Tag Archives: interest rate

A Guru in China (part II)

1 Dec

Anthony Bolton updated investors via webcast today on his thoughts about investing in China. There were some interesting insights regarding the composition of his China fund at Fidelity.  I’ve previously written about Anthony’s bold move to move to China (https://ravendragon.wordpress.com/2010/11/18/an-investment-guru-in-china/ ). In that previous blog entry you will find a link to Bolton’s previous webcast, with more general China investment themes/insights. I will update this blog entry with a link to today’s webcast once Fidelity add it to their website.

What did we learn today?

  • 37.5% of the fund is in companies below US$1bn market cap. 35% of the fund is invested in companies with a market cap between US$1-5bn. This plays into Anthony’s themes of looking for growth companies, and companies that are less likely to be covered by the sell-side. The idea is that low coverage can equate with hidden value.
  • The presentation outlined all sector weightings. What interested me was that the fund is massively overweight consumer stocks (21.7% vs. an average of 5.5%). This plays into a macro theme that I’ve written about a number of times: the growing power of the Chinese consumer. Anthony talks of a 2-tier world when it comes to growth, with China outpacing the West (albeit slightly slower than the past decade). This 21.7% weighting clearly plays to that theme.
  • Top holdings include:

o   Bank of China in HK – If I understood correctly, this company has an effective monopoly in clearing!

o   China Unicom HK and China Mobile – Convinced that the data revolution will have a positive impact on Chinese telephony.

o   Ping An – Insurance. The State is slowly migrating its responsibility to the private sector.

o   Brilliance China – 50% JV with BMW. Expects them to sell 300k cars in a few years (up from 50k). This is part of a replacement cycle (including replacement of BMWs built in Germany). A highly recognized brand that’s underrepresented in the domestic market.

o   United Labs – working on insulin. Set to take on the dominant global players.

  • 2 of my questions were answered in the webcast:

o   With blue-chip US companies at historical lows, and the recent flows into EM/Chinese markets, do you think there’s likely to be pressure on Chinese markets next year?

Anthony answered with his investment thesis on the 2-tier growth world. He said that he is not concerned as he expects US growth not to return to its regular place for a while, and expects the delta to remain compared with Chinese growth. He added, however, that flows will indeed reverse if he is wrong.

This answer concerns me slightly. Why? There are key differences between US GDP and the S&P500. The former is characterized by domestic spending (mainly consumer), net imports, net borrowing, prefers a strong USD, and is captive to US taxation. The S&P500 on the other hand is global, driven by business spending (and note that global Capex spend is becoming less dependent on the US), is characterized by net savings, prefers a weak USD, and contains companies exposed to attractive tax rates compared with the US.

Granted the strength (or lack thereof) of the S&P is not the only driver of Chinese/EM markets. The risk is even lower for a fund that does not track an index. Nonetheless, I do envisage flows to the US pressuring EM markets in 2011.

o  My second question was whether Anthony sees a risk of rising interest rates in China impacting the market. He said that he feels that at some level rate increases can impact a bull market, but he felt that China is less sensitive than Western markets, mainly due to the fact that there is less consumer debt. As a side point, he said that’s why the authorities rely more on direct controls to lending and increased RRRs when as tools to control real estate and liquidity.

My question does not come out of thin air.  The Dow Jones Industrial Average was 875 on both the 31 Dec 1964 and 31 Dec 1981. Over that 17 year period US GNP grew 373%. By 31 Dec 1998 the Dow was up 10.5x to 9181.43. Over that 17 year period US GNP increased 177%. It’s no coincidence that at the end of 1964 long bonds in the US were 4.2%. At the end of 1981 they were 13.65%, and at the end of 1998 they were back down to 5.09%. There’s a lot more to say about this subject, and many other drivers of the markets (including psychology, and expectations). But interest rates do have a major impact in the value of all assets, and not just bonds!

Today with quantitative easing, economic stimulus, commodity increases, and flows into EM the risks are tilted towards an increase in interest rates from their historically low levels.

What else? He said he likes Gold, but is not bullish on other commodities.


The real real interest rate

14 Mar

In February inflation in China reached 2.7%, up from the 1.5% level recorded in January.  At first glance this is a scary jump, especially in the context of a 2.25% 1-year deposit rate – in other words it looks prima facie as if real-interest rates are negative.  Negative interest rates could stoke the real estate fire, and perhaps lead to the Government appreciating its currency in a bid to fend off the concurrent inflation.  However, let’s not be too hasty…

Firstly, China’s sequential inflation data is not seasonally adjusted, as we are accustomed in published data series from developed nations.  This year the week long Chinese new-year was in February, while last year it was in January (the result of incongruity between the Gregorian and Lunar calendars, with the new-year being based on the latter).  During the new-year food prices tend to rise, which would explain the jump to 2.7% from 1.5% – it was simply artificial.

More to follow…