GREETINGS FROM SINGAPORE!
A number of people have emailed me regarding the following quote I made in last week’s FOXHALL GLOBAL OUTLOOK:
“I believe there will be a significant rally in Asian and emerging markets over the next month and at that time FOXHALL CAPITAL will determine whether to decrease our already reduced holdings in Asian and emerging markets based on the expected U.S. slowdown.”
A number of people asked if this quote means we are selling out of our Asian holdings.
ASIAN SECTOR INVESTMENT SHIFT
The answer is if there is a downturn in exports to the U.S., because of a recession in the United States, WE DO WANT TO REDUCE OUR ASIAN HOLDINGS in broad ETF index funds that largely represent export manufacturing companies.
However, because we believe Asia will still be the fastest growing economy in the world, (but not as much in their export manufacturing sectors) we are shifting our Asian investment focus to the area everyone here in Asia agrees will continue to boom despite a U.S. slowdown or recession. That sector is “basic materials” and “commodities” like steel, copper, oil, gold and other precious metals.
HERE IS MY REASONING FOR THIS ASIAN INVESTMENT SHIFT:
Last week and Monday, we saw a huge drop in almost all Asian markets. Some were down over 20%.
During the final days of last week, the Asian markets have rallied back strongly as I predicted. Largely the Asian markets fell because of worries about the sub-prime banking crisis in the U.S. and the health of the U.S. economy. Now that they have seen the Federal Reserve rate cut and the economic stimulus package approved by congress they are feeling better and the markets are starting to rally back. I also believe they will rally even further if the Federal Reserve cuts rates again, as is expected, at the end of this week.
Many local Asian market analysts and journalists that I have been meeting with over the past few weeks, still believe a slow-down in America will not affect them.
I DISAGREE FOR THE FOLLOWING REASONS:
The Asian and developing economies—where 85% of the world's population lives—are maturing and are far less fragile than they were a decade ago. But they still are not strong enough to escape the pain of a slowdown in the US or self-sufficient enough to sustain global growth on their own.
Those realities were underscored last week, as Asian stock markets dropped precipitously amid fears of a global recession. Hong Kong's HANG SENG INDEX suffered its biggest point decline ever last Tuesday.
Many emerging markets are reliant on exports to rich countries. And while local sources f economic growth, including consumer spending, have taken root in China and elsewhere, they aren't enough to keep developing countries from slowing if their exports to the US and Europe start to significantly recede.
Economists have been debating for years whether the developing world is robust enough to move ahead should the enormous U.S. economy soften. Their theory is called “decoupling."
ASIAN MANUFACTURING WILL SLOW IN A U.S. DOWNTURN
Unfortunately, in my view, no country can decouple completely from the U.S. and Europe. The question is the impact.
American consumers carry much more weight over the world economy's fate than do their counterparts in the big emerging markets: The U.S. spent about $9.5 trillion last year—nearly six times as much as Chinese and Indian consumers between them, according to Morgan Stanley Asia.
The U.S., after all, accounts for 22.5% of the world economy, according to the latest World Bank estimates. Japan, along with Germany, France, Italy, Spain and the United Kingdom, account for an additional 23.6%.
ASIAN RESOURCE SPENDING WILL INCREASE IN NEXT TWO YEARS!
I want to be very clear here that I am not saying that Asia and emerging markets are headed for disaster.
China, by far the largest emerging economy, is still on track to grow strongly in 2008. According to the WALL STREET JOURNAL (1/24/2008), “that could keep commodity prices from collapsing—despite the latest fears of a correction. Chinese commodity demand, in turn, should help sustain resource-rich countries in Latin America, Africa and Southeast Asia. Economists at Anglo-Australian mining giant Rio Tinto predict that commodity prices will remain at historically high levels for a long time to come because of China, which accounted for between 60% and 90% of the increase in world demand for steel, aluminum and copper between 2000 and 2006.”
The WALL STREET JOURNAL also pointed out that, “emerging-market spending on infrastructure also is likely to continue. China's latest five-year plan calls for more than $100 billion in railway construction, including a $22 billion Beijing-to-Shanghai high- speed railway. Russia, India and oil-rich Middle Eastern countries are nearly as ambitious.”
Because of the trade surpluses of many of these countries they currently hold enough US dollars in savings to complete all these infrastructure programs and more. These big infrastructure projects also provide a lot of public works jobs for their economies to soften the blow of export related job cuts.
The bottom line is, even though Asian and emerging markets will come through this, they are not immune if demand for imports falters in the U.S. and Europe and fails to revive in Japan.
Many emerging markets depend more than ever on exports. In Asia excluding Japan, exports were the equivalent of about 55% of gross domestic product in 2007, compared with slightly less than 40% in the recessionary year of 2001, according to Lehman Brothers. "The set of countries that is trying to grow on exports is still quite large, and they're not all going to be able to," says Simon Johnson, chief economist at the International Monetary Fund.
Taiwan, Singapore and South Korea are particularly exposed to U.S. consumers, because they are major suppliers of semiconductors and high-tech goods Americans snap up. Singapore's economy contracted for the first time in four years during the fourth quarter of 2007, largely because of slowing exports.
ASIAN STOCK MARKET DECLINES RIGHT NOW ARE “SYMPATHY SELLING.”
There were a number of reasons why the Asian markets went down over the past few weeks, but most of it was what is called here, “Sympathy Selling.” That means a lot of people in Asia sold just because everyone in the US was selling. As is often said, big institutional investors tend to run with the herds.
Once the Federal Reserve and U.S. politicians started to stabilize losses in the US, the Asian markets have rallied back strongly. However, I believe that over the next few months analysts will be working day and night to see how a U.S., Japan and European slow down will affect markets in each Asian country.
I have been worried about, and have been studying, export figures from Asia to the U.S.,
Japan and Europe for months now and I believe it will slow down most Asian markets. Also because many Asian stock markets especially in China, are well over-valued, in my opinion, if there is a major correction in the future, it could be a big one.
FOXHALL CAPITAL will not be completely exiting Asia and emerging markets, but we may be shifting some exposure away from broad Asian Index funds in favor of many commodity funds like steel, oil, gold, and other commodities that will be used by Asian countries in their infrastructure spending over the next three years. That way we will be investing in those parts of Asia that are expanding and trying to insulate our client’s portfolios from those sectors of the Asian economies that I feel will drop over the next year or two.
FOXHALL CAPITAL’S DEFENSIVE STRATEGY
The key to FOXHALL CAPITAL’S successful global investment strategy is to focus investing on those sectors and regions that are going up, (our FOXHALL OFFENSIVE STRATEGY) and to sell out of declining regions or sectors (our FOXHALL DEFENSIVE STRATEGY) and replace them with defensive investments like bonds, money market funds, dividend paying utilities, and hard asset commodities that all tend to do well, over the long-run during stock market slowdowns and recessions.
We are currently in one of those economic transition periods between a global bull market and one that may be changing to a global bear market. This is a time for caution and for being very conservative in the management of our client’s portfolios. We take our risk management responsibilities very seriously. However, our goal is to try to make money for our clients whether we are in a bull market or a bear market. I am very optimistic we will continue to do this in 2008.
Please be on the lookout for my special edition commentary on SOUTH KOREA RISING.
直到下個星期 (Until next week…)