Tag Archives: interest rates

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.


Don’t expect a rate hike

3 May

Over the weekend the PBoC raised the bank’s reserve requirement ratio (RRR) by 50bp.  This is likely to remove about RMB250b from the banks.  The question is, why make such a move?

A priori it makes no sense as the government controls the loan supply by setting targets – a target of RMB 7.5tn was set for 2010 for example.  In fact over the past few weeks both short-term rates and long-term yields have been heading south, the result of adequate supply and limited demand for credit.  In other words this RRR increase is not a tightening measure, but simply the equivalent of issuing in central bank bonds at a lower rate (i.e. the deposit rate for required reserves is 1.62%, while the 1 year bills are about 1.93%).  But we still haven’t directly answered the question as to why the RRR was raised.

Well, it looks like the PBoC’s move was intended to manage market expectations of an imminent rate rise.  In recent weeks hot money has flowed into China, and foreign currency in the country has been exchanged to RMB on the assumption that the currency would appreciate.  Such FX flows in combination with tightened demand for credit reduced rates at the near end of the curve.  By raising the RRR the PBoC is trying to support short-term rates, which means that the banks itself does not intend an imminent rate rise.

A number of my readers have commented that they would like a beginner’s explanation of some of the topics I cover in my blog.  There is a wonderful website called http://investopedia.com – a financial dictionary with tutorials and comprehensive articles.  This blog entry touches on topics including money supply, the impact of interest rates, foreign exchange.  Clicking on the link below will take you to a definition of the term “money supply”.  There are links on the page to related terms and related articles.


Regulation vs. Speculation

18 Apr

China is taking steps to cool its real estate market, but will they work?

The changes

At the end of last week China raised mortgage rates, and the proportion of down payment for some home purchases.  The cabinet said that “more forceful steps” are needed to reduce speculation on the back of real estate prices rising at a record pace.

The new rules stipulate that down payments for second homes must be at least 50% (up from 40%), and that mortgage rates cannot be less that 110% of benchmark interest rates.  In addition, banks are being encouraged to raise the ratios and rates for third home purchases by “a broad margin”

There is speculation that the Government will soon add a property tax in a bid to control price increases.

Will the regulation work?

These changes have been largely welcomed by pundits, nonetheless when speculation and regulation meet there are one of two outcomes:

  1. The market continues its climb
  2. The regulation is so strong as to precipitate a collapse!

Often, initial regulatory changes lead to outcome 1, which in turn leads to a stronger regulations and eventually outcome 2. Why should it be any different this time?

Back to double digit growth

21 Jan

There’s been a lot of buzz in the media this morning about China’s announcement that GDP grew 10.7% year-on-year in the 4th quarter of 2009.  2009 GDP expanded 8.7% as a whole, which was higher than market forecasts of 8.4%-8.5% (though I note than the figures published for the first half of the year were slightly upgraded).

I would imagine 2010 is going to be strong, and might actually reach 10%, helped by a surge in exports, which could increase by as much as 35% in the second quarter of this year.

Infaltion in December jupmed 1.9% (against market expectations of 1.4%).  This was primarily due to food prices.  I can see the CPI increasing above the 2.25% deposite benchmark rate some time in the first quarter of 2010, which I would expect to result in an interest rate hike sooner rather than later.

Governmment sponsered spending on rail and highway projects slowed towards the end of 2009.  In conjunction with the macro tightening policies enacted last week (raising banks reserve ratio requirements) this is negative news for the raw material and construction segments.

People are asking what this means for the world economy.  Essentially growth can only be good.  On the back of this good news I would expect wall street to rally today, and perhaps for the dollar to continue strengthening (after its little fall last week) – though that could be affected by payroll data due out today.