Dear rss free blog,
China
launched its new Nasdaq clone today and 28 stocks began trading in
Shenzhen. The former Growth Enterprise Market (GEM) is now called
ChiNext. On Day I trading in all 28 newly-listed shares was
suspended because their prices all at least doubled.
Immediately,
pundits started musing about the risks of a bubble. “It shows the
immaturity of the Chinese market. Everybody is out for a quick
profit, without considering the actual worth of the company. The risk
is that all the money will go into the GEM [ChiNext] board,” Francis Lun, general manager at Fulbright Securities, told Bloomberg.
Leading
gains on the ChiNext in today’s trading, movie producer Huayi Brothers
Media Corp stock climbed to 91.80 yuan by afternoon, more than triple
its ipo offering at 28.58 yuan, before closing out at 70.81 yuan
Shares
of electric appliances company Qingdao Tgood Electric Co rose as high
as 64 yuan, 168% above its IPO at 23.80 yuan, eventually ending at 44
yuan. Casino investing is alive and well in the Pearl River basin (which includes Hong Kong, a short rail journey away.)
Also today, fund
flows trackers EPFR (of Cambridge Mass.) reported that last week
saw a setback and loss of momentum in flows to emerging market
equities. The level was $2.2 bn, half of what had been recorded in
the previous two weeks. Emerging markets investing is felt to be high risk and when Wall Street is pulling in its horns, this is where people pull back from.
However, unlike the situation a year ago, when the need for liquidity by hedge funds and investment banks led to the sale of any investment medium which was not nailed down, the volatility in emerging markets recently is well within historic norms. Last year emerging markets shares lost 50% when the US market los 43%. This year the developed country stocks rose 90% while the US market rose 60% (depending on which index you use.)
Brazil is up 100% in reais, and even more if you started out with dollars.
Which
leads to the obvious question: is the emerging markets story coming
to an end? That was the subject of the BNY Mellon Asset Management
lunch I attended yesterday. The bank has a major role in
emerging markets businesses, from acting as depositary to new American
Depositary Receipts (ADRs) to paying off its exchange control fines
to Russia by financing small business there to running specialized
funds for institutional investors seeking exposure to developing
country bonds, small caps, and value investing. The luncheon featured the latter.
Despite the nice food I take their boosterism with scepticism. But
here are some comments. Hugh Hunter, CEO of their Blackfriars Global
Emerging Markets Asset Management outfit in London is forecasting a
27-8% rise in EPS (earnings per share) for emerging market stocks. He
bases this on long-term factors like demographics (young populations);
a rising meddle class; the presence of natural resources; sustainable
economic and stock market performance; and the growth of domestic
stock markets.
His
colleague Carolyn Kedersha of the parent bank is in charge of
international small caps value equity stocks. She focuses on gaps in
the market (like the lack of distribution infrastructure in China),
where she is targetting her investments. She expects better dividend
yields and a 13% return on equity from the small cap group she is
picking. These shares are in companies with good balance sheets but
not much access to bank financing.
Over
at Standish Portfolio Management, David Leduc is seeking out fixed
income and bond investments denominated in local currencies, and
cited Brazilian Petrobras bonds as a potential investment grade play.
The differential from US Treasuries, he expects will fall. The risks
are liquidity and a delay in the global recovery, but the bonds come
from well-known equity firms.
China
hand Hugh Simon, CEO of Hamon Investment Group in Hong Kong, where
BNY owns a minority, cites sustainable growth in China, the rise of
offshoring for technology in Taiwan (comparable to the use of Hong
Kong as an offshore financial center) as trends to play. For China,
Taiwan offers solar, LED and infrastructure ideas. He also is looking
at plays in food and retailing, mortgages and construction, and
railroads on the Mainland to benefit from the huge Chinese stimulus
package.
The word from BNY is that there will be better growth from emerging markets, particularly with investments picked by their team, than on Wall Street. Here is another interested party’s view. Comments
our contributor Paul Renaud, of www.thaistocks.com
Just
for the record:
Emerging
markets have had a hot 10- year run, even if you include the setback
in 2008. In fact, even if one had invested in the MSCI Emerging
Markets ETF (NYSE.EEM) on Jan. 2, 2008, one would be sitting on a
profit today. By contrast, the S&P 500 Index has delivered a
double-digit loss over the same time-frame.
During the same time gold
(so acclaimed by Marc Faber and his gold bugs) has barely held its
value in non US$ terms.
Of course Paul, based in Phuket, selects Thai small cap stocks so naturally he thinks that they are a good investment.
If pushed, I will admit that I am not ready to ditch emerging markets stocks yet. And I am looking for more medium-sized companies’ shares from China but of course not on the ChiNext.
Notes
for paid subscribers follow.
Taking
Mr. Simon’s comments seriously, I am looking for a railroad material
stock. But I want to find one priced properly on the Hong Kong or ADR
market, fearing the bubbly Chinese market.
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