Category Archives: Asia

Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

TCX Chooses Diligence on Myanmar

The folks from Netherlands-based TCX (The Currency Exchange Fund) have just passed me the following video, which encapsulates a two-day conference they hosted last month in Myanmar.

So far all I’ve only watched the introductory four-minute video and I can tell you that it’s worth noting first that this is eminently more watchable than the video attempts I’ve seen from certain other outfits in this space who shall remain nameless.

I’m all for the DIY revolution, but sometimes paid professionals are paid professionals for a reason.

Anyway, the point here being that if you understand and trust TCX’s general outlook and approach to new markets (which I do) and if you bear this in mind as you watch how TCX has chosen to chronicle its impressions of last month’s Myanmar gathering, this is worth your time.

In particular, I would like to draw attention to the emphasis on regulatory concerns voiced by some of the participants interviewed and encourage a lot of reading between the lines here. Maybe I’m reflecting my own bias, but the way I’m interpreting these answers is that nothing is happening overnight and that if your inclination is to ask a question like, “When will this begin to pay dividends?”, well…I think you may have taken a wrong turn somewhere.

Here’s the video:

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Frontier Markets Opportunities and Risks, Bloomberg Edition

As part of last month’s Bloomberg Dealmakers Summit in London, the following roundtable took place, featuring Timur Issatayev of Verny Capital, Parag Saxena of New Silk Route LLC and Danladi Verheijen of Verod Capital Management. It’s 22 minutes and all worth it, but if you want the single most profound statement for my time, fast-forward to 15:10, when Parag Saxena has the following to say when asked about investment risks in South Asia:

“If you stay away from purely government-granted things you can probably do all right but sometimes that is where the opportunity is so it’s hard. To me the big surprise that I learned in India, having been in the investment business for 31 years and thinking that I have made already most of the mistakes that I was going to make in my investment life, the one that surprised me in India, and I know it’s true in Pakistan and Bangladesh too, is the lack of talent. So when I invest in the U.S., which I continue to do, I know that even for a pretty tough to fill job, in 120 days to 180 days I can fill almost any job. And so typically now at my age, I get resumes from my friends’ children. I used to get them from my friends at one point and now I get them from my friends’ children. And in the US I think it’s going to be hard to actually place them because there is so much talent available for a limited number of jobs. In India, I find myself grabbing every resume because I can hire baristas for somebody that wants a summer internship job, we have a restaurant company and cellular tower company and we need CEOs, so I can hire CEOs for those companies, and everything in between. So the biggest surprise to me, and the opportunity, is training for lower level jobs. And that’s a real unexpected risk, because time is the enemy of internal rate of return and if it’s going to take you more time to fill these slots and you can’t get stuff done, you have a real problem.”

Here’s the video in full:

Chart of the Day : Triple Threat for Emerging Markets

Apologies to everyone for the radio silence, but I’ve been occupied with an ongoing project in Peru the past few months. In the meantime, Morgan Stanley just published this chart via Barron’s:

2013.08.19.Emerging Markets Triple Threat

Chart of the Day: The World as 100 People

From Jack Hagley:

World-as-100-People_3

 

Chart of the Day: China Mobile Users Surpass US

From Mary Meeker’s recent presentation on the state of the web (slide 67):

Chinese mobile users surpass Americans

A Tale Of Two Bond Curves: Malaysia vs Indonesia

Thanks to Denise Law for drawing my attention to this…

Malaysia government bond yields fall post-elections:

Govt bond curve - Malaysia May 2013

While Indonesia government bond yields rise after S&P reduced its outlook on Indonesian credit from positive to stable:

Govt bond curve - Indonesia May 2013

Related reading: How Singapore’s currency club fell apart

How Much More Can Emerging Markets Debt Grow?

EM versus US High Yield Bonds riskLondon-based Clear Path Analysis has an excellent report detailing investment considerations for Emerging Markets debt and FX investing. So good, actually, that it’s forcing me to second-guess my previously held view that Emerging Markets debt is in a bubble approaching crisis proportions. It’s a long-ish report (32 pages) and it’s all important, so let’s get straight to some of the notable commentary they’ve put together. I think these quotes really speak for themselves.

Gregoire Haenni, Chief Investment Officer, CERN Pension Fund, on why Asia has and will continue leading EMs:

One of the main reasons why investors are beginning to allocate into EM is because of the Asian sovereign credit re-rating trend. Asian sovereign credit fundamentals have generally been on the up for the last six years which is in contrast to other developed countries. The fiscal discipline and underlying economy growth has capped government debt to GDP without exceptions and trade surpluses over the past decade have resulted in a build up of foreign exchange reserves.
Continue reading

Chart of the Day: Frontier Markets Correlations, Round 2

S&P Capital IQ slipped this press release out last week, which I’m glad I followed up on since it led me to the following correlation chart:

Frontier Markets Correlation vs Major Indices

Equally important, this comment which came alongside it:

From an asset allocation perspective, one of the biggest positive differentiators of frontier market equities is their relatively low correlation with both developed and emerging market equities as well as commodities (see table 2). The asset class’ ability to “zig” when others “zag” is a function of its aforementioned limited integration into the global economy and its more domestically driven fundamentals, in our view.

Continue reading

Charts of the Day: The Future Of Emerging And Frontier Markets

CarnacTheMagnificentThanks to Ernst & Young, I’ve got my retirement destination all picked out: Turkey.

Because, you see, in 2040, when I’m 67 years old, forget the BRICs or Mexico or Dubai or South-South anything; Turkey’s gonna be an export boomtown. Or at least that’s one of the forecasts E&Y is touting in its new Rapid Growth Markets forecast. And if, come 2040, I’m not rolling G-style through the souks of Istanbul, I’m definitely suing the crap out of the 2040 incarnation of Ernst & Young,  which by then might be better known as ErnstPWCDeloitte-Slim/Gates LLC dot unit D sector. 

In all fairness E&Y does a dependable job of summarizing the main economic characteristics of developing markets for those who don’t plug into this stuff every day.

And they also have a nifty online interactive tool you  can play with here.

For the rest of us…the thing is I really just have a hard time taking seriously any forecast that goes out to 2040. But let’s try anyway. According to the charts, those of us lucky enough to still be alive in 2040, assuming there’s still a human race by then, should probably be doing something with exports. But definitely not anything between the Eurozone and the US:

Continue reading

Map Of The Day: Global Shipping Routes

Thanks to CNI Group for this:

2013.04.16.Global Shipping Routes

I guess what strikes me the most about this map is the huge blank spaces among the world’s global shipping routes: the Bay of Bengal, southern Australia, the west coast of South America, and pretty much all of sub-Saharan Africa that isn’t connected to either South Africa or the Gulf of Guinea. Of these, Australia at least has a viable road network. Relative to the entirety of the world, these don’t look like large spaces, but the increased costs for closing these gaps via land are not insignificant.

Another thing that comes to mind here is imagining how the shifts in shipping patterns may have happened over the centuries. Never mind the obvious growth in gross number of journeys; what I’m thinking of here is the opening up of new routes.

I’m not a shipping person, but I try to be as much of a history person as I can. Off the top of my head, I would venture that China’s periodic bouts with isolationism over the centuries have had material effects on the Asia routes, the most recent probably being a massive dropoff during the 1950s through sometime in the 1970s as China re-opened and Japan started coming online. And transatlantic development from the Industrial Revolution forward has kind of been done to death.

There’s also this book, which I’ve yet to read but has been on my to-do list since it came out. I suppose where this all leads is, what’s the future of this map? More specifically, how much of south-south trade development will any of us live to see?

Plain English: China’s Cash Stash

2013.04.11.China FX ReservesThis little quip from the FT about China’s rising FX reserves made me stop in my tracks:

“Reserves jumped $130bn to $3.44tn – roughly equivalent to the size of the German economy…”

Really?

Yes. Really. You can look it up here.

This now raises some other basic questions: what else is worth $3.4 trillion? Or: what could China buy with that kind of money? How else can we even conceptualize this number?

In the spirit of my previous conceptualization of Facebook’s $100 billion IPO, here are some other ways to conceptualize $3.4 trillion:

Continue reading

A Diplomatic Way Of Saying A BRICS Development Bank Is A Stupid Idea

Dani Rodrik has this in Project Syndicate today:

It can be cause only for celebration that the world’s largest developing economies are regularly talking to each other and establishing common initiatives. Nonetheless, it is disappointing that they have chosen to focus on infrastructure finance as their first major area of collaboration.

This approach represents a 1950’s view of economic development, which has long been superseded by a more variegated perspective that recognizes a multiplicity of constraints – everything from poor governance to market failures – of varying importance in different countries. One might even say that today’s global economy suffers from too much, rather than too little, cross-border finance.

What the world needs from the BRICS is not another development bank, but greater leadership on today’s great global issues. The BRICS countries are home to around half of the world’s population and the bulk of unexploited economic potential. If the international community fails to confront its most serious challenges – from the need for a sound global economic architecture to addressing climate change – they are the ones that will pay the highest price.

Yet these countries have so far played a rather unimaginative and timid role in international forums such as the G-20 or the World Trade Organization. When they have asserted themselves, it has been largely in pursuit of narrow national interests. Do they really have nothing new to offer?

Read the rest here.

What Central Bank FX Reserves Really Tell Us

The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:

That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

And this, from the opening paragraph, is also worth drawing attention to:

To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.

The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:

Continue reading

Chart Of The Day: Food & Agriculture Demand And Supply

What this screams is the urgency of leveraging Africa’s arable land potential. I wonder how Africa would stack up against the righthand chart:

2013.04.03.Food-Agriculture demand supply

From @CamboRobert.

What The BRICS Really Have In Common

2013.03.28.BRICS as The_Breakfast_ClubSometimes news editors exercise such brain-dead judgment that it’s a wonder journalism as a practice even survives.

That sentence was one of a few I conjured up as a possible lead-off thought. Well, technically, it was the only sentence, since the rest are thoughts posed as questions. Here they are:

Is the BRICS Durban conference officially the acronym’s 14th minute of fame?

When will the country grouping of France, Uganda, Chad, Kenya, Oman, Fiji and Finland finally supplant the BRICS as the political economy cadre du jour? What about Bulgaria, Uganda, Lithuania, Latvia, Spain, Haiti, Italy and Thailand?

2013.03.28.bric_summit_durbanDoes anyone honestly still believe in the BRICS as an investment theme?

Am I the only one seeing that Brazil, Russia, India, China and South Africa may actually have less in common than a brain, an athlete, a basket case, a princess and a criminal?

What drives this apparently human need to shrink everything down into bite-sized archetypal infonuggets?

Continue reading

Is Asia’s Foreign Exchange NDF Market The Next Domino To Fall?

2013.03.15.ASEAN mapThat’s the basic question I take away from this recent article from the FT’s Jeremy Grant, which uses a wrongful dismissal lawsuit ex-UBS traders are bringing against their former employer as a gateway to discussing price transparency in the Asian non-deliverable FX market.

The important bit doesn’t come until the second half of the article:

“Quite how this “shadow” fixing system has emerged in Singapore, alongside the official rates set by southeast Asian central banks, is a bit of a mystery. Bankers say it was because traders didn’t historically trust the onshore fixing. It is easy to forget the depth of anti-market feeling in Malaysia during the Asian crisis.”

Actually, how it emerged in Singapore was rather straightforward. Continue reading

InfoGraph of the Day: Chinese Companies and Risk in Africa

This is really impressive and makes me really rethink my previous notions of a political risk framework, particularly in the context of Africa. No more preface necessary:

2013.03.14.China risk in Africa

Sourced from Africa-Asia Confidential.

China Latin America Trade: Who’s Dependent On Whom?

Yes, I am obsessed with charts. And if you’re still reading this blog with any regularity, you are too. Especially if they’re about China Latin America trade.

I finally had a chance to dig through a BBVA report from last month entitled, “How dependent is Latin America’s Economy on China?” Following are the essential takeaways.

  • Commodities have always taken a significant share of Latin American exports; the level of commodity exports concentration had been declining until the start of this century, which coincides with the further involvement of China in global markets.
  • The shift of China’s economic model makes it the biggest contributor to world commodity demand and the top importer of Latin America’s natural resources.
  • There is a positive China effect on commodity exports concentration; the dependency on Chinese demand for sample commodities has indeed increased during the last decade.
  • However, Latin American countries’ economic growth is far less dependent on China than the commodity exports figures might imply.

Now with those overview bullets out of the way, the first chart that strikes me is shown a few different ways but all with the same conclusion. This is one of the versions, demonstrating the proportion of each country’s exports that are commodities:

2013.03.12.Latam-China commodity exports percent share total

Continue reading