The mantra from advisers has become almost a creed and as a result I have heard of some significant investments being made based on the view that this was a one way escalator going up and that one would be a fool to miss out. Such blind complacency never ceases to amaze me, especially when dealing with other people’s money!
The long term story in the East is still a good one and one that no global and multi-asset investor should ignore but reliance on blind faith and dogma will always be fraught with danger. I have written before about the inevitable effect of a global slowdown on certain markets, especially those that became the fashion fads of the moment with over excited domestic investors.
So far this year the worst performing indices have been those of the mainland Chinese exchanges in Shenzhen and Shanghai with drops in excesses of 50%. What a difference a year can make – this time in 2007 the same graphs were nearing the vertical in the upward trajectory. Despite efforts to try and stabilise the situation, it would appear that the domestic Chinese punter has been frightened off for the moment after many, probably for the first time, have experienced the inevitable event that markets can go down as well as up.
In fact most of the region’s markets have fallen between 20% and 25% but for a variety of reasons. Malaysia and Thailand have been suffering a rise in inflation mostly due to their interest rates being too low. Vietnam with its inflation of over 25% has been suffering more and their economy may well be heading for some significant difficulties unless strong action is taken.
Singapore, Hong Kong and Korea have other issues, primarily relating to a fall in economic growth especially affecting exports in their more open economies. To add to this Singapore is seeing a pull back in commercial property prices, and Korea is still trying to digest an excessive level of private debt that has been built up.
An asset allocation decision to be away from these markets was therefore a correct one, but that does not mean that they should be ignored. This adjustment is very different from the chaos we saw towards the end of the last decade where both valuations and economic structures were severely hit.
This time foreign exchange reserves are higher and overseas borrowings lower and, with falling commodity prices, the inflation issue might start to ease. All of this means that growth for the region (without Japan) may still be around 7%, which is healthy compared with last week’s prognostications from the OECD (and our dear Chancellor) about the outlook for our own weakening economy.
However, even with this slowdown and the fall back in market values, I think it would be irresponsible to say that these markets are cheap when most are on a value of 9 times consensus earnings. Watch and wait.
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The price of oil has come rattling back from $144 a barrel back in mid-July to a paltry figure of under $107 as I write. Just to put that into context it was under $80 a year ago. This movement seems to have roughly mirrored the rise in the US$. What will be interesting this week will be the deliberations of OPEC as they meet on the 9th to discuss their output. Close to $150 was probably seen as too high and certainly the Saudis raised capacity – equally, closer to $100 may persuade the somewhat disparate group to start to cut some capacity again.
Given the nervous markets at the moment we can only hope that this is kept to a modest level.
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Last week we had another shudder through the banking system as Mr Trichet narrowed the banking support window from the ECB, and the normally restrained Bill Gross of Pimco urged the US authorities to take direct intervention into the banking system, including Fannie Mae and Freddie Mac, stating “Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami”.
Strong stuff. So is it inevitable that direct renationalisation will be taken? In order to establish some confidence and stability it may become inevitable as the major investors like Pimco sit firmly on their hands and their assets – as far as they are concerned they have already bought into the banks – and are sitting on losses to date, so as far as Mr Gross is concerned there will be no more good money after bad.
This story has further to run – and it won’t be just in the US, but closer to home as well.
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And finally...............following on about my concerns about discount airlines desperately cutting costs, my colleague Aparna Ram has discovered that Air Canada’s regional airline “Jazz” has found a novel, if somewhat concerning way of saving even more money. On the basis that if you can lighten the plane you can save more fuel, what else can you chuck out? Well how about the life jackets?
Apparently if you fly within a 50 mile range of the shore you are not obliged to have them – which is also rather worrying, as 50 miles out is still quite damp and deep and come to that I can’t swim one mile let alone 50.
A spokesman for the airline comforted clients, saying that Jazz only flies across the continent and doesn’t fly over any oceans – mind you it does fly over some quite big lakes – like the Great Lakes, which as the name implies are quite large, as well as the Eastern coast of Halifax and Nova Scotia. Safety cards in the seats now direct concerned passengers to hang on to their seat cushions as flotation devices instead. Oh well that’s alright then. Streuth!
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited