Last week was yet another strong one for equities as the rally that got underway in early March continued. For the week, the Dow Jones Industrial Average climbed 3.1% to 8,763, the S&P 500 Index advanced 2.3% to 940 and the Nasdaq Composite rose 4.2% to 1,849. With these gains, the S&P is now up about 4% for the year, the Nasdaq is up 17% and the Dow is just about flat.
Stocks have been on a wild ride so far in 2009, and it was thought it would be useful to step back and offer some broad perspective as to where it has been and where it might be going. It would be an understatement to say that global equity markets have been volatile in 2009. After sinking sharply in January and February amid worsening economic data and growing uncertainty about policymakers’ next steps in combating the credit crisis, global equities began to rise in the next couple of months and now have seemed to enter a period of uncertainty. Investors are now left to wonder if the recent rally is for real.
Since the bear market began in earnest last September (with the collapse of Lehman Brothers marking an important inflection point), several equity rallies have failed to take hold. In our opinion, however, the rally that started in March is different. This current rally, which has resulted in a nearly 40% advance in stocks, has been based on a combination of technically oversold conditions, aggressive global policy actions and a general sense that the global economic recession is moving past its period of greatest weakness.
The question now is whether this rally marks the end of the bear market, or if it merely represents a temporary bounce from oversold conditions. It would be premature to suggest that a new bull market has emerged or that it has seen the end of the see-saw patterns that have been in place since last fall. Nevertheless, it is believed that there are several important differences between current conditions and the failed rally attempts that occurred previously. From a technical perspective, the current rally has been marked by strong momentum and expanding volume on the upside, and diminishing momentum and volume on the downside. Additionally, lower-quality and more cyclical areas of the market have been outperforming, as have emerging markets when compared to developed markets, trends that occur when more sustained recoveries begin.
The extent to which equities are able to continue to advance will depend largely on the degree to which the global economy is able to recover. On balance, our view is that the global economy is still in the midst of a severe and dangerous recession, but, importantly, the massive policy initiatives around the world have begun to bear some fruit. The dramatic interest rate cuts, spending increases, tax cuts, capital injections, bank rescues and plethora of new government programs have all helped to combat ongoing credit-related deflation risks. It is believed that the fourth quarter of 2008 and the first quarter of 2009 will mark the low points for economic growth. It is expected that a small gain in world economic growth by the third quarter of this year, and also expect to see modestly positive growth in the United States at some point in the second half of 2009.
While investors have grown more optimistic in recent months in the face of "less bad" economic news, it is important to remember that less bad is not the same as actual good news. As such, it is believed that the rally that started in early March may run out of steam unless there is more solid evidence of an economic recovery. At present, it is believed that equities are entering a sideways correction phase, and it is also expected to see ongoing levels of high volatility. It is extremely unlikely that prices will retreat back to their early-March levels, but it could be seen that some modest near-term declines, since markets never move straight up. Typically, such corrections result in a give-back of between one-third to one-half of gains, which, should this occur, would result in a short-term drop to between 800 and 850 for the S&P 500 Index. Over the longer term, however, it is expected that improving economic conditions will help equity prices to move higher, and it is believed that stocks will outperform bonds and cash over the next 12 months.
Corn
The corn market ended the fortnight unchanged despite near- and long-term supportive fundamentals. Regarding the near-term, we are still in the middle of the critical planting stage in the northern hemisphere: the soils are soggy in the US cornbelt and severe planting delays could seriously threaten the national average yields in our opinion. The US Department of Agriculture released their 09/10 US supply/demand balance and we think that the yield forecasts look very high with respect to current weather conditions. In a longer run, the first USDA estimates of the 09/10 global supply/demand balance seem very supportive of prices. We note that total supply will increase marginally, thanks only to higher beginning stocks. In short, while the "starch addiction" (for feed, ethanol, HFCS, and other numerous industrial uses) increases worldwide, the world production will be reduced for the second season in a row. As a result, just a slight decrease of the global yields in one of the major producing countries (like US, EU-27, Brazil or China) would be sufficient to ration the demand in the next season. It is on this basis that we have increased our corn exposure during the last two weeks.
Wheat
Regarding wheat, we remain sceptical about the current rally. The US and global fundamentals are still bearish long term for this product, and it seems as if the current price move is being predominantly influenced by strong fund buying. In the latest USDA report, we noted that the 09/10 world production is estimated at 657 mln tons (vs. 682 mln tons last season). We strongly doubt this forecast and expect production to be closer to 620 mln tons at this stage. Nevertheless, the world does not face a shortage of wheat and we expect new lows for this market soon.
Oilseeds
Oilseeds prices continued to rally during the last two weeks. These markets have been fuelled by regular and supportive items of news (Chinese purchases, revised downward revisions of the Latam crops, expectations for very low 08/09 US soybean ending stocks, planting delays) and a renewed interest from investors for agricultural commodities in general. The USDA report only confirmed this extremely bullish picture, lowering both its 08/09 old crop ending stocks and the Argentinean crop estimates. However, a proverb says that "the fundamentals are always the most bullish at the top" and we all keep in mind in July last year that corn prices started a 60% fall despite strong planting delays (due to floods in the Midwest) and exuberant ethanol perspectives. We do not expect such a movement in the short term, we are increasingly careful about this sub-sector. From a technical point of view, we also note that oilseeds markets traded outside the US are beginning a correction phase. This divergence reinforces our prudence.
Soft
Soft markets traded different directions all along these last two weeks. Coffee ended sharply up while sugar and orange juice moved in a short term congestion phase. Cocoa continued to loose round on renewed concerns about the demand in Europe, the US and emerging countries (China’s April bean imports were around 50% lower than a year ago). All in all, fundamental news was poor across this sector in the last two weeks. We remain bullish long term about all these markets, notably coffee and sugar.
Meats
Meats prices continued to move lower in the last fortnight and 2009 risks to be one of the worst years for all the animal producers worldwide. Indeed, meats prices remain very weak while feed markets (notably soybean meal) rallied strongly over the first 5 months of this year, further pressuring their margins. Pilgrim Pride, the largest US poultry producer, is now in bankruptcy and the recent swine disease, even if it has no link with pork eating, is the straw that might break the camel’s back. Despite all the bad news, we remain positive long term about this sub-sector.
Materials
Cotton and rubber showed the worst performances in these last weeks. We are still negative near term about this sector. The USDA report was bearish for US cotton next season as the US production is seen higher while exports are expected to fall compared to the current season.
8 Jun 2009 - Market Commentary
China & Hong Kong
Pulled down by the decline in food prices following the weakening demand, China’s consumer price index (CPI) and the producer price index (PPI) fell 1.5% and 6.6% yoy respectively in April, worsen than market had expected. However, with the recent strong loan growth, CPI is expected to rise in the second half this year. China’s export in April fell 22.6% yoy to 91.9 billion Yuan for six successive months, after a 17.1% fall in March and weaker than market expectations. Fixed asset investment (FAI) growth has been very strong YTD, with real urban FAI picking up from 36% yoy in March to over 40% yoy in April. The market expected that the robust investment spending could be maintained with the accelerating construction activity and growing number of the infrastructure projects. China's new lending reached RMB591.8 billion in April, which is about a third of the record RMB1.89 trillion in March. The cooled new lending helps to ease worries over banks' ability to fend off credit risk.
Hong Kong's total exports in April fell just 18.2% from a year earlier, better than market expectations for a 23.6 percent decline. But, exports were likely to continue to decline in coming months amid weak demand from recession-hit Western economies. Going forward, the external environment will remain challenging. Hong Kong's unemployment rate climbed 0.1% to 5.3%, the highest in the past 41 months. The number of unemployed increased by around 9,700 to 196,900 over the period, with construction, food and manufacturing sectors hardly suffered. Together with the fresh graduates, the outbreak of human swine flu has also emerged as a new source of pressure on the labor market.
Asia Pacific
IMF reported that due to the over-dependence of Asian economies on export sector, the Asian countries, excluding China and India, suffered a decrease of no less than 15% in the fourth quarter of 2008 and the situation would be further worsened this year. It suggests that Asia should boost domestic demand and reduces the dependence on exports to resume its sustained growth.
The employment markets of Asia showed signs of stabilization recently as unemployment rate of Korea and Australia dropped from 4.0% and 5.7% in March to 3.8% to 5.4% in April. As dragged down by plunging exports and thinner factory output, Japan's economy shrank at a record 15.2% annual pace in the first quarter and comes after a 12% plunge in the fourth quarter of 2008.
The Bank of Japan raised its view of the economy for the first time in almost three years on signs that a record contraction in 1Q represented the worst of the recession as exports and production are beginning to level out. However, the path back to sustained growth still looks challenging for Japan.
Taiwan's economy contracted at a record rate of -10.24% year on year in first quarter as export demand dwindled. However, the TWSI rose strongly to a nine-month high on hopes that stronger Chinese growth and improving relations with the mainland would boost growth prospects later in the year.
Korean Composite just rose 2% last month, underperforming other Asian markets, as people worry the effect of North Korea missile tests on South Korea’s economic recovery.
US
The encouraging economic data boosted investor's confidence as U.S. ISM non-manufacturing index in April recovered from 40.8 to a six-month high of 43.7, while Conference Board's Consumer Confidence Index vaulted from 39.2 to 54.9. The results of the stress tests were far better than anticipated. It showed that 10 of 19 large U.S. Banks require additional capital buffer, including Bank of America, Citigroup, Morgan Stanley, etc. and need to raise a total of USD 74.6 billion, which were much lower than initially feared.
The recent homebuilding data showed that housing starts and housing permits fell to the lowest level in 50 years in April, and the accelerating foreclosure rates contribute to fears the bottom may not yet have been reached. Moreover, the rising bond yields may further threaten recovery of the housing markets. The U.S. largest automaker, General Motors filed for Chapter 11 bankruptcy protection. In the bankruptcy plan, U.S. government will give General Motors USD30.1 billion finance its bankruptcy reorganization in exchange for 60% stake in the company. It is expected that General Motors will close more than 10 plants with 20,000 jobs cuts.
Europe
ECB plans to buy 60 billion euro in covered bonds, joining the Federal Reserve and other central banks in buying debt under their quantitative easing policies. Meanwhile, ECB cut its main policy rate by 0.25% to 1.0%, and extended the long-term liquidity provision out to 12 months. Standard & Poor's lowered its outlook on the UK to "negative", owning to the worries over the fast-deteriorating public finances as public deficit ballooned to a record 8.5 billion pounds in April. That agency also warned that debt could rise to 100% of output by 2013, which could lead to the UK losing its coveted 'AAA' status.
Suffered by the massive production and staff cuts, Eurozone economy contracted at a record quarterly rate of 2.5% in the first three months of the year with serve decline in investment and export sectors, following a contraction of 1.6% in the final quarter of 2008. With the hopes for a global economic recovery, the recent Eurozone economic data was further improved. Eurozone's April PMI was 36.8, the highest level since October 2008. Meanwhile, the ZEW investor confidence index in Germany rose to a three-year high in May, a further sign that the rapid slowdown in the Europe economy has ended.
Emerging Markets
Emerging market equities significantly outperformed their developed market counterparts as commodity prices hit a new high for the year and outweighed renewed concerns over the global economy, boosting the resource-rich markets. The MSCI Emerging Markets Index returned 12% versus a 5.8% gain for the MSCI World.
India’s Sensex surged by a record 17% after Prime Minister Singh's Congress Party won nationwide elections. Meanwhile, the rupee rose 3.1% against the USD, the most in more than two decades. A return of foreign interest into the Indian market can be expected as the political risk has been effectively reduced after this election. Moreover, its economy expanded 5.8% (stronger than market forecast of 5%) from a year earlier in the first quarter with social spending and financial services the biggest growth drivers.
In Russia, the RTS performed strongly with growth of 72% YTD as oil prices rose back above USD 60 per barrel, helping strengthen the rubble and support the country’s depleted foreign currency reserves.
Despite Mexico's central bank cut interest rates by 0.75% to 5.25% in a bid to counter the deleterious effects of swine flu and U.S. economic recession on the country’s economy, Mexico’s BOLSA underperformed other regional markets.
Others
OPEC cut its 2009 forecast for the ninth straight month, predicting oil demand will fall as consumption shrinks in the U.S., the world’s biggest energy consumer. Also, despite the oil price rose sharply recently, OPEC reported that the increase in oil price is being driven by speculation other than fundamentals.
U.S. dollar weaker and gold price rose to around USD990 as concerns over soaring U.S. government debt, which may lead to future downgrade of U.S. credit rating.
1 Jun 2009 - Market Commentary
Gold
The gold market had a good month in May, with bullion gaining 1.8% to US$944/oz. Weakness in the US Dollar was a key factor, while physical demand from India has been strong following the election results. The FTSE Gold Mines Index gained 7.0%, bringing their monthly return to 26.7%. Once again, the equities delivered some decent gearing to the bullion price - this is exactly what investors in the shares are seeking.
Last month, the World Gold Council released its Gold Demand Trends for the first quarter. The highlight of the report was the huge growth in identifiable investment - up 250% year-on-year - which more than offset falls in other areas of demand. ETFs accounted for the bulk of this investment, although purchases of coins and "other retail investment" were also strong. Jewellery consumption, meanwhile, fell 24% year-on-year, with India, the biggest consumer, falling by 50%. China and Hong Kong registered modest growth in jewellery demand.
In equity news, Fresnillo and Randgold Resources are benefitting from the latest MSCI World Index rebalancing. Both stocks will be included in the index, resulting in buying by index-trackers. Fresnillo and Randgold Resources are up 60.2% and 52.8% respectively in the past month, compared with a 26.7% gain in the FTSE Gold Mines Index.
All the ingredients are in place for a sustained bull market in gold. Falling mine supply, robust jewellery demand and the potential for a reduction in net central bank sales will all be supportive of prices. The key factor, however, is the strength in investment demand, as evidenced by the latest data from the World Gold Council. In terms of the gold equities, they now appear to be generating leverage to movements in the bullion price, a characteristic that had been conspicuously absent in recent years. As costs pressures are abating, with the pull back in oil from US$147/Bbl, for example, it is believed that earnings will expand as gold prices rise and investors will be attracted back into the sector.
China
After nearly a decade of preparations, the final launch of China's Growth Enterprise Market (GEM) becomes imminent as mentioned by Premier Chinese Wen in March this year in the First Session of the 11th National People's Congress. The purpose of the GEM is to primarily target "self-innovation" and "growth" enterprises and offer an avenue for them to capitalise on their growth opportunities.
In March, the China Securities Regulatory Commission (CSRC) promulgated the Tentative Administrative Measures for IPOs and Listing on the GEM board, which has taken effect on 1 May 2009. The draft rules for the GEM stipulated the conditions, procedures of issuance, information disclosure, supervision and punishment in a specific fashion. Companies to be listed in the GEM must realize profits for two consecutive years and have combined profits of at least RMB 10 million, or the company must post revenue of at least RMB 50 million and a net profit of at least RMB 5 million for the latest fiscal year. This promulgation of the rules is regarded as a milestone in developing a multi-level capital market in China.
The official listing of stocks on the GEM board is expected to begin in August. Shenzhen Stock Exchange figures show that over 300 start-up firms are making plans for public trading on this Shenzhen's new Nasdaq like GEM board. When the Shenzhen bourse conducted a survey of more than 900 companies in 29 development zones throughout the country, it found over 300 firms to be qualified for listing on the GEM.
SMEs playing an important role in the Chinese economy
China's innovative companies and growth enterprises have constituted a key force in job creation and economic growth. According to China Association of Small and Medium Enterprises, Small and Medium Enterprises (SMEs) account for 99.8 percent of the country's companies, and contribute about 60 percent to the GDP and offer 75 percent of all manufacturing jobs. However, so far most of China's RMB 4 trillion stimulus program has gone to state firms in industries like construction, real estate and transport. Only 2 percent of the capital raised by SMEs comes from direct financing. Most of it is from banking loans and other lenders.
As such, a market like GEM will be a crucial step for China to build an international financial center. The GEM board platform will provide these companies a new mechanism for raising needed capital. The market also sees GEM as part of a wider industrial transformation, as China seeks to promote "innovation". Supporting high-growth SMEs which have prestigious proprietary technology - and an element of sustainability beyond cheap labour - is now part of the central strategy for the Chinese government.
Meanwhile, company resources for the GEM board are abundant. There are already 50,000 SMEs nationwide that are qualified to list, according to the CSRC’s source. The GEM board will create a recognized avenue for domestic and international investors, especially those venture capital investors, to get exit from the enterprises they invested, and help stimulate the venture capital investment in China.
While some may have concerns over the impact on existing stock markets, we think that the launch of the GEM will not have significant impact on the liquidity of the main stock markets, as the companies listed on the GEM board will be limited to RMB 100 million in financing, a level far below the RMB 10 billion that can be raised by a large enterprise on the main board.
To spur the rapid development of China’s equity markets
Indeed, China’s equity market has grown rapidly over the past decades. From 1990 to 2000, China's stock market capitalization went from under a billion US dollars to one of the top ten stock markets in the world. By 2001, Chinese market capitalization reached over half a trillion dollars and surpassed Hong Kong for the first time. As of December 2007, the combined market capitalization of China's stock markets total $3.3 trillion, far ahead of Hong Kong ($2.0 trillion) and behind only Japan ($4.1 trillion) in Asia.
Meanwhile, the Chinese companies have been playing an increasingly important and active role in Hong Kong stock markets. China-related companies now make up half the market capitalization of the Hong Kong exchange, significantly up from about 10 percent a decade ago (Figure 1). In 2008, total turnover of H shares and Red chips accounts for about 67% of the total turnover in the Hong Kong Stock Exchange (Main Board). Moreover, eight of the 15 largest stocks in the Hang Seng Index are Chinese companies.
While the CSRC is attaching great importance to risk management to guarantee the smooth launch of the GEM board, nowadays the Chinese capital market is more mature than what it was 10 year ago, and investors and venture capital firms are keen to invest in the country now than before. Coupled with the recovery of the stock market, we believe that the GEM board launch roadmap comes at a time when meeting the funding needs of many cash-strapped private sector enterprises has become an integral part of the government's stimulus efforts.
Investment Implications
The "green-light" of China’s second board marks an important measure to improve the structure of China's capital market and expand the market's depth and width. The development of China's economy, the growing stock market, policies to encourage innovative SMEs and the rising investment passion for stocks and funds all point to a second board. With the support of more direct financing, it is predictable that some of China's most innovative companies and growth enterprises will have a much better chance of growing into industry leaders. It will also help soak up excess liquidity and stimulate development of private equity.
The launch of the GEM board is a long-term positive to the Chinese economy. From the investment perspective, the GEM also provides attractive investment opportunities to those investors who are looking for listed companies with high growth potential. Given the robustness of the Chinese economy and the on-going structural reforms, it is believed the Chinese domestic stock markets will continue to develop, which in turn, will further boost investment opportunities and liquidity in both Hong Kong and China markets.
26 May 2009 - Hong Kong Economic Times - Executive & Market
25 May 2009 - Market Commentary
India
The Bombay Stock Exchange’s Sensex Index surged over 17% on 18 May 2009, reflecting expectations of a growth-oriented policy environment for the next five years following the victory of the Congress Party in the parliamentary elections. After having been hamstrung by its coalition partners over the last five years on policy decisions, the Congress party is now likely to have a free hand to pursue its pro-growth and pro-reform agenda.
Some of the key areas of policy action are likely to be in: infrastructure investment, deregulation of ownership in financial services (insurance and banks), likely divestment of stakes in government-owned companies and specific programmes targeted at the rural economy. The companies involved in these areas are likely to benefit immensely. In addition, the stable political environment and policy framework is likely to attract foreign capital, which will be positive for the Indian rupee.
After 18 May 2009’s move, the market is trading at a price/earnings ratio (PER) of over 16 times (on March 2010 earnings), which is above the long-term average of 14-15 PER, but below the 20-21 PER peak valuation level. Earnings growth for subsequent years is likely to be revised up now given the assumption of a more favourable macro-economic environment. 18 May 2009’s move was, however, very sharp and some consolidation in the near term is quite likely.
Exposures to financials and infrastructure-related areas will likely benefit under a liberalised policy regime. Depending on individual stock valuations, an expected market consolidation phase over the next few weeks to further increase exposures to some of the above mentioned sectors, which are likely to benefit under the new administration.
Chinese property
Chinese tax authority issued a notice on its website on 20 May, releasing details on the collection of land appreciation tax.
Apart from the bid to enhance fiscal revenue (which shrank significantly YTD), a more important message behind such a notice could be a reminder for Chinese developers, warning them not to raise property prices too much or too quickly following the strong sales volume recovery.
The acceleration of land appreciation tax collection is negative for property developers cash flow, especially for the high end products developers. But more important negative impact could be on investors' sentiment regarding the sector on the concern of any policy change.
Policies have been so supportive since Q4 2008 for the property developers and the property market has more than stabilised since then, which means the policy target has been met. Any significant property price hike may push policies to be hawkish. Hence the policy risk could be more on the negative side going forward. It is negative for property developers.
US
April Housing starts unexpectedly slid 13% to an annual rate of 458,000, led by a 46% tumble in multifamily starts. This is negative for building industry, but this is positive for housing pricing as it will help to work out the supply glut.
President Barack Obama announced the first national standard for greenhouse-gas emissions from automobiles and tougher fuelmileagestandards, marking the most sweeping new regulation of the industry in decades. The plan represents a "historic agreement tohelp America break its dependence on oil, reduce harmful pollution and begin the transition to a clean-energy economy," the president said.
Obama said automakers must meet average efficiency standards of 35.5 miles per gallon by 2016, four years sooner than previously planned. The plan would reduce greenhouse-gas emissions by 900 million metric tons through 2016, according to the administration.
6 May 2009 - Oriental Daily Money Talk
23 Apr 2009 - Oriental Daily Money Talk
Apr 2009 - Capital CEO
Mar 2009 - Capital CEO Nite 2008
Feb 2009 - Hong Kong's Most Valuable Companies 2009
GlobalBEST has been named Hong Kong’s Most Valuable Company from the Mediazone Group of Publications. This award further demonstrates GlobalBEST’s top-of-class brand image that is widely recognized by its customers and the Company’s outstanding services in Hong Kong.
The Hong Kong’s Most Valuable Company Award is presented by the Mediazone Group of Publications. It is comprised of 33 industry categories, including banking and finance, property developers, hotels, insurance, jewelry, motoring, public utilities, travel agency. The board of editors selects the winners based on readers’ recognition, business performance over the last decade, no incidences of corruption and market leadership.
This honor demonstrates public recognition of our efforts in brand building as well as a vote of confidence in our comprehensive portfolio of professional wealth management services. The award presented this year is of particular significance to us. It represents the firm support of our customers during this period of global financial turbulence.
12 Jan 2009 - ATV Interview
5 Jan 2009 - ATV Interview
20 Oct 2008 - Market Commentary
In a move to calm its frazzled financial markets, the South Korean government said Sunday it will back as much as $100 billion of its banks' foreign-currency debt and could make $30 billion of its foreign exchange reserves available to the banking sector, according to media reports Sunday. The government and its state-run lenders, including Korea Development Bank, will give a three-year guarantee for as much as $100 billion of external debt taken up by Korean banks from Monday until June 30 next year, Bloomberg News reported, citing a government statement.
The moves came as South Korea deals with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost almost two-fifths of its value this year, the report said.
"The government has decided to join in global coordinated efforts to stabilize financial markets," Reuters quoted Strategy and Finance Minister Kang Man Soo as saying. "We will continue to provide pre-emptive, decisive and sufficient measures to this end."
Ratings agency Standard & Poor's said last week that it may cut the credit ratings of South Korea's largest lenders, while Moody's Investors Service said that the country is one of the few in Asia where domestic deposits are not enough to fund loans. Meanwhile, authorities also plan to allow banks access to $30 billion from its foreign-exchange reserves. The move follows similar steps made earlier this month and last month.
In late September, the Finance Ministry said it would inject $10 billion into the local currency swap market through the middle of October to help domestic banks stave off persistent dollar funding shortages, according to Reuters. Days later, it announced it would inject another $5 billion into domestic banks and cash-strapped exporters through the state-run Export-Import Bank of Korea.
The mood in Hong Kong has gone from fear to gloom, as evidence mounts that the financial contagion is fast spreading from financial institutions to the real economy. Most likely this dashes hopes of any quick equity-market recovery.
Priority to date has been to shore up liquidity in the banking sector, but now emergency aid is being demanded by the ailing corporate sector as a string of corpses emerge. The bankruptcy Friday of electronics retail chain Tai Lin Radio Services -- the third largest in Hong Kong -- comes a week after local retailer U-Right succumbed to the financial crises.
Over in neighboring Guangdong factories are shutting amid predictions things could get much worse. Hong Kong-listed appliance maker BEP International plans to lay off 1,500 workers this week, days after toymaker Smart Union went into liquidation taking with it 6,500 staff.
Over the weekend, Federation of Hong Kong Industries Chairman Clement Chen said the credit crunch could bankrupt a quarter of Hong Kong-owned small and medium businesses by next Chinese New Year, costing 2.5 million jobs.
The government at least has been quick to act. Last week, the Hong Kong Monetary Authority moved to guarantee all bank deposits, saying it is ready to use the HK$1.4 trillion dollars in the Exchange Fund. Now, attention has turned to helping small businesses. The government says it will boost its guarantee on half of loans up to HK$12 million, and all the money can be used for operating expenses, up from HK$2 million previously.
This will be welcome but much depends on the external turmoil abating. The Hong Kong interbank offered rate has hardly budged, and with more rumors of hedge fund-related liquidations, it is hardly surprising banks are still reluctant to lend.
While these latest government measures are aimed at smaller businesses, corporates big and small are facing challenging times. One new problem caused by sharp falls in stock and asset prices is that debt suddenly looks much more onerous if we use newly shrunken market capitalizations as a proxy for the balance sheet.
While market cap covenants on loans are unusual, this makes bankers uneasy when debt needs to be rolled over. Companies with funding questions outstanding are being avoided, as this will at the very least be an overhang on share prices until shown otherwise.
Even if a corporate could get a bond away in this market, what interest would they need to pay if Warren Buffet is getting 10% on his preferred Goldman shares? If the cost or availability of bank loans is unpalatable, watch out for discounted rights issues or placements that dilute existing shareholders.
It is worth remembering that Hong Kong's family-owned companies, where much of the wealth is held privately outside listed entities, can use this as a means to increase ownership on the cheap. Last week major shareholder Richard Li controversially sought to use the low share price of PCCW to take Hong Kong's once proud fixed-line telecom operator private. Media reports said board members questioned whether the move would be seen as unfair to minorities, although we have still to see the offer price.
One company under particular funding scrutiny is Hang Seng Index bellwether Hutchison Whampoa, as analysts hone in on the gargantuan debt that powers its business interests across shipping, retail and telecoms that span the globe. Hutchison's share price is now below $45 after falling over 50% in last twelve months, pricing in a lot of bad news.
It is not Hutchison's next-year earnings that analysts are focusing on, but rather the balance sheet: a market capitalization now south of HK$200 billion and debt around $260 billion. Out of that debt, it appears that HK$50 billion of loans are current and need to be rolled over this year. Hutchison is a solid blue-chip name and probably falls into the category of too big and too important to fail, yet its somewhat opaque finances have been controversial in the past. Back in 2004, when Hutchison was laboring under funding its Greenfield 3G business, brokerage CLSA likened the company's leverage to a hedge fund, even throwing in the phrase "Parmalitis" for good measure, referring to the Italian dairy firm that collapsed under a tangled web of debt.
That call proved wrong then, but for a company that so regularly accesses capital markets to fund its businesses and generate exceptional gains, it looks to be facing some testing times.
6 Oct 2008 - Market Commentary
Global equity markets took an almost unprecedented hit and with it the agribusiness segment. Although we had balanced the portfolio in previous months to a more mid-and downstream bias, enormous selling pressure on fertilizers, crop protectors and emerging markets lead to a weaker performance. Instead of repeating last month’s seven reasons and observations that we identified as responsible vectors, today we have to look through basic assumptions and premises of our universe, stress test and validate them. Since investors have already made their own investment decision based on the many viewpoints surrounding credit freeze, bailouts, recession fears, commodity declines, we refrain from repeating the obvious and try to reflect agribusiness views only.
There is no reason to assume that population growth is slowing due to the reduction in global growth. More people will need food. The stress on existing arable land is not easing. Environmental issues, urbanization and desertification will follow us no matter what economic environment we operate in.
Land prices remain healthy with Brazilian prices still going up in August, although land historically tends to lag the crop price cycles. Looking at the last 3 years price increases, a short term slow down in price increases would not seem to unrealistic and not disturbing at the same time. The argument for land arbitrage still is valid, also with freight prices coming down sharply over the last months.
Price elasticity has been observed in consumption patterns in the US, Europe, Australia and Japan. Consumers traded down from dining out to in home meals and now from branded products to private labels. This change in behavior can be predominantly observed in Europe, where the culture of Aldi is still very present in buyers’ mindsets. With crop prices coming down from their highest levels in May, and with inflation adjusted prices still not even close to peak levels, the substitution from a cereal to meat based diet is still ongoing. China for instance experienced some relief on the food pricing.
Current crop prices do not reflect risk premia for future crop shortfalls. This year has so far been extraordinary in terms of lack of droughts, pests, frost. The exception being the Midwest flooding, but many acres impacted by that disaster still are in production and expect some output later this harvest season. It should be reminded that it will be tough to beat this year’s crop production going forward. One high yielding year cannot overcome the neglecting of investments in global agriculture of the last decades.
Valuation levels of our universe have reached historic lows with fertilizer stocks trading at two times their annual EBITDA and in some cases below 5x earnings. If it was not for the current credit freeze situation, one should expect acquisitions, buyouts, buybacks, etc not only within the nutrient segment. Like in other sectors, fundamentals are thrown overboard these days. Peak cycles can be observed at valuation levels between 8-10x earnings in the past. The recent sell-off is believed to be more technical driven and a function of forced selling, bans on shorting in the financial sector or just psychologically selling holdings that still show profits.
Stock markets are projections of the future. If that holds true for agriculture too, an expectation of halving of fertilizer prizes in 6-9 months, a corn price at the farmers’ breakeven level of USD 3.50, revenue and earnings increases at food processors and most importantly, a significant breakdown in global crop trades. Current corn prices are around 5, the inventory levels for potash and nitrogen are close to zero. At current corn, soy and wheat price levels, the total US net farm income will rise to 100bn USD by year end. Belarus just implemented an export tax on potash, the strike in Canada is still ongoing and with the market implied lower potash prices going forward, greenfield and brownfield investments become less feasible if not even unattractive.
Stocks in the processing/distribution area are being carefully monitored, since they currently are one of the few hiding places for global equities, with valuation significantly above the market average. DWS turns very skeptical on the consumer in Europe and also would challenge some consumption assumptions for emerging markets. Current dividend yields for the sector are around 2.5 to 3%. Attractive, but other sectors would deliver more. In addition, the free cash flow yield is shrinking below the 10 year median.
Specifically on phosphate, prices fell by 15%, still about 40% higher than at the end of last year. Sulfur, as one of the biggest input costs, is falling as well; margins might not be impacted in the long run. Similar trends can be observed for nitrogen (urea), where natural gas is the biggest input. A short term margin expansion is coming. Potash prices held up firmly. Current pricing of potash exposed stocks suggest at best no increase of prices negotiated with China. Not impossible, but unlikely due to the under-fertilization of that specific nutrient.
At this stage no signs of company see financing issues with the farmers. Upcoming quarterly earnings and 2010 assumptions of analysts are important. Although maybe one month too early, the building of positions in mispriced upstream stocks is prudent. An unwinding of the credit freeze, an unwinding of the recent high correlation with oil, crops and the USD and a stabilization in the markets should help an appreciation of beaten up stocks in our universe. Interestingly, the prices for soft commodities in real terms are not even close to record levels, with fundamentals giving even stronger support.
29 Sep 2008 - Market Commentary
The US Democratic congressional leaders announced their agreement Sunday on details of a massive financial rescue plan proposed by the Bush administration, releasing a draft text trumpeting taxpayer guarantees and caps on executive compensation.
The draft bill, titled the "Emergency Economic Stabilization Act of 2008," follows days of legislative wrangling over a $700 billion plan proposed by Treasury Secretary Henry Paulson as U.S. financial markets teetered on the edge of a collapse triggered by the U.S. mortgage crisis.
The bill will be introduced in the House of Representatives Monday morning and then head to the Senate. The draft legislation would authorize $250 billion immediately, with another $100 billion upon presidential certification. A further $350 billion would also be available subject to congressional approval.
US President Bush commented that the bill was necessary to provide a funding to help protect the economy against a systemwide breakdown. Under the proposed bill, the Treasury Department can use a combination of tactics to buy bad loans, focusing on mortgages and mortgage-backed securities but also including other types of loans under certain conditions. Treasury could purchase the bad debt through an auction process as well as by buying loans directly, a Treasury official said in a conference call with reporters.
The proposed legislation also allows companies to participate in an insurance program, whereby Treasury would guarantee troubled assets, charging companies a premium "sufficient to cover anticipated claims," according to the bill. This bill provides the necessary tools to deploy up to $700 billion to address the urgent needs in our financial system, whether that be by purchasing troubled assets broadly, insuring troubled assets, or averting the potential systemic risk from the disorderly failure of a large financial institution.
The government would get a stake in companies receiving bailout funds so that taxpayer money could be recovered if those companies grow in the future, according to the bill. The proposed legislation also requires that in five years, the president submit a proposal to Congress that recoups from the financial industry any projected losses to the taxpayer.
In some cases, the bill requires companies limit executive pay, but those limits vary depending on the method by which Treasury purchases a firm's troubled assets, and how much Treasury antes up. When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.
While the proposed bill prevents companies from signing new golden-parachute deals with top executives after Treasury gets involved, it does not change the terms of already-existing contracts, apparently in an effort to encourage companies to participate in the bailout program. In situations where Treasury steps in to directly purchase a company's bad loans, the government will move aggressively to ensure executive compensation is not excessive.
The bill puts oversight provisions in place, including creating the position of an inspector general as well as a congressional oversight panel to monitor the program, plus a requirement that the Treasury secretary regularly report to Congress the details of all loan purchases.
The bill also contains some provisions to help families in financial distress avoid foreclosures, in part by creating a plan to encourage services of mortgages to modify loans and allowing the Treasury to use loan guarantees to avoid foreclosures.
While critics have noted that government encouragement won't necessarily impel servicers to work with borrowers, the Treasury official said that buying large groups of loans will help push that process forward.
Before the release of the draft text, presidential candidates John McCain and Barack Obama said Sunday morning that they would be willing to sign off on the massive financial rescue plan but would need to first consider the details.
22 Sep 2008 - Market Commentary
The U.S. Congress is likely to raise the cost of a $700 billion rescue deal for U.S. markets by adding a new economic stimulus plan to benefit taxpayers, according to Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee.
Further, the cost of the latest government plan to stabilize the credit and lending market could cost up to $1 trillion dollars, said Sen. Richard Shelby, R-Ala., ranking member of the Senate Committee on Banking, Housing & Urban Affairs.
That raises the specter of higher taxes under the next presidential administration. Raising taxes on households making more than a million dollars a year to help pay for the plan, saying that will help nail some of those responsible for the current credit crisis. The U.S. national debt is fast approaching $10 trillion, or $31,727 for each American, according to the U.S. National Debt Clock.
Beginning next year, financial markets can expect greater government oversight. The credit market crisis is due to Wall Street greed and lack of regulatory oversight.
Along with greater market regulation, Frank said he wanted to cap executive compensation for companies relying on the government for help. For those corporations are offering bad debt, and it's entirely appropriate to ask for limits on executive compensation. Both Congressmen agreed the $700 billion package to buy up the bad debt of U.S. financial institutions over the next two years was necessary.
Speaking about a meeting with Treasury Secretary Henry Paulson last week, Frank said the secretary emphasized the need to add quickly to unclog a system choked by a credit and lending freeze.
In the $700 billion package, the government should expect to recover most, if not all, of the money used to buy the bad mortgages from the nation's banks by selling them later on.
Emerging-market stocks rallied around the world Friday, buoyed by hopes that the U.S. government will hammer out a broad-ranging plan to stem the global financial crisis.
Emerging equity markets in Asia, Europe, Latin America, the Middle East and Africa posted strong gains. In the debt markets, the EMBI+ fell by 14 basis points to 386 basis points, some 48 basis points below the peak seen earlier in the week, according to data from RBC Capital Markets. High-yielding, emerging-market currencies rallied against the U.S. dollar, with the Brazilian real, the South African rand and the Turkish lira leading the gains.
On Wall Street, U.S. stocks surged, with the Dow Jones Industrial Average, soaring nearly 400 points, boosted by the Treasury and Federal Reserve's rescue plan for the U.S. financial sector as well as regulators' move against short sellers.
Stocks in all the so-called BRIC countries -- Brazil, Russia, India and China -- skyrocketed, with Russian markets leading the gains. In Moscow, the Micex index leaped 29% and the RTS index rallied 22%.
In China, the Shanghai Composite soared 9.5%, leading gains in Asian markets. India's Sensex stock index surged 5.5%.
In Brazil, the Bovespa stock index rallied 10%. The biggest beneficiaries to be the most "leveraged" and high-beta emerging markets are expected to be countries such as Turkey, Brazil, South Africa, Hungary, Romania and Iceland. Elsewhere around the world, Turkey's IMKB-100 index soared 13%, South Africa's All Share index rose 5.4% and the Czech Republic's PX index rallied 12%. In Latin America, Argentina's Merval stock index rose 10% and Mexico's IPC index gained 5%.
Despite Friday's rebound, emerging equity markets remain sharply lower year-to-date. The MSCI Emerging Markets index has fallen 38% this year. Among the BRICs, China's Shanghai Composite is down 60%, Russia's RTS index is down 43%, India's Sensex is down 31% and Brazil's Bovespa is down 19%. Among these pressures will be the deterioration in global growth prospects and ongoing downward pressure on commodities prices.
8 Sep 2008 - Market Commentary
In the biggest government bailout in U.S. history, the Treasury said Sunday that regulators are seizing control of home mortgage giants Fannie Mae and Freddie Mac.
Under a sweeping plan, the two companies will be run by the government indefinitely, with the two current chief executives to be replaced and the government investing up to $100 billion in each firm to keep them solvent.
The Treasury said that stock in the company will continue to trade, although powers of stockholders will be suspended until government control ends. In order to improve the availability of mortgages, Treasury will start buying Freddie and Fannie's mortgaged-backed debt in the open market. The companies will also end all lobbying of the government and eliminate dividends.
Together, Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee almost half the home loans in the country's roughly $12 trillion mortgage market. Over the past year, the companies have recorded combined losses of around $14 billion.
Technically, the government placed the two companies in conservatorship. The FHFA will assume the power of the board and management.
Paulson stated that the move won't eliminate Freddie and Fannie's common stock, but it does place common shareholders last in terms of claims on the assets of the enterprises. Preferred stock shareholders will be second, after the common shareholders, in absorbing losses.
Added One quirk in the plan is that Treasury will allow Fannie and Freddie to actually increase their mortgage portfolios over the next year. The move will also replace the chief executives of both Fannies Mae. Fannie Mae Chief Executive Daniel Mudd and Freddie Mac CEO Richard Syron will leave their positions after a brief transitional period.
Mudd will be replaced by Herb Allison, the former vice chairman of Merrill Lynch, and the former chairman of the TIAA-CREF teachers' pension funds. Syron will be replaced by David Moffett, who was the vice chairman and chief financial officer of U.S. Bancorp.
In essence, the plan is similar to a Chapter 11 bankruptcy that will give the two companies breathing room to reorganize. The plan was a "time out" to stabilize the two companies. Congress will have to decide their future role and structure.
To support the plan, Treasury will purchase up to $100 billion in each company to ensure they maintain a positive net worth. If the FHFA determines that Fannie and Freddie's liabilities have exceeded its assets under accounting rules, the Treasury will contribute cash capital to the firms to make up the difference, receiving senior preferred stock in return.
It will also buy mortgage-backed securities from the firms in the open market, with a lending facility held at the Federal Reserve Bank of New York. Under the terms of the proposal, the government would make periodic injections of funds by buying either convertible preferred shares or warrants in the two companies as needed, as opposed to a large, up-front cost.
The bailout involves total assets that would dwarf the savings-and-loan rescue in the 1980s that shook the banking sector to its core. Fannie and Freddie hold roughly $1.5 trillion in direct debt, guarantees on which could be as large as $5 trillion as well as possible off-balance sheet obligations that could reach $3 trillion, according to recent estimates from Ladenburg Thalmann & Co.
1 Sep 2008 - Market Commentary
South Korea's five carmakers posted a combined 7.5% on-year decrease in August sales, due mainly to a cut in output caused by strikes and the summer holidays. Prolonged strikes and the Korean version of the Thanksgiving holidays which fall on the second week of September may hit the third-quarter results. GM Daewoo Auto & Technology Co., Ssangyong Motor Co. and Renault Samsung Motors Corp. - sold a total of 366,295 vehicles, down from 396,051 units a year earlier.
Ssangyong Motor, 51.33%-held by SAIC Motor Corp. (600104.SH), posted the biggest on-year drop - 36% - in overall sales to 7,302 units from 11,421 units. The company's domestic sales fell 47% on year to 2,805 units from 5,301 units, while exports were down 27% at 4,497 units from 6,120 units. Ssangyong said that sales suffered a sharp drop in August because of the one-week summer holidays and a two-week shutdown of plants to make them environmentally friendly. In July, Ssangyong workers accepted a 4.6% wage increase and two months of salary as bonus to boost productivity. For the January-August period, Ssangyong's total sales fell 25% on year to 67,173 units.
Hyundai Motor and 38.6%-owned affiliate Kia Motors posted an on-year decline in sales in August as strikes led to production losses. Hyundai and Kia suffered KRW158.5 billion and KRW112 billion, respectively, in production losses.
Hyundai posted a 7.7% on-year drop in August sales at 196,826 units. Its domestic sales were down 25% on year at 38,023 units while exports fell 2.1% to 158,803 units. The slowing domestic and U.S. demand amid high oil prices is another factor pulling down car sales. For the first eight months of the year, Hyundai posted a 9.4% on-year rise at 1.87 million units, while Kia reported a 6.6% on-year increase at 904,996 units.
GM Daewoo suffered frequent work stoppages in August, which resulted in 45,000 units in output losses. The company posted an 18% on-year decrease in combined sales to 49,622 units from 60,781 units. Domestic sales declined 28% on year to 6,583 units, while exports were down 17% at 43,039 units.
The production of small and midsized cars are likely to have an impact on the third-quarter bottom line even though it sees strong demand amid high oil prices. Although a weak Korean currency against the U.S. dollar will be helpful for export-oriented carmakers, the weakening demand still remains a concern.
25 Aug 2008 - Market Commentary
A fallback in oil prices and a weaker euro did nothing to dispel growing gloom over Germany's economic outlook. The Munich-based institute's closely-followed business sentiment index tumbled more sharply than expected to 94.8 in August, down from a reading of 97.5 in July. Market expectations were for a reading of 97.1.
The German economy is encountering an increasingly more difficult situation. The data sent the euro to six-month lows. The single currency changed hands at $1.4583 against the dollar, down 1.1% on the day. The German DAX 30 stock index extended losses amid a weak European tone, but subsequently recovered to gain 0.1% on the day.
The Ifo index gauges sentiment among executives from 7,000 German firms. The survey's current conditions index fell to 103.2 from a revised 105.6 reading in July, while the index gauging business expectations over the next six months tumbled to 87.0 from 89.9 in July.
A worsening euro-zone economic outlook has led credit markets to price in a quarter-point cut in the ECB's key lending rate by May, which stands at 4.25% after a quarter-point rise last month.
The Ifo expectations index is heavily influenced by sentiment, which makes it likely business expectations will begin to pick up in coming months provided commodity prices don't surge anew and the euro remains on a weaker path. The survey implies that even Europe's biggest economy -- which had in recent quarters been supporting overall euro-area GDP -- is stalling, supporting ideas the euro zone requires an easing in overall monetary and financial conditions, they wrote.
India's state-run petroleum company, Oil & Natural Gas Corp, may purchase London-listed Imperial Energy Plc for 1.4 billion pounds ($2.58 billion). ONGC made a preliminary offer valued at 1,250 pence a share, London-listed Imperial said in a statement on its Web site.
Imperial, an oil and gas explorer founded in 2004 with operations in Russia and Kazakstan, said in statement that the boards of both companies had reached preliminary agreement on the equity and convertible bond component of the bid.
Imperial bondholders will receive 60,357 pounds for each $100,000 principal in convertible bonds, Imperial said in a statement. Imperial said its board recommends bondholders and equity holders accept the offer. "The Imperial Energy Directors...consider the terms of the offers to be fair and reasonable," Imperial said in a statement.
In London, Imperial's shares traded down 1.8% at 1,218 pence in midday dealings, on the heels of a recent rally. Imperial has also attracted the interest of China Petroleum & Chemical Corp., the parent company of Sinopec, Asia's largest refiner, and Korea National Oil Corp., according to reports. A counter bid for Imperial Energy is possible, as Asia energy companies scramble to secure additional assets. Chinese firms have a history of outbidding Indian rivals in acquiring overseas energy assets. Imperial, whose primary operations area is in the Tomsk region of western Siberia, had about 920 million barrels oil equivalent of proven and probable reserves at the end of 2007, according to its Web site.
18 Aug 2008 - Market Commentary
While Hong Kong shares finished last week at a five-month low, and Shanghai A-shares have been making daily Olympic lows, a new concern is how to react to recent currency moves. The Australian dollar has fallen 10% against the greenback, and the Singapore dollar, Korean won and Malaysian ringgit are also sharply lower in recent days. After six years of Asian currencies making steady gains against the U.S. dollar, the trend looks to be changing. Focus is also turning to the Chinese Yuan, seen as one of the strongest one-way currency bets this year after its prolonged climb against the dollar. Currency moves are likely to remain in focus this week after the U.S. dollar's recent rebound has caught many investors off guard.
The Yuan tumbled against the U.S. unit in the offshore forwards market at the end of last week, as the implied 12-month appreciation of the Chinese currency hit its lowest level this year, reaching 6.757. Mainland authorities appear to be preparing for regulatory changes. Last week the People's Bank of China said it was establishing a new exchange-rate department to decide currency policy and develop an offshore Yuan market. The central bank also pledged to prevent any large capital outflows, indicating it did not want the Yuan to enter a depreciating trend. It is understandable authorities would want to watch the situation closely, although if China was not able to manage hot-money flows coming in.
Given the long slump in equities this year, which has already seen the Hang Seng Index shed 6,000 points, twinned with a weak Hong Kong dollar and low interest rates, capital preservation has been the priority for many. This resulted in the dollar-carry trade being popular -- short the U.S. or HK dollar and go long on commodities or other currencies, including the Yuan. Another popular trade in Hong Kong was to ride the negative local interest-rate environment and weak dollar by piling into property. CLSA Securities repeatedly trumpeted this as a key conviction call earlier this year.
The trades could be heading for trouble if the greenback rebound continues. Consensus appears to be forming that the dollar could continue to strengthen, it is still uncertain whether this currency reversal signals a better time for equities or not. HSBC Securities tells us in a new note that consensus thinking for weaker Asian currencies to help equities is wrong. They argue weaker currencies are usually a symptom of a deeper fundamental problem and are historically correlated with falling stock markets and weaker earnings. HSBC say not to be enthusiastic about weaker currencies boosting equities by highlighting a 64% positive correlation between currencies and earnings growth over the past two decades. However, it runs into difficulty in Hong Kong's pegged exchange-rate regime. Hong Kong, for instance, has seen some of its strongest performance since the dollar began weakening in 2001.
Meanwhile, Hong Kong dollar strength when other Asian currencies plummeted in the second half of 1997 pulled the asset-based equity market into a steep bearish trough. Of course, all Asian currencies and markets crashed simultaneously back then, although Hong Kong was arguably one of the last economies and markets to recover. For fund managers back behind their desks after the summer break, it will be time to look afresh at the new economic landscape. As higher-yielding currencies and commodities now look to be more dangerous bets, equities that come with strong dividend support at current beaten-down prices could get a second look.
Recent dialogue with the private equity community suggests there is much more attention focused on distressed equities right now, rather than funding new growth. Shunning new capital market offerings has certainly paid off in Hong Kong this year -- only three of the 16 IPOs launched on Hong Kong's main board in the first half were trading above their offering prices.
11 Aug 2008 - Market Commentary
China's industrial output growth slowed to its weakest pace in 18 months during July, as global demand softened, the government enforced temporary factory closures to curb air pollution ahead of the Olympic Games, and shortages of electrical power shuttered assembly lines.
Monthly industrial production rose 14.7% from July 2007, easing from a 16% year-over-year growth rate seen in June, the National Bureau of Statistics said Thursday. July's increase fell short of analysts' expectations calling for 16% growth.
The mainland's industrial growth in the first seven months of the year rose 16.1% when compared to the comparable 2007 period. The factories and constructions closed in Beijing and some other Olympic cities before the games caused the drop. A rebound after the games on both pent-up demand and the post-earthquake reconstruction are expected.
Beijing has enforced factory closures around Beijing and other Olympics venues in a bid to improve air quality for the athletes competing during the Games. Most restrictions will be lifted at end of the September, after both the Olympic and Paralympic Games conclude.
The slide in industrial growth rates also reflected the softening global economy and waning overseas demand for Chinese-made goods as consumers tighten their belts and reduce spending. Weaker overseas orders in the July Purchasing Managers' Index will likely reduced the need for production growth. The growth rate for industrial output will continue to trend lower in August. Third-quarter growth in gross domestic product will fall to 9.2% from the 10.1% expansion seen in the second quarter.
4 Aug 2008 - Market Commentary
The presidential election was very important for business sentiment in Taiwan. Now that the Kuomintang party (KMT) controls both the presidency and the legislative yuan, it is expected to lead to increased business and political ties with the mainland. Since the election, the Taiwanese people have become more optimistic about the economy, although tangible improvement might take years to unfold. The financial and property sectors are already benefiting from the more probusiness government and are expected to continue to do so in the near term. The cyclical materials sector is also still seeing growth thanks to its exposure to emerging markets demand and a tightness in global capacity growth. The increasing cross-strait ties and the opening of Taiwan to more Chinese tourists are also favourable to companies in the airline, hotel and retail industries.
The biggest near-term risk is the weakening sentiment of the US consumer. A substantial part of Taiwan's economy depends on the assembling and manufacturing of consumer electronics products that are exported to the West. Should the US and the rest of the developed world suffer a prolonged economic slowdown, then the tech sector in particular may suffer as well. As such Taiwan needs to increasingly diversify its access to other markets, such as China and other parts of Asia, as well as also across sectors.
Taiwan as a developed market, is now forging closer links with the mainland following the national election, both China and Taiwan have a vested interest in maintaining positive relations to maximize mutual economic benefits. The rising inflation is leading to currency appreciation and the domestically focused stocks are likely to outperform in the coming year. Besides the market is also supported by the better relationships with China and should give a boost to the Taiwan market in the coming one to two years.
28 Jul 2008 - Market Commentary
A sub-prime meltdown that started with the problems in the US housing market has added an air of volatility to the global financial markets amid mounting uncertainties. Increased risk aversion has triggered a massive run on commodities such as oil, agriculture and metals, which are deemed to be less affected by the credit crunch. Crude oil and corn prices have surged. With most commodities prices are rising faster than that of the inflation rate which is spurred by higher oil and food prices, investment in commodities may hedge against inflation. In addition, investment in commodities can provide risk diversification as there are a wide range of commodities with different market cycles.
Demand across all commodity sectors such as metals, agriculture and energy is on the rise and continues unabated in newly industrialized economies, particularly China and India, as these emerging markets possess a rapidly growing population and exhibit expanding urbanization.
Moreover, many countries are now actively trying to develop biological energy, initiating sustained, rising demand for agriculture products (corn, wheat and soybean) that can generate biofuels.
However, reserves of natural resources are nearing depletion, while at once any increase in capacity requires much time to effect. Furthermore, the pace of exploration lags behind the utilization rate; moreover, climate change and geo-political events have intensified the pressure on supply. Although prices of many commodities, in particular gold and agriculture goods have risen remarkably in recent years, the overall supply has failed to catch up with the rally in price. With such supply/demand imbalances, commodity prices are set to rise with a drop first.
21 Jul 2008 - Market Commentary
Since June 30, oil on the New York Mercantile Exchange has fallen 18%, and natural gas has sunk 37%, to $8.349 a million British thermal units. And since the end of second quarter, gold is off more than 11%, and several industrial metals also have tanked. Agriculture has pulled way back, with a 31% drop for corn, a 24% drop for soybeans and a 5.9% drop for wheat.
Many market watchers expect the basics of supply and demand to build in a pricing floor well above where commodities traded a year ago. Then, oil was still in the $70-per-barrel range, gold was $670 an ounce compared with Monday's $821.50 and corn was at $3.33 a bushel compared with $4.97 Monday. Market players see the likelihood of upward spurts in the future.
Now, the market's deepening losses reflect how rapidly pessimism has mounted about European and Japanese economic contractions knocking out raw-materials demand. Traders also fear that as these economies weaken, the dollar's new strength will push down prices of commodities denominated in dollars.
In the oil markets, despite weak U.S. demand, oil price is expected to drift to a more acceptable equilibrium of $125 or below. Sharp declines of oil prices may also be expected if the dollar is going to strengthen in the coming month. A substantial forecast of drop to below $110 from current prices may perhaps come into sight in September.
Within major banks, there is disagreement about the sustainability of commodities prices. Analysts at Deutsche Bank AG's global macro strategy group declared that oil was set to fall from its peak to $100 a barrel in the first quarter of 2009 and to $85 by early 2010. Yet the bank's commodities specialists expect to see $135 again sometime in the third quarter and say falling inventories in the U.S. Midwest indicate that fundamentals are "tightening and may herald a stabilisation in the oil price." Bank of Montreal global portfolio strategist Donald Coxe wrote that when "anguished clients" ask whether the commodities bull run is over, he says "definitely not." Yet, a BMO senior economist, Sal Guatieri, declared the commodities boom "over." BMO says Mr. Guatieri was referring to a moderation in prices, not a collapse.
The credit crunch has made it harder for traders to nurse bullish commodity futures bets as the market has turned, because of the collateral, or margin, traders must post to stay in the game. What's more, many are bailing out of positions as Congress debates a legislative overhaul of commodity markets that could reduce the size of bets speculators can make.
Meanwhile, markets have grown jittery in the face of rumors that large traders were liquidating holdings in the volatile energy markets, especially after the July bankruptcy filing of a large oil trader, SemGroup LP, which has confirmed that it exited big oil-futures positions in July.
16 Jun 2008 - Market Commentary
Crude-oil futures on Friday posted a weekly loss of almost 3% as speculation over an output hike from Saudi Arabia, a lower forecast for growth in global oil demand and strength in the U.S. dollar helped push crude prices down by nearly $2 a barrel.
Crude oil for July delivery traded as low as $133.69 a barrel on the New York Mercantile Exchange Friday, before closing at $134.86, down $1.88, or 1.4%. The contract finished 2.7% below last Friday's closing level.
Prices haven't reached a record high level since June 6, when it hit $139.12 in electronic trading on Globex.
Demand for crude from the Organization of the Petroleum Exporting Countries in 2007 averaged an estimated 32 million barrels per day, up 260,000 barrels per day from the previous year, OPEC said in its monthly report released Friday.
But in 2008, demand for OPEC crude is expected to average 31.8 million barrels per day, down 130,000 barrels from 2007, the report said.
The cartel said it expects global oil demand to grow to 86.88 million barrels per day for 2008, up 1.28% from 2007's demand of 85.78 million, but down from the estimate of 86.95 million it forecasted in the May report.
OPEC member Saudi Arabia, the world's largest oil producer, was considering a sizable increase in output to near-record levels of about 10 million barrels per day ahead of a meeting of producers and consumers in Jeddah on June 22, Reuters reported Friday, citing news from the subscription-based Middle East Economic Survey.
But the drop off in production from Venezuela, Nigeria and other Gulf nations has been so significant in the past few years.
Taking a look at the bigger picture for oil, the combination of continued global supply disruptions, increasing global demand and wild swings in U.S. domestic supply/demand data will continue marching energy prices higher until there is a raft of continual bearish data entering the market.
For now, prices are holding at higher levels despite the severe daily volatility, which would normally scare off the average speculative investor. These types of movers are probably only encouraging some speculative bets because of the potential for massive gains in a very short time period.
But speculative trade likely accounts for $10 in the oil price, maybe more, he said. Institutional investors in commodities face one of their biggest threats to date in a draft Senate bill, set for airing next week, that would prohibit these traders from buying oil and other futures contracts after they reach a certain limit.
On the currency markets, the dollar extended gains against the euro and other major currencies Friday, with traders reluctant to sell the greenback as top finance ministers gather in Japan to discuss inflation worries. Strength in the U.S. dollar typically weighs on dollar-denominated commodities, such as crude oil and gold.
Finance ministers from the G8 nations -- the U.S., Japan, Germany, France, Great Britain, Italy, Canada and Russia -- are meeting in Osaka to lay groundwork for the summit of G8 leaders next month.
Officials, who aren't being joined by central bankers, are slated to discuss inflation pressures. And while foreign exchange issues aren't expected to make it into the group's final statement, the dollar will be up for discussion in the weekend meetings, officials said.
The dollar found further support after a government report showed U.S. consumer prices last month accelerated more than economists forecast.
U.S. consumer prices rose at the fastest pace in six months in May, bolstered by surging energy prices, the Labor Department reported Friday. The seasonally adjusted consumer price index rose 0.6% in May, worse than the 0.5% gain expected by economists. The core CPI, which excludes food and energy prices, rose 0.2% as expected.
10 Jun 2008 - Market Commentary
Vietnam's current account deficit is rapidly widening due to dramatic increases in prices of global commodities such as petroleum-based products (fuel, plastics, chemicals), metals (iron, copper, steel) and cement, In the first 4 months of 2008, the country's exports jumped 27.6% YoY to US$18.3bn while imports surged 71% to US$29.4bn, bring the Jan-April trade deficit to US$11.1bn. This is not surprising, as Vietnam depends heavily on imports of machinery and building materials to sustain its rapid rate of industrialization. In 2007, the top 3 import items were:
1) machinery and equipment (22% of total value of imports, value rose 53% in 2007)
2) petroleum (12% of total value of imports, value rose 26% in 2007) and
3) steel (8% of total value of imports, value rose 66% in 2007)
This trend continued through the first 4 months of 2008, with the import value of equipment and machines rising 47% and petroleum products up 70.2%. In order for Vietnam to improve productivity, it must continue to use imported machinery for factories and building materials for much-needed infrastructure - power, utilities, roads and buildings. But with its iron ore and steel industries still relatively underdeveloped, it must rely on imports for these commodities. Vietnam will be less reliant on petroleum imports when its first refinery (Dung Quat Refinery) becomes operational in mid 2009. The government aims to meet 30% of total petroleum consumption from there, most likely at heavily-subsidized prices. In 2007, the current account deficit (official numbers not released yet) is estimated to be 4 - 7% of GDP.
This year, S&P estimates the number to be 10% of GDP (Bloomberg 2 May). Similar to other emerging economies in the past, Vietnam's current account deficit is characteristic of the type of growth phase it is in. This is why foreign investors, in the midst of Vietnam's problems today, continue to fund the deficits with investments: FDI pledged for the first 4 months of 2008 was US$7.8bn, a 43% increase during the same period last year. This April saw the single largest disbursements of FDI ever - US$1.4bn. Though the country has always been running a current account deficit since 2002, it continues to be in an overall positive balance of payments position. For example in 2004, 2005 and 2006, overall balance was US$883mn, US$2.13bn and US$4.32bn, respectively.
Increasing overseas remittances have also contributed to the positive balance, at US$2.3bn, US$3.15bn and US$3.8bn in 2004, 2005 and 2006, respectively. In 2007, overseas remittances have been estimated to be between US$5bn - US$7bn. Improving receipts from services shall also be seen. In 1Q08, trade grew 7.5%, hotels and restaurants grew 12%, and transport, warehouse and communication grew 11%. These 3 sectors collectively contributed to 26% of 1Q08 GDP.
The rise in CPI was driven by imported food and foodstuffs which saw prices spike since late 2007. Much of the inflation and current account deficit problems were external, supply shock issues that not only Vietnam, but the world, faces. Inflation and deficits will normalize when commodity prices slow down. The key reasons for Vietnam's situation being weaker than the rest are its weak currency (decision by the government to keep exports attractive) and a lower income population (food accounts for 43% of CPI basket).
19 May 2008 - Market Commentary
The earnings season of China is currently underway and the market is looking for reassurance in this backdrop of slowing global growth and rising inflationary pressures. Meanwhile, need to remain vigilant regarding the success of the balancing act that China is undertaking in its attempt to steer the economy into a sustained stable growth path. The overriding aim is to avoid systemic inflation without the economy grinding to a halt, while coping with an unknown negative exogenous shock given weakening demand from the developed economies. Because of the need to contain inflationary expectations, there will be no reprieve for the markets in terms of comforting/loosening policy statements, and the tightening issue is clearly critical for China for the rest of this year, and this will likely continue to weigh on the stock market – both the domestic market and the Hong Kong-listed Chinese equities.
The impact of the liquidity withdrawal from Chinese shares was under-estimated, which faced an indiscriminate sell-off in recent months. Once the situation stabilizes, global investors are expected to recognize the relative appeal of the China markets, especially as the OECD countries look vulnerable to becoming stuck in a low-growth mode for quite some time. From a long-term perspective, the equity market however is a claim on the nation’s underlying economy, and returns on equities are determined by corporate profitability. In the meantime, 2008 for China equities is likely to be a year of consolidation, as the newsflow deteriorates in the developed world in what may ultimately prove to be a great long-term buying opportunity. More patience is going to be required with Chinese equities than one would initially have hoped at the start of the year.
13 May 2008 - Market Commentary
Soft commodity markets recently picked up in volatility. Reasons behind this sudden move are the reversion of the long lasting Euro strength, a better harvest outlook in several production regions, the pressure from governments to solve food shortages, and finally the impact of a US led recession on emerging market growth. Several crowded large cap names in agribusiness mirrored the volatility, expressing their high correlation with soft commodity prices.
The Argentinean’s export tax on soy impacts only a couple of companies to a small extent so far. The negotiations between the government and farmers continue which has resulted in the recent farmers’ strike being put on hold for a month. Domestic farmers and agribusiness co-op members and are not assuming a re-introduction of this government plan. With Argentina being a net exporter of crops, it is believed that the taxation does not make sense from an agricultural perspective but only from a budgetary view.
The global discussion on rice shortages only reinforces our view on investing to overcome infrastructure and transport inefficiencies from the farm gate onwards. Roughly one third of rice production is already lost on its way from the harvest to the food processor, and stemming these losses could increase supply. Furthermore there is still room for possible yield increases in many regions. Hoarding of rice and other food items could in the short term help food producers to increase volume, while consumers already expected future price hikes for their dairy, cereal and meat consumption.
Positive performance contributors included some fertilizer producers on rising prices. Logistics and supply chain companies caught investors’ attention due to supply disruptions mainly for rice. Rice is a highly concentrated crop with Thailand, Vietnam and India accounted for almost 60% of global exports. One misunderstood fact relating to rice is that only 7% of the global production is traded internationally, the rest is produced and consumed within the consuming countries. Negative performance for this month came from individual stock specific items rather than industry trends. Some poor performers are expected to rebound for technical reasons.
Earnings season will continue with more positive surprises in agribusiness. The weather situation in Australia and the Midwest of the US should be the driving variables for this year’s crop assumptions. An increase of global inventories is already expected by market participants, and the agribusiness team will aggregate consumption data to verify that the street is not being overly positive. Global trade intervention deserves premium observation in this very heated political arena. More mergers and acquisitions could be an imminent result from political interventions. Some governments may get more involved acquiring global agribusiness assets.
14 Apr 2008 - Market Commentary
The yuan broke the symbolic seven-to-the-dollar mark last week should bring cheer to U.S. senators looking for China's trade surplus to shrink. But for those in Hong Kong caught in the middle between these two giants of world trade, it's a painful reminder that the only thing getting smaller is their spending power.
And if the yuan reaches a six-to-one ratio by the end of the year, as some predict, the future of the Hong Kong dollar peg, now 25 years old, looks set to come under yet more scrutiny. Indeed, investors and hedge funds are already beginning to circle.
Since the end of last year, yuan savings in Hong Kong banks have reached 47.8 billion yuan in February, up from 33.4 billion in January. And that doesn't count the increasing numbers making the day trip to neighboring Shenzhen to open yuan bank accounts. Besides, Yuan saving rates are close to 4%, and Hong Kong banks are just only giving a few basis points on a dollar.
Not only is the interest hardly worth counting, inflation ensures that real returns are worse still. With the yuan in the limelight, more investment banks have been issuing reports that turn the spotlight on the Hong Kong dollar peg. It's been a sacred cow for so long in this town, even to question its existence invited ridicule.
Hong Kong's success increasingly depends on the goodwill of Beijing and the mainland's provincial governments, as embodied by the Closer Economic Partnership Arrangement, and Hong Kong will be looking to build on advantages offered by CEPA for its firms and industries.
It certainly makes no sense for China to have Hong Kong-originated savings flooding into yuan. Savvy observers will be watching out for signs of progress on the investment "through train" to balance these money flows.
We are expecting a Hong Kong dollar pegged to the yuan might follow as China pushes forward with currency reform, which might take place faster than many think.
If such expectations grow, then the Hong Kong currency will become the "sure thing" as it moves to the China price for a yuan. The bigger that gap gets, the more upside for investors.
This provides a further rationale for parking some assets in Hong Kong, preferably in something with a dividend. H-shares and red chips have already been gaining as investors factor in the yuan currency boost to Hong Kong dollar earnings. Hedge funds are watching this development carefully as there will be money to be made.
Apr 2008 - Market Outlook
In Asia, a growing middle class, changing consumption patterns arising from the new Asian wealth, and changing social behavior enlarging disposable income have combined to boost consumer spending and create many investment opportunities.
Asian healthcare sector is one beneficiary of consumer demand boom. The sector is still tiny when compared with its counterpart in the US. Yet, expectations looking forward for Asia to overtake the US as the place for the highest incremental annual demand for healthcare in terms of dollar amount in the next decade, forecasting the incremental demand by 2015E to be US$693 billion for China, India, Japan, Korea and Singapore combined, compared with US$690 billion in the US.
One interesting growth driver to the Asian healthcare sector is healthcare tourism. According to data from Abacus, the Asian medical tourism industry is expected to grow eight-folds from US$500 million in 2006 to US$4,000 million in 2012. In particular, Asia becomes a popular destination for the casual medical tourist who would like to combine a holiday with seeking medical treatment.
There are other reasons too. Take the Middle East as an example, more stringent US visa requirements post-September 11 have led Middle East patients to turn away from the US and go for Asia, particularly into Thailand and Singapore. The National Arab-US Chamber of Commerce estimated that the US was losing US$500 million annually from healthcare tourists from the Middle East as a result of tighter visa requirements. There is potential for Malaysia to develop as a healthcare tourist hub for Muslim patients given the cultural and religious similarities.
Mar 2008 - Market Outlook
Amidst the recent volatility, consumer demand in Asia offers an opportunity for diversification by drifting away from sectors that are sensitive to the global slowdown, as this investment segment typically depends on domestic consumption pattern, not on global economic conditions. Favorable economic conditions, accumulated wealth of individuals and changing mindset of Asian consumers in credit purchasing have developed into an unprecedented wave of growth for Asian consumer demand.
Asian economies have exhibited a constant stream of robust GDP growth figures in recent years, and the region is seeing dramatically improved fundamentals, led by China and India, the fastest growing economies in the world. Elsewhere in Asia, Singapore, Taiwan and Hong Kong all delivered strong economic performance. An increase in wages is expected across all markets in Asia, lending further stimulus to purchasing power. This rise in income has added an extra dimension to Asia’s savings glut and boosted household wealth. As such, Asian consumer demand will nonetheless continue to rise, both in terms of spending for day-to-day necessities and up-market discretionary spending. In addition, low jobless rates across Asia at around 3% to 4%, will further accumulate more wealth to drive the Asia consumer demand.
Asia’s financial sector, in particular, offers tremendous upside potential for credit consumption, with Asia’s very high deposit-to-loan ratios, which implies a group of cash-rich Asian consumers. Credit growth represents a recent fundamental change in consumption spending dynamics, as a means to enhance consumers’ purchasing power. And, lower interest rates are expected to propel the region’s demand for consumer credit, such as mortgages. In light of the robust economy, rising wealth and changing consumption patterns of Asian consumers, the demand in Asian consumerism is set to grow.
Feb 2008 - Career Expo 2008
More than 500 educational institutions, government departments, commercial organizations and professional bodies were taking part in the 18th Education and Careers Expo, which opened on February 21 and continues until February 24, at the Hong Kong Convention and Exhibition Centre. GlobalBEST was one of the exhibitors and we are currently recruiting Wealth Management Advisors and Wealth Management Managers. For the year of 2008, GlobalBEST will be expanding and inviting high caliber candidates to join us in promoting excellence financial services to our clients.
Feb 2008 - GlobalBEST servicing at its EXCELLENCE
GlobalBEST (Int’l) Financial Limited is the first and only IFA receiving the HKACE Award and has been entirely dedicated in providing the most professional, most considerate and most attentive financial service to clients.
We are very much delighted that our efforts have been recognized and approbated by the Hong Kong Association for Customer Service Excellence. We defected many high standard competitors and received the award as the first Independent Financial Advisory (IFA) achieving such award. We are glad to be the market norm in the customer service standard.
The Hong Kong Association for Customer Service Excellence is always leader to promote and exait the customer-focused service culture in the past few years. The association also provides a very good benchmarking opportunity to showcase the outstanding achievements of staff from the practitioners. In the progress of the Award Scheme and at the day of the Award Ceremony, we are glad to have a very valuable opportunity to share the best practices in service excellence. As a leading organization, we will continue to upgrade the quality of service, and provide the most excellent services to all our client.
Feb 2008 - Market Outlook
We believe that the ‘rosy’ scenario we painted at the start of this piece is the most
probable outcome, where we start to see the bottoming out of the economic
downturn near the middle of this year. We expect those central banks that focused
more on growth to be rewarded with a stronger currency and hence we expect the
US dollar and sterling to outperform the euro in the second half of the year.
We also expect the Antipodean currencies to do well despite the increased market
volatility due to strong underlying fundamentals, hawkish central banks and
continuing regional demand from Asia. The Japanese yen is our other favourite
currency which should outperform amidst these more volatile times leading to the
summer.
Finally, we expect emerging markets to continue offering opportunities across
regions, but we have reduced our net ‘beta’ exposure as volatility remains high.
