is an environmental or public health scare (How about the new strain of H1N5 virus?) just round the corner? Will India be able to shake off the policy paralysis and overcome the land acquisition, environmental clearances hurdle? There are no convincing answers.

EROSION OF VALUES

All this reminds me of a poem by Dorothy Parker, the noted American satirist and literary critic. She combined an exceptional creative talent with some very ordinary looks. The latter might not in itself have worsened her odds in the sweepstakes of romance but for a regrettable inability to suffer foolish men that is compounded by a marked tendency to employ her talent for acerbic wit to put them down. The result was a series of failed relationships and attempts at suicide. But there was a resilient quality about her that helped her bounce back. Take this example from her book of verse, Enough Rope :

Razors pain you;/Rivers are damp;/Acids stain you;/And drugs cause cramp./Guns aren’t lawful;/Nooses give;/Gas smells awful;/You might as well live.

Substitute razor, river, acid, drugs, noose, guns and poisonous gas with different economies, currencies, commodities and you will end up with the realisation that we might as well not bother to save. And if we do save, we may acquire a fatalistic attitude to seeing some erosion in our investment values.

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