Skyhigh Exuberance
Euphoria remains high
As Asian markets ended the year with a bang (some more lethal than others, see Thailand) with some markets posting all time highs, and with strategists and analysts from the sell side generally being bullish about 2007, I can’t help but feel cautious about exuberance in the markets. Part of the reason is perhaps the fact that I’m based mainly in Bangkok, which is not exactly the centre of booming Asia at this point in time, and that sort of brings one back to reality. Just open up the Asian Wall Street Journal’s Year-End Review of Markets and Finance and the headline says it all “Can the party get even better?”, which is under a picture showing Investment Bankers ready to have a feast in 2007.
Having been on the sell side for more than a decade, I have had the axiom pounded into my brain “Bullish Brokers get the Business”. A self evident truth upon which other knowledge must rest, and from which other knowledge is built up. With an estimated more than 90% of funds invested in Asia being long only (of which the remainder has the ability to short but is probably long biased), the inability to short (more than probably at best a quarter of the stocks in less than half the markets in Asia) and it’s not difficult to see why it just doesn’t pay to be a bear in Asia (on the sell side at any rate). Richard Russell succinctly puts it, “Conventional market wisdom tells us that "the higher the rise, the bigger the fall." Well, the markets have been on the up-escalator ever since October, 2002, and nothing bad has happened yet. Furthermore, the universal opinion of the experts is that nothing bad is going to happen in 2007. In fact, from what I gather, the experts believe that nothing bad is ever going to happen -- at least not in this lifetime.” He was talking about the US stock market, but then, he could be talking about a few other markets in Asia from what I can see. Investors tend to forget…fast.
For a value fund, it’s a tough time to be picking stocks, for we are the “turtles” of any race and it’s tough to see the way when the “hares” are rushing past. Still I’m an optimist and the good thing is when the “hare” is rushing past, inevitably, it will not find the diamonds hidden in the rough. As such, we will continue to search far and wide in 2007 for similar types of gems to those we dug up in 2006.
I thought it would be appropriate to round up some of my thoughts for markets in Asia and what we could expect to see in 2007 and what we are likely to be focusing on in 2007.
ASEAN markets
I believe the ASEAN markets remains undervalued relative to other emerging markets, despite the fact that Indonesia, Vietnam and Philippines have been probably three of the top five best performing markets in Asia in 2006. However, I would not be focusing on the blue chip stocks in ASEAN as I believe they are not only expensive but are also over-owned. For larger funds to get exposure to these smaller markets, they tend to focus on the top few stocks, which mean average valuations for these stocks tend to be higher than what you would pay if you went for ‘second tier’ stocks. Given analyst resources in these markets (which tend to be a lot less than the larger markets in Asia), it’s not surprising that only the top quartile of the number of companies listed in these markets are covered, providing significant opportunity for those willing to do some deeper digging.
Despite the relative resilience of the fund to events in Thailand so far, we are a little wary of recent events in Thailand. It just goes to show even the more stable countries can ‘blow up’ in a short period of time, and I suppose that’s why risk premiums for these markets tend to be higher than more developed markets. For 2007, we will probably look to switch rather than continue to increase our exposure to both Thailand and Indonesia in order to reduce country risk for the portfolio. I believe there is more room to invest into Malaysia and Philippines and will be doing more digging there. We have already established some initial headway into Vietnam and will be sniffing around there in 2007. For the latter, I believe there is currently too much money chasing after a very small pie (the Vietnamese stock market) and that risk premiums are not being reflected if we compare the valuations being paid for in Vietnam versus the rest of ASEAN. Still there is no harm looking, but the better valued investments are probably private, and that will take a lot more work.
As for Thailand, after a series of mishaps (although unrelated - as far as I know anyway), investors are beginning to have doubts about Thailand as a laggard play (relative to rest of Asia, having been the worse performer now for almost two years running). I myself continue to believe the long term potentials of the Thai market, it’s just a shame that it’s been run by a small group of greedy, power hungry individuals (no names) with more interest in lining their own pockets than to further the development of the country. This issue unfortunately does not have a short term solution because the pro democracy advocates (generally Bangkokians), who are so keen to see everyone get their right to vote, also happens to be the ones who are most unhappy at seeing who gets voted in and will happily support a non democratic removal of such parties, for which the age old adage for Thai democracy still stands true, “The provinces votes into power a Prime Minister which Bangkok will inevitably kick out”.
Until more investment is put into education, this will not change and is also the fundamental issue that the Junta is facing in drafting a new constitution that will both satisfy Democracy advocates and those that want to see less corrupt politicians in power. The fact is that the previous constitution was perfectly workable except that it did not factor in the ability of someone who was rich enough to bypass its’ controls (in other words, it was not written with someone like Thaksin in mind). Consequently, the only other option is to appoint a Prime Minister and Cabinet, something which would not only make the Junta look no better than the previous government but would also probably cause some major dissent amongst the populous. On the other hand, if you polled voters even now, one of the more admired and desirable Prime Ministers from the past is probably still Anand Panyarachun, whom, as it happens, was an appointed Prime Minister. Damned if you do, damned if you don’t.
It will be interesting to see how the Junta will try to meander from promising full Democratic elections at the end of 2007 to promising a non (or perhaps less?) corrupt appointed Prime Minister and Cabinet. Although the current appointed Cabinet was actually quite well respected to start with, the recent misstep over Capital controls from the BOT (for which no one has yet resigned to take responsibility), the lack of activity (due mainly to the lack of experience in dealing with government matters from new appointees) and the rapid appointments of soldiers to boards and positions of power has somewhat toned down initial euphoria and support for the coup and the Junta. At any rate, further violence, disruptions and shuffles cannot be ruled out as both Junta and pro-Thaksin camps manoeuvre to negotiate a ‘settlement’, with both sides flexing their muscles to improve their leverage. In meantime, it’s probably not going to be too pretty for the Thai stock market.
Korea – Derating to continue?
Korea is another seemingly darling turned nightmare market for foreign investors with recent rulings over Lone Star’s Investment in Korea Exchange Bank (004940 KS) signaling potentially a more nationalistic and patriotic stance from the government. Foreigners have been exiting this market faster than you can say, well, Korea Exchange Bank. In fact, since the beginning of the year, foreign investors have net sold close to US$12bn worth of stock, the only stock market (in Asia) to see net outflow in 2006. Nevertheless, from my visits, Korean companies are, in my opinion, on the leading edge of manufacturing in Asia, and are difficult to ignore for pure absolute value. It’s just a shame that corporate governance and minority shareholder treatment is probably still one of the weakest in Asia. Still, I believe we will probably be doing a lot more work in Korea in 2007. I always find that the best value is quite often in places where investors are exiting (especially in a rush), not where they are heading to.
HK/China (and India) – Irrational exuberance?
As I had indicated from my previous memoirs, China and India are difficult markets to ignore given the enormous growth potential for both markets. In fact, our main gripe with China and Indian stocks are not the growth prospects but the valuations. In order to get exposure, we have to pay prices which will take 2-3 years to bring into reasonable levels, assuming current growth rate is sustained, something which is not only against the fund’s investment strategy but would also probably keep me awake at night. Still, that won’t keep us from digging, but don’t hold your breath.
Taiwan – Best Value in Asia?
Taiwan, at this juncture, given average PER valuations of 13x FY07 earnings against average EPS growth of 20% and dividend yield of 4.2% (vs 3.2% for Asia), is probably one of the best value markets in Asia. The only problem is that political risk for Taiwan remains high and a large proportion of the listed companies are technology related. Still, that’s not enough to put us off, and we’re probably going to be all over Taiwan in 2007.
I believe as we see a strong ASEAN growth story pan out, earnings momentum and revisions are likely to follow, together with more M&As, which should bode well for our portfolio, given our close to 87% exposure to the ASEAN market. However, 2007 will be a challenging year in my opinion and given where markets are now relative to 2006, it would not be a surprise to see a couple of repeats of May 2006 performances for Asian markets in 2007.
With close to 270 companies visited in 2006, we had great coverage over the past year and were able to unearth some real gems. Despite the strong performances in Asian markets so far, I continue to remain optimistic on our prospects for uncovering more under-researched gems as the rush for beta to play the momentum will leave a lot of ‘value’ stocks untouched, largely because liquidity is generally lower, market capitalization is smaller or purely because growth is not as sexy as the higher rate (but much more expensive) growth stocks.
I would like to leave you with a summary of our “stock recommendation sheet” (back by popular demand). I always like to think of the fund as an investment holding company, which incidentally, holds not only some of the most well known brands in Asia, but also globally. NTAsian provides an investor with unparalleled exposure to rising affluence and domestic consumption in Asia. At 9x FY07 and 7.8x FY08 earnings, NTAsian (NTASIAN KY Equity) is not only trading at close to a 40% discount to average Asian market PER valuations but is also growing close to 3-4x faster versus the Asian markets, in terms of EPS growth. You can’t find better value than that!
Another Global Warming Plug
With reports coming in now that China will probably exceed originally forecast emissions within half the time that was originally targeted (or potentially equal US emissions within the next 10 years), and that most countries, even those that signed the Kyoto Treaty, are unlikely to meet their emission targets, it is a constant reminder that there is a price to growth that is not purely monetary. For us, being on the frontier of investing in Asia, we feel strongly that we have a social responsibility to ensure that the companies we are investing in are fully compliant or working towards these goals and in 2007, will be working hard with our investments to meet these goals.
If you were one of our fund subscribers, you should have received the book, “An Inconvenient Truth” from us. We hope you enjoy it. It’s not totally accurate or scientific (after all, it’s authored by a politician!), but it’s an excellent introduction to one of the greatest problems that we are potentially facing as the human race. For those whose interests have been piqued and would like to learn more, I highly recommend “The Weather Makers: How Man Is Changing the Climate and What It Means for Life on Earth” by Tim Flannery. This is a little more technical but a superb book highlighting this issue and why this is a matter that will impact our generation. In the end, a point the author makes is most prescient, if you thought you had a disease which may or may not be fatal, but the doctor recommended you to take some medicine anyway as insurance, you probably wouldn’t think twice about doing something about it. Scientists may never fully be able to prove of the link between human caused emissions and global warming until it is too late, but why should we not take prudent steps now to avoid it, rather than finding out that they were right only when it is too late to do something about it.
Until next month. Happy New Year everyone!
As Asian markets ended the year with a bang (some more lethal than others, see Thailand) with some markets posting all time highs, and with strategists and analysts from the sell side generally being bullish about 2007, I can’t help but feel cautious about exuberance in the markets. Part of the reason is perhaps the fact that I’m based mainly in Bangkok, which is not exactly the centre of booming Asia at this point in time, and that sort of brings one back to reality. Just open up the Asian Wall Street Journal’s Year-End Review of Markets and Finance and the headline says it all “Can the party get even better?”, which is under a picture showing Investment Bankers ready to have a feast in 2007.
Having been on the sell side for more than a decade, I have had the axiom pounded into my brain “Bullish Brokers get the Business”. A self evident truth upon which other knowledge must rest, and from which other knowledge is built up. With an estimated more than 90% of funds invested in Asia being long only (of which the remainder has the ability to short but is probably long biased), the inability to short (more than probably at best a quarter of the stocks in less than half the markets in Asia) and it’s not difficult to see why it just doesn’t pay to be a bear in Asia (on the sell side at any rate). Richard Russell succinctly puts it, “Conventional market wisdom tells us that "the higher the rise, the bigger the fall." Well, the markets have been on the up-escalator ever since October, 2002, and nothing bad has happened yet. Furthermore, the universal opinion of the experts is that nothing bad is going to happen in 2007. In fact, from what I gather, the experts believe that nothing bad is ever going to happen -- at least not in this lifetime.” He was talking about the US stock market, but then, he could be talking about a few other markets in Asia from what I can see. Investors tend to forget…fast.
For a value fund, it’s a tough time to be picking stocks, for we are the “turtles” of any race and it’s tough to see the way when the “hares” are rushing past. Still I’m an optimist and the good thing is when the “hare” is rushing past, inevitably, it will not find the diamonds hidden in the rough. As such, we will continue to search far and wide in 2007 for similar types of gems to those we dug up in 2006.
I thought it would be appropriate to round up some of my thoughts for markets in Asia and what we could expect to see in 2007 and what we are likely to be focusing on in 2007.
ASEAN markets
I believe the ASEAN markets remains undervalued relative to other emerging markets, despite the fact that Indonesia, Vietnam and Philippines have been probably three of the top five best performing markets in Asia in 2006. However, I would not be focusing on the blue chip stocks in ASEAN as I believe they are not only expensive but are also over-owned. For larger funds to get exposure to these smaller markets, they tend to focus on the top few stocks, which mean average valuations for these stocks tend to be higher than what you would pay if you went for ‘second tier’ stocks. Given analyst resources in these markets (which tend to be a lot less than the larger markets in Asia), it’s not surprising that only the top quartile of the number of companies listed in these markets are covered, providing significant opportunity for those willing to do some deeper digging.
Despite the relative resilience of the fund to events in Thailand so far, we are a little wary of recent events in Thailand. It just goes to show even the more stable countries can ‘blow up’ in a short period of time, and I suppose that’s why risk premiums for these markets tend to be higher than more developed markets. For 2007, we will probably look to switch rather than continue to increase our exposure to both Thailand and Indonesia in order to reduce country risk for the portfolio. I believe there is more room to invest into Malaysia and Philippines and will be doing more digging there. We have already established some initial headway into Vietnam and will be sniffing around there in 2007. For the latter, I believe there is currently too much money chasing after a very small pie (the Vietnamese stock market) and that risk premiums are not being reflected if we compare the valuations being paid for in Vietnam versus the rest of ASEAN. Still there is no harm looking, but the better valued investments are probably private, and that will take a lot more work.
As for Thailand, after a series of mishaps (although unrelated - as far as I know anyway), investors are beginning to have doubts about Thailand as a laggard play (relative to rest of Asia, having been the worse performer now for almost two years running). I myself continue to believe the long term potentials of the Thai market, it’s just a shame that it’s been run by a small group of greedy, power hungry individuals (no names) with more interest in lining their own pockets than to further the development of the country. This issue unfortunately does not have a short term solution because the pro democracy advocates (generally Bangkokians), who are so keen to see everyone get their right to vote, also happens to be the ones who are most unhappy at seeing who gets voted in and will happily support a non democratic removal of such parties, for which the age old adage for Thai democracy still stands true, “The provinces votes into power a Prime Minister which Bangkok will inevitably kick out”.
Until more investment is put into education, this will not change and is also the fundamental issue that the Junta is facing in drafting a new constitution that will both satisfy Democracy advocates and those that want to see less corrupt politicians in power. The fact is that the previous constitution was perfectly workable except that it did not factor in the ability of someone who was rich enough to bypass its’ controls (in other words, it was not written with someone like Thaksin in mind). Consequently, the only other option is to appoint a Prime Minister and Cabinet, something which would not only make the Junta look no better than the previous government but would also probably cause some major dissent amongst the populous. On the other hand, if you polled voters even now, one of the more admired and desirable Prime Ministers from the past is probably still Anand Panyarachun, whom, as it happens, was an appointed Prime Minister. Damned if you do, damned if you don’t.
It will be interesting to see how the Junta will try to meander from promising full Democratic elections at the end of 2007 to promising a non (or perhaps less?) corrupt appointed Prime Minister and Cabinet. Although the current appointed Cabinet was actually quite well respected to start with, the recent misstep over Capital controls from the BOT (for which no one has yet resigned to take responsibility), the lack of activity (due mainly to the lack of experience in dealing with government matters from new appointees) and the rapid appointments of soldiers to boards and positions of power has somewhat toned down initial euphoria and support for the coup and the Junta. At any rate, further violence, disruptions and shuffles cannot be ruled out as both Junta and pro-Thaksin camps manoeuvre to negotiate a ‘settlement’, with both sides flexing their muscles to improve their leverage. In meantime, it’s probably not going to be too pretty for the Thai stock market.
Korea – Derating to continue?
Korea is another seemingly darling turned nightmare market for foreign investors with recent rulings over Lone Star’s Investment in Korea Exchange Bank (004940 KS) signaling potentially a more nationalistic and patriotic stance from the government. Foreigners have been exiting this market faster than you can say, well, Korea Exchange Bank. In fact, since the beginning of the year, foreign investors have net sold close to US$12bn worth of stock, the only stock market (in Asia) to see net outflow in 2006. Nevertheless, from my visits, Korean companies are, in my opinion, on the leading edge of manufacturing in Asia, and are difficult to ignore for pure absolute value. It’s just a shame that corporate governance and minority shareholder treatment is probably still one of the weakest in Asia. Still, I believe we will probably be doing a lot more work in Korea in 2007. I always find that the best value is quite often in places where investors are exiting (especially in a rush), not where they are heading to.
HK/China (and India) – Irrational exuberance?
As I had indicated from my previous memoirs, China and India are difficult markets to ignore given the enormous growth potential for both markets. In fact, our main gripe with China and Indian stocks are not the growth prospects but the valuations. In order to get exposure, we have to pay prices which will take 2-3 years to bring into reasonable levels, assuming current growth rate is sustained, something which is not only against the fund’s investment strategy but would also probably keep me awake at night. Still, that won’t keep us from digging, but don’t hold your breath.
Taiwan – Best Value in Asia?
Taiwan, at this juncture, given average PER valuations of 13x FY07 earnings against average EPS growth of 20% and dividend yield of 4.2% (vs 3.2% for Asia), is probably one of the best value markets in Asia. The only problem is that political risk for Taiwan remains high and a large proportion of the listed companies are technology related. Still, that’s not enough to put us off, and we’re probably going to be all over Taiwan in 2007.
I believe as we see a strong ASEAN growth story pan out, earnings momentum and revisions are likely to follow, together with more M&As, which should bode well for our portfolio, given our close to 87% exposure to the ASEAN market. However, 2007 will be a challenging year in my opinion and given where markets are now relative to 2006, it would not be a surprise to see a couple of repeats of May 2006 performances for Asian markets in 2007.
With close to 270 companies visited in 2006, we had great coverage over the past year and were able to unearth some real gems. Despite the strong performances in Asian markets so far, I continue to remain optimistic on our prospects for uncovering more under-researched gems as the rush for beta to play the momentum will leave a lot of ‘value’ stocks untouched, largely because liquidity is generally lower, market capitalization is smaller or purely because growth is not as sexy as the higher rate (but much more expensive) growth stocks.
I would like to leave you with a summary of our “stock recommendation sheet” (back by popular demand). I always like to think of the fund as an investment holding company, which incidentally, holds not only some of the most well known brands in Asia, but also globally. NTAsian provides an investor with unparalleled exposure to rising affluence and domestic consumption in Asia. At 9x FY07 and 7.8x FY08 earnings, NTAsian (NTASIAN KY Equity) is not only trading at close to a 40% discount to average Asian market PER valuations but is also growing close to 3-4x faster versus the Asian markets, in terms of EPS growth. You can’t find better value than that!
Another Global Warming Plug
With reports coming in now that China will probably exceed originally forecast emissions within half the time that was originally targeted (or potentially equal US emissions within the next 10 years), and that most countries, even those that signed the Kyoto Treaty, are unlikely to meet their emission targets, it is a constant reminder that there is a price to growth that is not purely monetary. For us, being on the frontier of investing in Asia, we feel strongly that we have a social responsibility to ensure that the companies we are investing in are fully compliant or working towards these goals and in 2007, will be working hard with our investments to meet these goals.
If you were one of our fund subscribers, you should have received the book, “An Inconvenient Truth” from us. We hope you enjoy it. It’s not totally accurate or scientific (after all, it’s authored by a politician!), but it’s an excellent introduction to one of the greatest problems that we are potentially facing as the human race. For those whose interests have been piqued and would like to learn more, I highly recommend “The Weather Makers: How Man Is Changing the Climate and What It Means for Life on Earth” by Tim Flannery. This is a little more technical but a superb book highlighting this issue and why this is a matter that will impact our generation. In the end, a point the author makes is most prescient, if you thought you had a disease which may or may not be fatal, but the doctor recommended you to take some medicine anyway as insurance, you probably wouldn’t think twice about doing something about it. Scientists may never fully be able to prove of the link between human caused emissions and global warming until it is too late, but why should we not take prudent steps now to avoid it, rather than finding out that they were right only when it is too late to do something about it.
Until next month. Happy New Year everyone!
posted by Kenneth | 2:06 PM
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