Friday, September 17, 2010

Meanwhile in Asia

One big industry event that has been on recently is the CLSA Conference which some of TMM have had the chance to attend. The sheer number of meetings and events is somewhat mind-boggling, so we are going to have to stick to the highlights at this point in time:

  • Simon Schama gave a pretty compelling speech on the political risks to the global economy now. As some of the more ursine variety have noted, Act 1 of recovery: stimulus, capital injections to banks etc has been pretty successful. Its Act 2: don’t get hung drawn and quartered by the masses or have them take out their fury on others that is tricky.
  • Everyone seems incredibly bulled up about anything that isn’t China, India, Australia (i.e. - the obvious carry and commodities stuff). Mongolia is about to start producing insane amounts of copper and coal and in the event it taps the market for sovereign debt looks like pretty compelling yield pickup. The Central Asian Sovereign market has previously had some horror stories (Kazakhstan) but TMM is of the view that a bird in the hand is worth two in the bush and Mongolia seems to be executing on its mining projects than Kazakhstan is at getting all that oil out of the Caspian. But TMM is sure that, eventually, those EM punters falling over themselves to buy those bonds will get Genghis Khan-ed (sorry, we couldn't resist). Robert “Toxic Bob” Friedland of Ivanhoe Mines gave a typically colorful presentation and is of the opinion that “it’s a good time to buy a house – if you build it out of copper bricks”. What does he mine again? Ah yes, copper. Nonetheless, his description if Chiquicamata and other mature Chilean mines as “a little old lady in bed, waiting to die” is geologically pretty accurate if in his characteristic bad taste.
  • Dragon Capital’s Dominic Scriven gave a good talk on all things Vietnam, though why one should invest with them is less clear. After explaining how half the banking sector was being forced to consolidate and raise capital and faced more equity dilution one member of the audience asked why their holdings of banks was so high. Indeed, why?
  • One standout presentation was from the head of the Central Bank of Sri Lanka, Ajith Nivard Cabraal. With a civil war behind them and a fairly credible inflation-targeting regime in place as well as sensible infrastructure spending Sri Lanka might not be a bad place to invest – had everyone else not found it already. The performance of the Colombo index screams one thing: early EM market with great fundamentals but way too much in the way of portfolio flows and not enough FDI. Beware the lessons of Vietnam and others: get some more private companies to be publicly listed or start thinking capital controls and real FDI incentives. Nonetheless, one country to watch.
  • Michael Komesaroff of Urandaline Investment expounded on many of his favorite topics (Western China infrastructure spend – buy copper! Buy metallurgical coal!), but one thing that did catch TMM’s ear was his description of zinc and lead as “both dogs of a metal”. Coming from a natural commodities bull that is worth pondering. Some of TMM have been doing some work on Lead and the picture isn’t great – as soon as your average Chinese punter moves from lead acid batteries for his e-bike to lithium it's absolutely game over. The key hurdle here is that despite higher upfront costs lead acid is worse at a 10% IRR. If lithium drops 50% over the next 5 years as Gerbrand Ceder at MIT said in his presentation, that number moves to 30% odd. At that level TMM would happily leave the speculating business and move into making small auto loans.
  • Marc Faber – the one and only – well, not much has changed here. Buy EM, buy gold, forget Japan and the US. Marc figures there is war on the horizon though between the US and China at some point and with the noise coming from the political peanut gallery that is US Congress it isn’t hard to imagine.
Meanwhile, judging by the recent price action in the USD & Equities, punters are desperately trying to identify "the trend" for Q4 that will rescue their years. TMM is interested to hear what their readers think "the trend" will be...

8 comments:

Charles Butler said...

With apologies to your partner, Polemic, long EUR/USD.

Although American crisis policy might around like a dog with two dicks, the one matter they are unequivocal about is protectionism - albeit on a guerrilla warfare scale. Bad choice on at least two counts...

Lots of surplus industrial capacity elsewhere.

Deleveraging makes it hard to imagine internal US demand picking up the resultant trade slack. A de facto long America bet when the trend lies elsewhere.

Nic said...

I think TMM's round two euro-shock is just beginning.

Jeffrey D. Benson said...

Equities fall from grace, driven by another dip in consumption after stimuli wears off. Clash for clunkers pulled demand forward, the housing tax credit pulled demand forward, maybe the end of the economic experiment indicates that fiscal stimulus only pulls demand forward leaving a hang over to write home about.

Nic said...

The price action this quad witching feels like the one in June. A few weeks back and fill might me on the cards.

FX said...

TMM,not many strides left before we notice if they feel like the Leobowski in the room or not.....

http://www.youtube.com/watch?v=xqqIUxZTdVc&feature=player
_embedded

giangle said...

"Dragon Capital.... why their holding of banks was so high?"

Possibly they hold the other half of the banking sector. In fact the "elite banks" in Vietnam have been enjoying privileges for years. Consider this: the governor of the central bank convened top 4 banks in 2008, at the height of inflation breaking out, to consult the interest rate level the CB would set. Or last year, as part of the stimulus package the government gave 2% interest rate subsidy to bank loans, which of course kept credit expansion whereas the final demand was falling. You have TBTF in the West, but too-connected-to-fail in Vietnam, and it's easy to identify who has the connections.

Nemo Incognito said...

Giangle we are well aware of TMGTF (too much Guanxi to fail) but the question is why hold a heavy weighting in a bunch of banks which are undercapitalized and are facing a big equity call sometime soon: regardless of how you cut it there are going to be some shotgun weddings and very dilutive equity raises happening soon, no point in catching a falling knife here - or are we missing something?

FWIW Net interest margins at these banks are great now, but that is partially due to the government issuing local bonds to banks for tenor and then lending to them at 3% less. Its hard to not build your equity up playing a game like that, its much like the US in late 08 / early 09.

Old Trader said...

Nemo,

I've not liked banks for quite some time. While it may have cost me a bit, in terms of short term trading profits, I'm not seeing anything that warrants a shift in my perspective.