Live from Singapore this morning - been busy getting in Asia this past week and I must say I am extremely positively surprised on the Asia economies, the policies and the outlook, but there are three pending issues which needs to be addressed out here:
The non-lesson of the 1997 crisis. ((Link:) http://tinyurl.com/28oeue ) The massive liquidity creation done by the Asian central banks as they refuse to let their currency strengthening is simply scary. Even here in controlled Singapore there is one property project after another being announced. The rule of controlled peg, or Breton Woods II, as many prefer to call it inflates assets as the locals banks get FLOATED with domestic currencies which then goes into stock markets, fixed income, land and consumption through low rates, leverage debts.
Infra-structure: Considering the extreme bullish forecasts for Asia consumption, production and investments there simply is not enough ports, refineries, railroads, electricity, cement, grains, corn, crude to go around! Asia needs massive investment in electricity just to keep pace with the demand function.
Illiquidity: As much as you have to love the story of Asia, it is hard to deploy capital efficiently, Vietnam only really have ten stocks you can trade etc.etc.
Having said that though, I had chance to meet Saxo Banks partners across all of Asia and I am impressed, more than impressed. There is this feeling of ability to DO SOMETHING, which I remember so vividly living in the US in the 1990s. )This contrast massively with my recent trip to the US. Had I not been one of the biggest fans of the US I would think the US was about to close for business!)
The world has simply seen a paradigm shift, and this time a REAL one, out of the US and into Europe and increasingly to Asia. The capitalisation numbers talks for themselves:
Table 1: Market cap. from end of 2003 to 2006.....
Ignore this if you like, but the fact is as a fund manager right now, in this part of the cycle, we are far more dependent on PBOC, People Bank of China, and BOJ, Bank of Japan, than the FOMC or the ECB.
Asia have 3 trillion US dollar of reserves, of which 2 trillion is EXCESS reserves. These funds are being moved into investment funds similar to Norway's Petroleum's Fund and Singapore's Investment Corporation, on top of this, the asset composition of these assets are slowly changing not just in currency terms but also in assets classes. Fixed income is now 80-90 pct of the global portfolio, but Norway's Bank and others have announced they will increase the equity exposure - so however negative you want to be on the markets right now, remember; below every 20-30 pct correction there will be an "sovereign investment fund" willing to put in bids to secure some translation of risk.
The other major positive "vibe" I got here in Singapore, is the notion, that China needs to introduce a few more companies IPO¨s before they are willing to "punish" the speculators in China. Chinese investors are opening about 300.000 new accounts....per day! The math is simple; In China there are really only two investments classes; Bank deposits with rates of 2% or less. Inflation is 3% equal net return - 1% OR... you can go speculate in the stock market and so far this year gain 10% per month! Elementary Dr. Watson!
The risk though being PBOC could be forced to move. The inflation numbers created some stir, and there is desperate needs deflate some of the bubble, but the Chinese have learned their lessons from the Japanese in the 1980s. Japan accepted to let their currency to go stronger and ever since they have been in deflation!
China wants to avoid deflation when this is over, the talk out here is that its more likely PBOC will tax directly- or indirectly the investment, or create minimum holding period in order to stem the speculation.
It is clear to anyone out here that this is not sustainable. Have a look at the steepness of the rise in the Chinese markets this year. Even the best Ponzi schemes of the world can not follow suit here!
The good news is:
Liquidity never been richer (support all risk taking)
There is structural reasons why stock markets will find bids below in every correction (Private equity, Asian sovereigns funds and relative valuation)
Central banks per se is supportive of markets when ANY trouble is on the horizon
There is some evidence that inflation seasonally will come down during the next 3-6 months
Private Equity and M&A activities increasing by the day
The bad news is:
Carry-trading is excessive
PBOC and BOJ will need to move and soon..
Seasonality in stock market works: "Go away in May...." is for real even when tested.....
Food prices, crude prices are stubbornly bid
The interest trend been broken in key markets like German bunds (however.....any small correction in stock market likely to make it false break)
US election puts focus on trade tension. The Democrats wants to bash the Chinese......
The end result? My best guess, which as per usual carries no predictive power, would say;
Biggest risk is the carry trading. Pull up chart of USDJPY in 1998 and check out the autumn correction!
Inflation is coming back - Long end yield curve will HAVE TO adjust upward to create risk premiums
Pretty much all commodities have distorted supply-demand function. There is simply too much demand in the world right now
Equities will need to correct but as always new lower levels will find new buyers
That's it from Singapore. More from rainy Copenhagen next week.
Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
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