Archive for category Strategy
Japanese Yen – Is It Finally Giving Up Its Strength Or Is It Just The Return Of The Carry Trade?
Posted by jeffreyyap in Economics, Japan, Money, Strategy on February 3, 2013
The fall in Japanese Yen for the past 3 months has caught many people by surprise and with its magnitude of fall (-15% against major global currencies) is it undoubtedly one of the best/worst performing investment assets for many people in the same period. Why is it falling the way it did? Is it because the world’s economy is picking up again? Is it because risk appetite is back again? Is it investors selling yen because they think its over-value? Is it the return of the carry trade? All these reasons might explain the fall in Japanese yen we have seen recently. But then again from 2003 to 2007 when the global economy was ragging and risk assets globally appreciated in value, the Japanese yen actually held its value against major currencies. So what could be different now? Despite the fall in the value of the Japanese yen in the past 3 months, the currency is still 25% stronger against USD, 10% stronger against EUR and almost 35% stronger against KRW in the past decade and that is the root of the cost. The carry trade is a result and not the cause if you like deeper. One would get similar cheap funding monies from EUR/USD/HKD/SGD/CHF etc
The strong yen in the past 10 years has caused a huge imbalance for Japanese corporations causing their competitiveness to fall against global peers. We have seen the rise of German automakers, Korean electronics and European consumer care companies in the expense of Japanese counterparts during this period. The strength of the yen has also discourage Japanese companies’ investments overseas in favor of a more domestic strategies during this period. With this strategy in mind, Japanese companies and financial institutions have in the pass decade favor a “long” yen position naturally.
With burst of the US subprime bubble and the European Sovereign Debt Crisis, the global imbalances have started to correct itself and with the natural force of nature and economics this would reverse the strength of yen we have seen in recent times. I would expect yen would at least need to fall by the magnitude it has risen against USD, EUR and KRW over the next few years for its products to be competitive against in the global landscape. At the same time it would encourage financial institutions in Japan to expand their business overseas and lend a higher proportion of their money outside Japan as well. Therefore, eventhough the yen has fallen 15% recently…it might have a long way to go if one is to take a longer term view..
The Trends And Shape Of The World’s Economic And Financial Markets in 2013…Part 3 –10 biggest events and industry trends
Posted by jeffreyyap in China, Economics, Equity Market, Fixed Income Market, Global, Hong Kong, Money, Strategy, United States, Words of Wisdom, World on January 8, 2013
This is the 3rd and final part of my overview of the trends and shape of this year’s global economy and financial markets. The 10 biggest investment trends that are likely to be feature and standout in 2013 are as follows:
1. China will become more global and powerful than before
2. The world would start to re-focus on emerging markets but frontier markets will be the most talk about
3. In 2012 it all about global government debt and currency but in 2013 country, sector and company picks would be back in vogue
4. Equities will see more inflows than bonds in the 2nd half of 2013
5. Commodities prices will rise, talk of global inflation will be back and so will the speculation of end of quantitative easing
6. Geo-political risk will pick up led by domestic dissatisfaction with income gap and low growth
7. The talk of hard landing in China and fallout of Europe fails to happen
8. Investors and corporates start to gear-up again
9. Technological advancement will be key driver of productivity instead of cost management
10. The new era of tech bubble will start to build as cheap money chase innovations/dreams and hopes
Before i moved into the long waited sectoral views for those that miss the Part 1 and 2 earlier on you can review it with the links below
Given what has been said thus far, we are in a new era of which Mohamed El-Erian says a new normal. In his context he refers to the global economy from financial and political perspective. I look at it more from a microscopic level, what would it mean to our day-to-day life and it is the day-to-day activities of the seven billion people in the world which will shape the world’s economy.
Some of you have probably read this week, many countries in the world faced one of the worst winter in many decades and as i said in part 1 of this analysis extreme weather is something we should all start to get use to. As a result of extreme weathers, urbanisation will speed up even more and as a result create more demand for urban homes. What would be implications? This would leave fewer people farming for crops for example.In a similar deduction, cities with moderate weather such as Hong Kong, Sydney, and Singapore will attract more affluent professionals and businessmen to house their families.
The industrial sectors which will see most technological advancement this year would be robotics, green energy and online commercialisation. There are many successful stories in 2012 on retail automations. This was helped partly by the growth in smart phone usage and mobile technology. I am sure many of us have noticed the use of Iphone in order taking in restaurants, Ipad usage for browsing of products in shops etc. The year of 2013 is the year of robotics with rising cost of labour and shrinking pool of cheap labour. Robotics is the way forward to maintain or increase productivity globally. On green energy, given the extreme weather and governments pressure to contain inflation and pollution with rising population green energy has to be the sector of focus for most large nations. Cost of production came down substantilly in recent years and the commercial viability is slowly becoming reality. Online commercialisation is another key theme this year. In 2013 we will see more people purchasing songs (not CDs) tv series (not DVDs) clothing (not shops), services (not in person). Have you used online personal trainers and dieticians? Is it coming our way big time. Consider this; will you learn to play golf from Tiger Woods and soccer from Lionel Messi online if they were available? Answer would be yes no matter how impersonal it may be. This wall of awkwardness is coming down EVERYWHERE.
Sectors which i like in terms of investment this year are as follows:
1. Retail Sector – Companies with mega brands with huge brand value as Porter’s five forces are less prominent these days. Companies using technology to reach global consumers with rising income in an aging population. Look at most of the countries where there is aging population which sector continue to flourish? Retail!
2. Green energy - solar, wind and water will prove to be winning sectors with potential rising crude oil price and technological advancement and governments backing globally to support this sector in 2013
3. Property - I am not a big fan of developers. Nevertheless, given the whole world is getting more centralized than before – seen the rise in density in global cities lately?? I like companies with good portfolio of investment properties as consumption growth and rising replacement cost would make these companies attractive. Look for those with huge landbank and solid properties in prime location
4. Healthcare – In here i am talking about pharmaceutical industry which produces drugs, vaccines, supplements for this growing aging global population. I am talking about companies that make technological breakthrough in terms of medical machinery Have you seen doctors and nurses in hospitals holding the latest IPhone and Samsung Galaxy but hospitals still running on old medical equipments?
5. Banks – As the number of players shrunk the survivors post Lehman with global franchise will do good in this less borderless world. I am talking about those facilitating cross border financing and investment business not propriety trading here..
6. Services - Education, Social Network, Nursing and Retirement homes are some of the services which will see an increase in importance. Everyone would want their child to go Harvard, MT, Oxford or Cambridge. Everyone would want feel connected through Facebook, Twitter or LinkedIn. Everyone would hope their retirement home is like staying in Fourseasons or Mandarin. If anyone can achieve that kind of stigma or following the world its their oyster.
The Trends And Shape Of The World’s Economic And Financial Markets in 2013…Part 2
Posted by jeffreyyap in China, Economics, Equity Market, Fixed Income Market, Global, Hong Kong, Money, Strategy on January 3, 2013
The financials market got off to a great start in 2013 as expected. Please refer the articles i have written in the past 3 months calling for this
Risk Asset Cooled ahead of Hurricane Sandy? Opportunity to buy for 2013!
China PMI rose above 50 – signs of sustained recovery to come?
Divergence In China Related Equities Recently – How To Read Into It?
The financial markets are likely to see a very strong year as equity risk premium for major economies such as EU, Japan, China, Hong Kong, South Korea are all over 10%. The fall in risk free rate plus the major compression of credit spread in 2012 has made equity markets one of the cheapest asset class out there. The other 2 asset class which could also perform well would be convertible bonds and high yield bonds as global default rate continue to fall on the back of quantitative easing.
Furthermore, in 2013 we are likely to see a repeat of 2003 and 1993 of which in 2003 the money that came out of the Nasdaq bubble fueled global risk assets including US subprime and asset backed markets which burst in 2007 . In 1993, the money that came out of post Japan bubble also fueled the markets in Asia ex Japan which resulted in the 1997 Asian Financial Crisis later on. I believe we are seeing a repeat here as globally central banks has embarked on massive quantitative easing and this year onwards the money is going to flow out of government bonds and money market funds to fueled risk assets especially those markets trading above historical risk premiums.
Stay tune for Part 3 of this article – as I analyze sectoral performance globally.
The Trends And Shape Of The World’s Economic And Financial Markets in 2013…Part 1
Posted by jeffreyyap in China, Economics, Equity Market, Fixed Income Market, Global, Money, Strategy, United States, Words of Wisdom on January 1, 2013
2012 marked a year of uncertainty from a global political and economic perspective led by China’s leadership changes, US and Japan Elections, US fiscal cliff, EU sovereign debt crisis and fear of China’s economic slowdown. Notwithstanding as well the Mayan’s end of the world prediction. In 2013 we will face a year with more normality than 2012. But how will the world look like?
Few things for sure, population will continue to grow led by the South Asia and the Sub Africa region while the mortality level continue to rise with growing aging population in the developed nations. Technological advancement will continue to drive our daily lives in 2013 with the advancement in mobile technology; more people will make internet part of their lives in areas such as social networking and online shopping. Income disparity will widen further unless we have a re-socialisation of current capitalism society (don’t see this happening just yet). Weather will get more extremes than ever and food prices will continue to rise with urbanisation and growing population. Water and arable land which have been basic necessities in the olden age of mankind will become more scare.
In terms of political situations, global governments are likely to work closer against the “new” common enemy of the internet. The threat of internet will tip preference towards social benefits against corporate capitalism. You will see more corporate backlash on top of the recent financials institutions bashing. Tensions among super power nations and regions will ease as they face more pressure internally and over the web over the issues which rose to prominence in the last decade.
Moving over to financial markets, on the back of the key developments highlighted above, key financial trends for the next few years would start to emerge in 2013. For details of my forecasts and predictions of key financial markets for 2013, please lookout for the second part of this 3 parts series.
2 months ago I made this call on Chinese Equity Markets and Currency – Equity markets defied the fall last night to rally to new highs this month…What about other indicators?
Posted by jeffreyyap in China, Fixed Income Market, Equity Market, Strategy, Offshore RMB, Money, Economics on December 25, 2012
2 months ago I made this call on Chinese Equity Markets and Currency. Since then the benchmark indices have rallied more than 10% to recoup all losses this year while the currency has hit a new 19 year high against USD
Divergence In China Related Equities Recently – How To Read Into It?
Posted by jeffreyyap in China, Economics, Equity Market, Hong Kong, Money, Strategy on November 27, 2012
Domestic Chinese A-shares fell to 4-year low today, however many Chinese equities or China related equities listed overseas are rising in value. This include H-shares in Hong Kong as well as China related shares in US, Japan, Hong Kong and Singapore. How do we read into it? In my recent conversations with onshore and offshore investors, there seems to be a reverse in terms of their outlook this time around. Domestic investors are less convince on the performance of the equity market going forward due to the fact for the pass 4 years China has registered above 30% in accumulated growth and property prices have doubled but we have seen flat performance in its equity markets. Foreign investors on the other hand are beginning to turn bullish on Chinese equities and its currency on the back of cheaper valuation on a global comparison. It is therefore a very smart move by investors to purchase Chinese companies and China related companies listed overseas. By the act itself, investors are buying cheap call option on the performance of Chinese equities and currency in the medium term.
Global Quantitative Easing On Full Speed – What Is It Doing To Our Money? Unorthodox View Here!
Posted by jeffreyyap in Economics, Global, Hong Kong, Money, Strategy, Words of Wisdom on November 24, 2012
Global major economies are implementing quantitative easing in a scale never seen before in human history, is it necessary? Is it because global growth is sub-par compare to the last 5 decades? I believe it’s partly due to global aging population and with aging population sub-par growth would be inevitable unless we have a huge jump in productivity.
The question is what does it do to our money? I had a colleague which came back from an art auction today in Hong Kong and he told me investors were grabbing up art pieces at prices significantly higher than 6 months ago. Furthermore, it was reported in the media recently, average car park prices in prime locations in Central Hong Kong have risen to HKD5,000,000 ($630,000!). Why is this happening when more than half the global economies such as Europe/US/Japan are barely growing? This is because quantitative easing reduces opportunity cost of capital which inversely appreciates anything which has finite supply such as paintings and car parks?
What should one do facing such a tsunami of easing? Don’t go against it is what I would advise (for now!). For those that followed me, this has always been my advice for the last 4 years post Lehman. There are morale hazards that come with quantitative easing and money printing and leveraging up but is more debt bad when the growth is likely to remain low due to global ageing population? If you work your math it is not. Just look at yourself right now, if a bank said to you, “you can have more money, but you only need to make the same repayment” would you say no? You probably would if you know your repayment will rise one day. What I am telling you now is the “repayment or cost of money” probably won’t be rising anytime soon but meanwhile your food, property, clothing, child education, university tuition fees, watches, handbags, cosmetics and even paintings and car parks will continue to rise……
The Final Frontier: Renminbi Hedging And Africa
Posted by jeffreyyap in China, Fixed Income Market, Strategy, Offshore RMB, Money on November 20, 2012
RMB has great opportunities for much bigger role in the trade flow between Africa and Greater China region. Please see my comments in Asia Risk
“Despite this uptick in interest in renminbi, trade and investment in Africa is still dominated by the US dollar: much of the Africa-China trade is resource based and therefore traded in the greenback. And despite the apparent existence of exotic currency crosses such as between the Zambian kwacha and RMB most are structured with the dollar as a go-between currency, according to Jeffrey Yap, managing director of fixed income trading Asia at Mizuho Securities”
For Full article please click
http://www.risk.net/asia-risk/feature/2225814/the-final-frontier-renminbi-hedging-and-africa
Hong Kong’s Latest Economic Indicators – What Does It Tell Us? – Part 2
Posted by jeffreyyap in China, Fixed Income Market, Equity Market, Strategy, Offshore RMB, Words of Wisdom, Hong Kong, Money on November 18, 2012
The current disparities between growth (+1.3%), deposit rates (zero!), inflation (5%) and property prices (20%) in Hong Kong its like watching a race between a hamster, tortoise, horse and cheetah! As mentioned in part 1 of this topic, the reason why there is inflation and upward pressure in monetary value of certain services and assets in Hong Kong is largely due to the demand from external factors. Similar to my analogy of Hong Kong resembling a shopping mall, most of the key products and services are targeted at serving/providing to foreigners (in a good way) The 3 key areas of growth for Hong Kong in this decade comes from the financial, property and luxury consumer sector which is largely targeted at foreigners (foreigner buying up luxury apartments, foreign companies raising IPO, foreign tourist buying up luxury products etc.)
Ok then you must be thinking what is different this time compare to 10 years ago? It is the HKD peg. Chinese Yuan and other Asian currencies have appreciated over 20% against HKD in the past 5 years and this trend is likely to continue with the quantitative easing in the west. The HKMA and Financial Secretary have denied the peg has brought about inflation? Look at 10 years Hong Kong Government Bond Yields 0.46%?! This is largely due to inflow of money and the result of increase in monetary base from defending the peg. 10 yrs yield at 0.46 while inflation is 10x of that??
Why are they in denial?They are just afraid to say it because given how well the peg has served Hong Kong, no one is going to change the peg, be it someone in HKMA, government or even the PBOC and the Chinese Government. One must also know this the HKD peg served as a good indicator for China on liquidity flow so why remove that….But something has to be done if we were to see a fairer race among the people in Hong Kong than the one we currently have. The peg can stay but for the sake of Hong Kong people who is reading, you should take your money out of the bank and move it into RMB, buy some equities or fixed income investments and last YOU mustn’t sell your property. If you don’t own a property in Hong Kong means you are short and the peg will kill you…If one decide not to do anything of such, they better make sure he/she gets a work in this mall or else you would be poorer even though the country continues to prosper….
Hong Kong’s Latest Economic Indicators – What Does It Tell Us? – Part 1
Posted by jeffreyyap in China, Hong Kong, Money, Strategy, Words of Wisdom on November 17, 2012
Hong Kong announced on Friday its Gross Domestic Product grew 1.3% year-on-year in the third quarter, similar to the 1.2% growth seen in the second quarter. The data also unveiled the underlying consumer price inflation stands at 4% in the third quarter. Residential Flat prices from June to September rose by over 6% (in just 3 months!).
These data must look rather bizarre for general public as well as economists and financial professionals. Here is another observation, China Daily reported this “Hong Kong‘s Causeway Bay has dethroned New York‘s Fifth Avenue as the world‘s most expensive retail area, as luxury brands retailers such as Burberry, Salvatore Ferragamo and Gucci compete for limited prime space in the city to court big spenders, particularly mainland tourists.
The average annual rent at Causeway Bay, the prime retail district on Hong Kong Island, surged 34.9 percent to $2,630 per square foot at the end of June from a year ago, beating the $2,500 price tag of Fifth Avenue in New York‘s Manhattan district, which has occupied the top spot for 11 consecutive years, according to estimates by commercial real estate consultant Cushman & Wakefield Inc.”
So why is this happening? This is because the economy has become more dependent on China and Global Spending (just imagine Hong Kong as a large Shopping Mall) hence even though growth been rather weak, inflation continue to rise especially in areas which supply goods and services to this large global shopping mall. In this shopping mall, you have bankers that provide credits, salesperson to serve customers, lawyers to document/advise the process and doctors to cure those that gotten sick while shopping,
This is the state of the Hong Kong’s economy. It is debateable whether it is good or bad but one thing is for such we need a good mall management team (the government!) to guide the people of Hong Kong to equip themselves to work in this mall. No shopping mall survive without makeover and enhancement and quality control. It is time for the government to start working on these or else it would turn into an unloved mall with little patrons just like those malls in Hong Kong which none of us patronise anymore…
PBOC Zhou And Commerce Minister Chen Absence From The China’s Central Committee List – What Would Be The Implications?
Posted by jeffreyyap in China, Fixed Income Market, Strategy, Offshore RMB, Money on November 14, 2012
Interesting day with China political party announcing the new list of 205 members today on China state television after the party’s 18th Congress in Beijing, where a once-a-decade leadership change is taking place. The most relevant changes were PBOC Zhou and Commerce Minister Chen was absence from the central committee list which means Zhou will retire from PBOC and Chen from his post as Minister of Commerce. This is inline with what I have heard from onshore sources months back on the dissatisfaction of the recent policies adopted by the Ministry of Commerce and PBOC especially in preferring a weaker currency while draining liquidity from the system via RRR hikes. CNH and CNY appreciated to a 19th years high for the 5th day in a roll on the back of stronger official fixing today. With the absence of these old guards, we can expect further strengthening of the currency against global majors in the effort of promoting domestic demand and increase per capita income. We look forward to the new leaders to promote consumer and domestic credit growth which means further credit easing and capital market formation is likely. The offshore RMB market would be one major beneficiaries of this as well. Stay tune for further updates…
Signs Of Demand Coming Back to China?
Posted by jeffreyyap in China, Hong Kong, Money, Strategy on November 10, 2012
Yesterday as I walked around Central, Hong Kong i got a sense that retail purchases by Chinese shoppers have started to picked up. There were various groups of tourist with bags full of luxury items purchased from shops such as Burberry, Prada, Chanel etc. This was not the case for the past six months. I gathered in recent months from friends and colleagues who have travelled globally for work, holiday and honeymoon! the sense is Chinese shoppers are travelling further away from China to shop. That would mean less shoppers are likely to flock to Hong Kong for their shopping spree. However, given my observation yesterday, I believe the Chinese demand has started to picked up in Mainland China, abroad as well as Hong Kong.
China To Speed Up Interest Rate Liberalization – Why Is It Needed And What Would Be The Impact?
Posted by jeffreyyap in China, Fixed Income Market, Equity Market, Strategy, Offshore RMB, Money on November 8, 2012
China plans to move toward full liberalization of interest rates, but hasn’t outlined a specific timetable for the reform. PBOC’s Zhou echoed the Chinese leader’s wish during the first day of the 18th National Congress of the Communist Party of China (CPC) which would last for a week. In President Hu’s speech, he emphasis on market developments, increasing domestic demand and improving people of China’s wellbeing by targeting a doubling of per capita income by 2020. I have no doubt the doubling of per capita income would be achievable but the quality of the income may vary significantly. I support PBOC Zhou’s push for interest rate liberalization because this step is needed to ensure a proper formation of the second phase of China’s monetary system to ensure capital are allocated efficiently to the hands of people and companies that produces the most economic and social benefits to the people of China. Even though I am not from China (but ethnic Chinese by birth!), I would be ecstatic to see this happening. Could you imagine the multiplier effect on mankind would be with 1.3bil people having the ability to contribute effectively to the world or at least able to improve the quality of their own lives? However, what would be the impact of such liberalization? It would mean further opening up of the banking and capital markets to global institutions, doing business based on market clearing levels and allow capital to flow to the highest risk adjusted return investments. However, Chinese financial institutions would need to innovate fast and moving up the knowledge chain at lightning speed to assist and be part of such liberalization. I witnessed the road to 1997 Asian Financial Crisis and my advise to Chinese leaders today is to ensure great governance over such liberalization. Liberalization is good if not great but only if it is done properly.
China PMI rose above 50 – signs of sustained recovery to come?
Posted by jeffreyyap in China, Equity Market, Fixed Income Market, Strategy on November 1, 2012
China PMI rose as expected. This did not come as a surprise as indicators such as retail spending, freight volume, overtime etc has been on the rise recently. What is extremely encouraging was the reading was strong despite the general slowness in October with long holidays and leadership transition in the horizon. I am certain further picked up in economic activities and growth in months and quarters are very likely and the recovery seems broad-based too. Some critics who are unfamiliar with the developments in China might point to the lacklustre lending numbers but if one was to add the growth in debt issuance (which are typically long-term financing) the total pick up in financing activities have actually picked up in pace and in strength. I would suggest readers to position for beaten down sectors (credit and equity included) to have a good rally in the next 3 months. In debt, Chinese Property, Auto Sector, Cement, Retail while in equity, Property, Auto, Retail, Construction, Healthcare, Logistics, Brokerage would be my obvious sectors picks.
PBOC’s Record Reverse Repo Operation – what does it mean?
Posted by jeffreyyap in China, Fixed Income Market, Strategy, Offshore RMB on October 30, 2012
PBOC injected 395billion yuan today the highest number on record. 7-day repo rate plunges 123bps to 3.09% the largest drop since Jan 19. I believe many economist that called for RRR cut has been disappointed this year as PBOC and Chinese Government wants to control excess lending in unproductive economy and the move to inject liquidity instead of RRR cut is a sign that the authorities will start to move to boos the economy through other methods. I would expect tax cuts etc to come soon…
Risk Asset Cooled ahead of Hurricane Sandy? Opportunity to buy for 2013!
Posted by jeffreyyap in China, Equity Market, Fixed Income Market, Strategy on October 29, 2012
Running up to the US election and Chinese leadership change and now Hurricane Sandy, risk assets have pulled back last few days. I believe this week would be the best time to add risk assets to your portolio if you have miss the boat earlier. Global inflation have started to pick up and fund flows have move out of money market funds in search of yields and returns as US and China economic data points to further recovery. Right now many global investors has parked cash in low yielding fixed income instruments such as government bonds. Once global economy picks up slighlty and QE being withdrew from the system money will chase for higher return assets and given low valuation in the equity and credit space, we will see a long and sustain run up in the Risk assets in 2013.
Rising onshore yields to impact offshore RMB yields?
Posted by jeffreyyap in China, Fixed Income Market, Strategy, Offshore RMB on October 28, 2012
The Export-Import Bank of China (China Exim Bank) sold 10 billion yuan worth of 1-year policy bank notes at a yield of 3.35 percent and 12 billion yuan worth of 3-year ones at annual yield of 3.80 percent on Friday. Eximbank of China sold 1yr and 3yrs domestic debt at 35bps and 65bps higher yields than existing offshore yields. The average difference for the last 6 months has been in the region of 40bps for 3yrs debt. Is this a sign that some policy banks will take adavatage of the yield difference to tap the offshore market? You bet. Furthermore Citic Bank sold 2yrs debt at 3.75% on Friday, the highest coupon ever paid by a Chinese Bank in recent times.
Equity markets defied the fall last night to rally to new highs this month…What about other indicators?
Posted by jeffreyyap in China, Equity Market, Strategy on October 25, 2012
Credit markets shown the similar decoupling vs Europe and US with Itraxx Asia narrowing 5bps today. DXY up, AUDJPY up, SGDJPY up despite the fall in EUR. Fund flows data tomorrow is likely going to point to further fund flows to Asia from western develop markets. This is the common given money will raise for the highest potential return in an improving global backdrop. I would bet on a stronger CNH/CNY and Chinese Equity markets next 9 months.
