2009 Ending Note (Supplement)

One good picture is worth a thousand words...

Can China alone pull the world out of the mess?

I prefer to look at the numbers. Numbers don't lie: China has 20% of the world's population, 7% of world GDP, 6% of world land area, below 100th in average income.

Imports 1.2trillion from Japan 13%/EU 12%/South Korea 11%/Taiwan 9%/US 7%. Export 1.4 trillion to EU 20%/US 18%/HK 14%/Japan 8%. Most of these countries/regions are at recession.

See you next year!

2009 Ending Note (Supplement)

To supplement my previous views on stock market - experience tells that "day trading" stocks, by following whatever method - you name it, momentum, trend following,... - is exhausting and may be quite ineffective over long term. I at least have not found a good way to do it. I believe that investing in a good company is worth taking a longer view - 3, 5 years or even longer, and snowballing (reinvesting dividends etc.) during the period can be more effective. In practice of course there is no company worth investing for ever. The darlings of 1950s are in no way the same as those in 1980s, and rarely one company/or even one industry in some cases (e.g., railway industry in US) survives over 50 years...

The perspective of Asia (hence companies positioned for Asia growth) is positive and I am confident Asia will outperform US and EU in the next decade (Marc Faber had strong argument in his "Tomorrow's Gold: Asia's Age of Discovery". A book worth reading although it's written before the crisis). This is the starting point for me to construct the equity portfolio. Despite there is high possibility of pull-back of global equity market in the coming year, it's no excuse not to act when there is good value investing in some good companies.

Noted that today China signed FTA with ASEAN, forming the world's biggest free trade area. It's a big step forward towards regional economic integration.

2009 Ending Note

End of the year is just two days away. For those stayed with the market, cheers for having had a smooth ride up and ending with a smile! Personally i have stayed neutral for majority of the time. I enjoyed the moment watching equity account doubling however regretted having to give back most of it on the currency positions. Over-confidence coupled with strong belief, when it turns out to be on the wrong side, is damaging. Staying neutral in a either up or down market is a losing proposition, nevertheless, i felt no longer confident in projecting the market reaction to the events happening from the beginning of the year to March... even when apparently Fed's buttressing Citi Group seemed to have signaled that that ought to be the end of big bank failures. (I need a separate and more detailed report on the events leading to March lows but i still doubt that i am able to find out sufficient hints for a market bottom). I made some bets on both Citi and BOA at that time but quickly exited seeing 10% profit in two weeks. I couldn't have caught the bottom. Rules seemed no longer to apply. It looked like 1930s-repeat. But i forgot "History never repeats itself". Anyway, for the subsequent 3 more months, I stayed as an observer. It was better to do so.

The past 24 months - 08 and 09 - without doubt, have marked their significance in the world's financial history. Wealth were destructed in scales unprecedented in almost anyone's living memory (except those lived through 1930s). The very foundation of the capitalist society was, at one moment, at the verge of total collapse... The doctrine of "efficient market", the "fundamentalists", the very theory the capital market was supposed to function around, were thrown into doubts again... or is market inherently unstable? Capitalism, if left unchecked, always swings to extremes of euphoria or depression? Do we need a new paradigm such as that claimed by George Soros so his "reflexivity"?

Crisis no longer only happens in the "fringe countries", or in a better name, "emerging markets". The shock wave emanated from the center and no one escaped. Some withstood it better - China, East Asia, Brazil... some were near complete blown-away - Iceland, Ukraine, Vietnam... The Bretton Woods circle is weakened. The world seems increasingly uncertain. What would be for 2010?

Will Feb keep interest at historical low for an extended period, maybe next half of 2010 or even 2011? So would other countries continue the competitive debasing of their currencies? I have not completed the thoughts on positioning for the next 6 months but that's the basic questions in mind and the affirmative answer to both questions seems to be a viable scenario due to my inclination to believe that the Fed (in fact all governments around the world) will try everything to avoid being blamed for repeating the 1937 mistake (withdrawing support "pre-maturely") so will welcome "some" inflation against which it believes itself has more tools to tweak. Chinese Premier Wen made the statement along the same line today... Asset inflation is already acute in China but it looks it will last for a little longer.

Hence, i will keep long commodities (not Gold), commodity currencies, certain relatively low-priced equities, housing in China (physical). It's a base scenario for 6 months and adjustment may come earlier than later if inflation starts to run amok and tightening in Asian countries will happen ahead of US whose high unemployment rate could accompany continued real problems in financial sector (CMBS, elevated mortgage/consumer debt default rate) and political pressure. Looking beyond 6 months, I am not convinced that excessive liquidity can prop up weakness in the economy for long. There will be some adjustment in equities and risky assets when liquidity support is withdrawn.

On China property sector, as at now, i do not believe measures claimed by government will effectively cool down the property market. The monetary policy and the GDP targeting (or shall i say "mandate"?) in a bigger picture, is working against it. I will not be surprised to hear that this year housing-related activities contributes to more than a quarter of the GDP number or even close to half of the achieved 8.6 per cent growth. It's evident that export markets recovery is painfully slow - Nov number is still -1.2% yoy and -18.8% for first 11 months. Mortgage and real estate loan provide the best target for credit expansion. This self-reinforcing exercise ("Reflexivity" in play) will not end until we begin to see withdrawal of excessive bank lending. In my view, the design of China's housing market is fundamentally flawed due to ill-incentivised government planning, in addition, the past crisis has created much moral hazard issues, especially with those large state-owned companies. The price is beyond reach of average people based on the income level and is not sustainable, however at its current design, the game will continue until a big bang, unless the government can create some mild recessions to prolong the final bang and make structural changes along the way.

That's the fallacy of life... i begin to believe more in what George Soros named "Reflexivity". Humans are full of flaws and many tend to be self-reinforcing. That is why free markets are inherently unstable, if left unchecked. The past crisis will not be last one.

Will Emerging Market Re-emerge - Vietnam (1)?

I've been following Vietnam, on and off, for a while. I have a very curious interest in the country. It's a story following China's, a state economy going through drastic reforms trying to find its way in creating wealth and pride. The road is surely bumpy, but it's set to move forward. The next big opportunity lies with Vietnam.

Vietnam has going through a small scale currency crisis at mid of 2008, slightly ahead of the full-blown worldwide banking crisis. As a large importer of Energy Commodities, rising of oil prices pushed the foreign currency reserve account to near diminishing. With double-digit inflation and tightening measures by central bank to combat inflation, foreign investors fled and left Dong sink by over 15% in the black market. - Officially Dong is pegged to USD and is traded in a very narrow band set by the central bank. By late 2009, recovery of oil prices again caused panic on the foreign currency reserve account. Summarized from Consultative Group Meeting with IMF, these are the main issues:

1, Pressure on the balance of payments. The easing of monetary and fiscal policy under the stimulus program has boosted imports, contributing to a return of significant trade deficits ($3½ billion in the third quarter).

2, Dong under depreciation pressure. Central bank has officially devalued Dong for 5.4% on Nov 25th, 2009. Residents have been rushing for gold and other foreign currencies. In black market Dong is trading further 10% or more lower.

3, Gross international reserves have fallen to below 2½ months of imports. Access to foreign exchange has been difficult.

4, Trade deficit stood high at $3.5bln in the 3rd quarter. Export remains weak. Export prices of all items (except Gold) fell.

5, Central bank turned to tightening due to pickup of inflationary pressure due to rising commodity prices and liquidity injection-led asset price inflation in the earlier months. Last measured CPI stood at 4%. 1-yr treasury is selling at above 10%.

6, Stock market has reversed the rising trend in the past 2 months and has retreated by nearly 30% from the Oct high.

7, NPLs at banking sector has been rising substantially. Official figure on NPL at State Owned Commercial Banks was at 4% at Q3 and doubled from 2007 level however Fitch estimate was at 13%. My speculation is that most banks were loaded by real estate loans including construction loans, mortgates, commercial RE loans during the boom time of 2005 to 2007 and now lots of those could be under water. Major effort such as the interest rate subsidiary program out of the VND143 Trillion Stimulus Package was put in place to alleviate the problem.

With most banks predicting some further devaluation of Dong in the coming year, central bank's drawing back the liquidity, and other negative domestic news (e.g., budget deficit may run to 50% of GDP next year), all-in-all, there is a lot of headwinds to recovery. The pressure on external account balances may persist for a while (may be for the next half to one year, probably?) due to elevated oil prices and continued weak external demand. But when most investors are deterred to put a stake in Vietnam, the opportunity of investing will be rising.