For this reason the US, following the UK example, has decided to recapitalize the banks, one of the tools the Japanese used back in the late 1990s, although their timing was a little off.
Times are changing, and, as with every major shift in economic leadership, as well as any major bottom in the markets, a new set of rules and ideas will gradually become the norm. The US will be a slightly different place after the crisis passes, with more “socialistic” characteristics than previously thought possible.
For those of you looking into buying US banks “on the cheap,” pay no attention to the dividends; under the new plan dividends paid to the US Treasury will have priority over the dividends paid to other preferred and common shareholders. Furthermore, Treasury won’t allow any increase in dividend payments beyond current levels, and many institutions may find it necessary to cut dividends further in order to protect their capital.
The eventual outcome of the current turmoil, provided a depression is avoided, will be that economic growth leadership will shift to the East. Long-term readers know that this is the main idea of this publication. The only difference is that what I thought would take years to materialize will now take place much more abruptly. One only wishes that China’s leaders are ready for such a responsibility.
It’s now clear that China will lead the world in the 21st century, helped along by its continental neighbor, India. On that front, it was encouraging to read what China’s Communist Party leadership had to say during the recently concluded third plenum of the 17th central committee meeting:
. “The country’s overall economic situation is good.”
. “The economy is growing quickly and the financial sector is operating steadily.”
. “The basic momentum of the country’s economy remains unchanged.”
China is concentrated in managing the growth of its own economy, dealing with domestic problems while making sure that its people, as well as the rest of the world, understand that the government has the will and the means to support growth and transformation during these dire times.
China will proceed as planned with its infrastructure projects aimed at boosting the economy’s capacity for domestically driven economic growth. The plan also calls for measures that will boost rural income, including, among other things, allowing farmers to use their land as they wish (buy, sell or borrow against), and spending on education and health care.
China may not be able to save the world, but it will be able to offer solid economic growth this year and next while the developed economies flirt with, at the very least, negative real economic growth.
Even so, the short term will most likely be bumpy. Not only China but the rest of the BRICs (Brazil, Russia and India, along with China the leaders of the transformation discussed above) are dealing with the economic slowdown and are trying to asses the damage it will cause to their domestic economies. But in the next five months the picture will be clearer, and these economies will be gearing for their next up cycle.
Bottom line: Don’t expect any major blowups in the main emerging economies (Eastern Europe remains the exception), and growth will remain at respectable levels next year. For Asia in particular, the 2 percent GDP growth of 1998 or the sub-5 percent rate of 2001 won’t be repeated this time around.
The Rally
The global markets are trying to stage a rally from extremely oversold levels. A rally could happen because there’s money on the sidelines looking for long exposure.
But for the rally to gain traction, market participants will need to see some kind of life in the credit markets. If this isn’t achieved, all metrics–whether fundamental or technical in nature–become obsolete, and the global economy will suffer a monumentally cathartic phase. In such a scenario all bets are off.
This isn’t my base-case scenario, though, and as things stand now a great opportunity to position your portfolios for long-term gains is upon us. Until proven otherwise, the big transformation in Asia and other emerging markets is still on track, as these countries are now focused on endogenous economic growth strategies.
Consequently, I recommend buying high-quality companies that have been punished disproportionately during the brutal market selloff.
The Fresh Money Buys list offers a guide to the countries I like now, in descending order. I favor the sectors in parentheses, and that also indicates my order of preference for companies listed in the Portfolio.
For instance, my favorite market right now is China, and my favorite company there is heavy machinery producer Lonking Holdings (Hong Kong: 3339, OTC: LONKF). Frontier markets Vietnam and Cambodia are at the bottom of the list, indicating that, although the long-term potential is there, their status as frontier markets means that a relatively small amount of your funds should be allocated there.
Cambodia-based Naga Corp (Hong Kong: 3918, OTC: NGCRF) merits special mention as it carries risk inherent in a truly emerging market.
It’s the only company investors can own in Cambodia, and given this country’s turbulent political past and the fact that it’s still in its early stages of economic development, you should be aware of the risks such an investment entails.
Naga remains the perfect way to get exposure to an exciting, pure emerging market opportunity in which the rewards can be substantial. See Silk, 5 March 2008, Holiday in Cambodia, for an in-depth discussion.
Naga’s advantage is that it focuses on middle-of-the-pack VIP gamblers, mainly from Malaysia, China, Singapore and Vietnam. Because Naga has spent far less than the other casino operators in Asia (i.e., Macau) in developing its property–prices are lower in Cambodia–it’s in a position to also offer more concessions to its VIP clientele.
The company’s hotel will also provide a steady revenue stream when it opens to the non-gambling tourist later this year. Its services and facilities are of international standards for a very reasonable USD120 per night. Naga has a major tax advantage, with an effective tax rate of around 3 percent, a far cry from what Macau operators are paying. Naga Corp remains a buy at current prices.
As always, I prefer the local shares–when we can get them–to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US, I strongly recommend buying the stock locally.
Finally, try and use the hedges (see the Permanent Hedges section of the Portfolio) for a more balanced portfolio.
Alternative Holdings
As I mentioned last week, the Alternative Holdings section of the Portfolio will be changing. The reorganization is comes in response to reader requests that I offer exchange traded fund (ETF) recommendations for those who want to avoid buying individual stocks. Fewer stock picks will be offered in that section, while the Long-Term Holdings section will expand.
Stocks in the Alternative Holdings section will now be higher-beta and more speculative in nature. For that reason, I recommend selling Henderson Land (Hong Kong: 12, OTC: HLDCY), LUKOIL (OTC: LUKOY), Sinopec (Hong Kong: 386, NYSE: SNP), and Vimpel-Communications (NYSE: VIP). Some of these companies may find their way into the Long-Term Holdings later on.
The remaining two Alternative Holdings, Alibaba.com (Hong Kong: 1688, OTC: ALBCF), and Melco PBL Entertainment (NSDQ: MPEL), are the speculative plays. They’ve both collapsed since recommended here, but at current levels they offer good potential upside. Neither should be part of your core holdings. I’ll keep track of them from current levels and periodically offer my outlook and advice on them.
The ETFs I’m adding this week are: iShares MSCI Hong Kong Index Fund (NYSE: EWH), which offers a 5 percent dividend yield; iShares MSCI Singapore Index Fund (NYSE: EWS), with a 7 percent dividend yield; iShares MSCI Japan Index (NYSE: EWJ), offering 2 percent yield; and Market Vector Russia ETF Trust (NYSE: RSX).
Vietnam is already represented in the Long-Term Holdings with London-traded DB X-Trackers FTSE Vietnam ETF (London: XFVT). This is the best way to gain comprehensive exposure to the Vietnamese market because it’s next to impossible for individual investors to own stocks there.
In buying these funds, match them to the Fresh Money Buys list in order to have a comprehensive exposure to the markets I like now.
Fresh Money Buys
The investment process is constant. If you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.
. China (machinery, Consumer, Banks, coal, port, e-commerce)
. Hong Kong (real estate, banking)
. Russia (energy, telecommunications)
. India (pharmaceuticals)
. Japan (banking)
. Philippines (telecommunications)
. Taiwan (ETF)
. Singapore (banking, telecommunications, industrial)
. Vietnam (ETF)
. Cambodia (casino/hotels)
. Macau (casino/hotels)
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