April Gold Fever
One of the biggest moves in April was by gold, which was up 11.4% in April, or 31% YTD. Although I confess to being a bit of a closet goldphile, we don’t have any gold exposure in the fund as yet. For those who think the gold price rise seems overdone in the past few weeks, take a look at the chart below of gold price vs Dow Jones Index. At the peak of gold fever, 1 ounce of gold was the equivalent of 1.3pts on the Dow, however at current prices; 1 ounce of gold is the equivalent of 17pts on the Dow. That’s a long way to go to previous peak, either that or Dow has to retrace by around 85%...Putting it simply, the downside definitely looks worse for Dow than gold!
On the other side, the best parity to gold is so far, interestingly, the Thai SET index, which is almost at parity to gold price. I.e. 1 ounce of gold will buy 0.9pts on SET index. Which will outperform, SET or gold? I’m still thinking about this one…but if gold hits $1,000/oz will the SET be at < or > 900 pts. Tough one that, but looking at the trend in chart below, it seems to be heading for parity of 1.0, i.e. if you want to outperform gold, you better buy SET…hey! I’ve just solved my conundrum over lack of gold exposure, buy Thai instead!
As central banks scramble to diversify their US$ exposure (and in particular, if we look at Asian central banks’ reserve backing, very little tends to be in gold), we can continue to expect further US$ weakness against Asian currencies. As such, one way to avoid ‘going down with the dollar’, is to remain highly invested in order to get as much of the benefit of potential for Asian currencies to rise further. If we look at North Asian currencies (Korean Won and Taiwan Dollar), these currencies are still around 25-35% above pre-crisis levels vs US$ whilst South East Asian currencies are northwards of 50% higher than pre-crisis levels.
April remained a hectic month for us, with over 54 meetings in three countries. Interestingly, we found gems where we weren’t expecting and duds where we were expecting to find gems. My trip to Taiwan was a little disappointing, especially given the attractive valuations there relative to the region and historically. It was not helped by aggressive run up in quite a few of the stocks we had arranged to visit thanks to President Chen Shui-bian’s comments on the potential for country to open to Chinese tourists for the first time. Still, we will continue to monitor to look for opportunities there.
The most interesting comparison for me this past month was between Korea and Taiwan. Both countries are potentially on the verge of war (South and North Korea are theoretically still at war) and both are extremely reliant on tech focused investments, i.e. exports. Ironically, despite an inextricably linked economy between Taiwan and China, the population there seems to be much more polarized to a reunification move then the Koreans. However, with the younger generation being much more supportive of a reunification, this issue seems resolvable. It’s just a matter of time.
One of the more confounding facts to me is that with the general obsession of Asians over brand names, valuations for companies with strong brands continue to trade at large discounts to peers listed in more developed countries. Instead, investors in Asia tend value companies growing sales at 30% but with a 10% margin higher than a company whose sales is growing at 10% but with a 30% margin. With today’s volatility in cost of production (due to volatile material and energy costs), a 5% increase in cost of production could reduce margins by half for the first company whilst it would have only a 16% reduction in margins for the latter company.
However, I do not believe this will continue to hold long term. With a younger generation who do not have memories of the bad old times, the habit to save for a rainy day is not as well ingrained. With generally easier access to credit, consumers are increasingly focusing more on buying ‘branded goods’, one of the reasons the ‘affordable’ luxury segment is one of the fastest growing segments in the fashion world. These are also some of the reasons why more than half of the stocks in the portfolio have strong brands, either globally or in their respective markets. Currently, our two largest positions manage or own global brand names, and are trading at 50-100% discounts to global peers, whether on PER or DCF basis. As awareness on the resilience of brands continue to increase, valuation discounts between these companies listed in Asia against peers in more developed countries should start to narrow.
As we start moving into May, after strong recent run ups in markets, we are taking a more cautious stance. The generally slower summer months for the stockmarkets are in our view perfect opportunities to pick up some stocks which have run up strongly recently, but that may see a pullback over the next few months as short term excitement gives away to longer term reality.
On the other side, the best parity to gold is so far, interestingly, the Thai SET index, which is almost at parity to gold price. I.e. 1 ounce of gold will buy 0.9pts on SET index. Which will outperform, SET or gold? I’m still thinking about this one…but if gold hits $1,000/oz will the SET be at < or > 900 pts. Tough one that, but looking at the trend in chart below, it seems to be heading for parity of 1.0, i.e. if you want to outperform gold, you better buy SET…hey! I’ve just solved my conundrum over lack of gold exposure, buy Thai instead!
As central banks scramble to diversify their US$ exposure (and in particular, if we look at Asian central banks’ reserve backing, very little tends to be in gold), we can continue to expect further US$ weakness against Asian currencies. As such, one way to avoid ‘going down with the dollar’, is to remain highly invested in order to get as much of the benefit of potential for Asian currencies to rise further. If we look at North Asian currencies (Korean Won and Taiwan Dollar), these currencies are still around 25-35% above pre-crisis levels vs US$ whilst South East Asian currencies are northwards of 50% higher than pre-crisis levels.
April remained a hectic month for us, with over 54 meetings in three countries. Interestingly, we found gems where we weren’t expecting and duds where we were expecting to find gems. My trip to Taiwan was a little disappointing, especially given the attractive valuations there relative to the region and historically. It was not helped by aggressive run up in quite a few of the stocks we had arranged to visit thanks to President Chen Shui-bian’s comments on the potential for country to open to Chinese tourists for the first time. Still, we will continue to monitor to look for opportunities there.
The most interesting comparison for me this past month was between Korea and Taiwan. Both countries are potentially on the verge of war (South and North Korea are theoretically still at war) and both are extremely reliant on tech focused investments, i.e. exports. Ironically, despite an inextricably linked economy between Taiwan and China, the population there seems to be much more polarized to a reunification move then the Koreans. However, with the younger generation being much more supportive of a reunification, this issue seems resolvable. It’s just a matter of time.
One of the more confounding facts to me is that with the general obsession of Asians over brand names, valuations for companies with strong brands continue to trade at large discounts to peers listed in more developed countries. Instead, investors in Asia tend value companies growing sales at 30% but with a 10% margin higher than a company whose sales is growing at 10% but with a 30% margin. With today’s volatility in cost of production (due to volatile material and energy costs), a 5% increase in cost of production could reduce margins by half for the first company whilst it would have only a 16% reduction in margins for the latter company.
However, I do not believe this will continue to hold long term. With a younger generation who do not have memories of the bad old times, the habit to save for a rainy day is not as well ingrained. With generally easier access to credit, consumers are increasingly focusing more on buying ‘branded goods’, one of the reasons the ‘affordable’ luxury segment is one of the fastest growing segments in the fashion world. These are also some of the reasons why more than half of the stocks in the portfolio have strong brands, either globally or in their respective markets. Currently, our two largest positions manage or own global brand names, and are trading at 50-100% discounts to global peers, whether on PER or DCF basis. As awareness on the resilience of brands continue to increase, valuation discounts between these companies listed in Asia against peers in more developed countries should start to narrow.
As we start moving into May, after strong recent run ups in markets, we are taking a more cautious stance. The generally slower summer months for the stockmarkets are in our view perfect opportunities to pick up some stocks which have run up strongly recently, but that may see a pullback over the next few months as short term excitement gives away to longer term reality.
posted by Kenneth | 9:34 AM
2 Comments:
Why do you think it is that Asia seems to value brand name companies less than in the West? Might it be because they are more concerned with counterfeiting?
Definitely part of the issue is copyright protection. What is the value of the brand, if it can be copied without legal recourse. So in the eyes of the Asian investor, the value of the brand is less appreciated than it would be in countries where there is much better protection. However, from the investment point of view, and part of my point in the article is that when a company's brand value is mainly in Europe, just because it is listed in Asia, it should not be discounted, just because the majority of investors are Asians, especially when we have global fund managers scouring ideas for investments in every country.
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