Keep Your Powder Dry
That’s why I recommend selling ABB (Swiss: ABBN, NYSE: ABB). The stock has contributed positively to Silk’s Portfolio returns; we’re up around 30 percent, but there are three reasons to sell it.
First, infrastructure has become a crowded trade. Because we hold several stocks exposed to the theme, we should take some profits off the table. Second, ABB’s Indian subsidiary ABB India recently reported earnings–the numbers were decent but also revealed lower sales and revenue. This isn’t a good sign, especially during turbulent market times.
Finally, the recent, sudden departure of the company’s CEO has clouded the stock with uncertainty. Even if the latter is a relatively short-term development, this is no time to stick around to discover what’s really going on. Sell ABB.
The Silk Portfolio still has exposure to infrastructure through Cheung Kong (Hong Kong: 1, OTC: CHEUY), Ericsson (Sweden: ERICB, NSDQ: ERIC), Keppel Corp (Singapore: KEP, OTC: KPELY) and Hopewell Holdings (Hong Kong: 54, OTC: HOWWY).
Hopewell–a conglomerate play in the Pearl River Delta region of China–has three great advantages, especially in the current market environment. Its cash-heavy balance sheet is clean, the company’s earnings are visible and it has a history of stockholder-friendly policies.
Hopewell engages in toll road operations, development and investment properties as well as power plant projects in Hong Kong, Guangzhou and Macau. It operates toll roads via a 73 percent stake in Hopewell Highway Infrastructure, which was spun off from the company in August 2003. (See Silk, 2 May 2007, The Waiting Game). Buy Hopewell Holdings.
Until recently, infrastructure–particularly in Asia–focused on road building. China alone has built 820,000 kilometers of new roads over the past decade (see the chart below), spending USD53 billion in the past five years alone. In 2006, China’s highway investment reached USD81 billion, surpassing the USD72 billion the US spent.
India, on the other hand, has added only around 470,000 kilometers over the past 10 years. In 2006, India spent USD6 billion on roads, a drop in the bucket compared to its needs and to China’s efforts. Furthermore, much of India’s road network is of low quality, with many single-lane and two-lane roads that slow traffic.
In 2006, only 10 percent of India’s national highways were four- or six-lane roadways, about 55 percent two-lane and 35 percent single-lane. The good news is India has planned a USD36 billion road expansion, so we should see more road investment there than in China in coming years.
Source: World Bank
The more interesting opportunity in infrastructure going forward will be in railways. In the next five years, China, India and Russia are expected to spend around USD270 billion on railway infrastructure.
For these countries, upgrading existing railways and building new ones has become an absolute necessity for transporting commodities and other imports and exports, as well as passengers.
China is at the forefront because its government has budgeted USD200 billion until 2010, most of which will be going toward building new capacity.
Source: Ministry of Railways
India also has big plans: Studies commissioned by its government have concluded that economic efficiency will be dramatically improved if the India rail system takes a bigger goods transportation market share. Currently only 30 percent of Indian freight is transported by rail, which has hurt the economy’s potential given rail transport’s superior fuel efficiency.
Because of the massive spending planned by China, more opportunities for investment will arise in the region. I’m currently looking at several opportunities in the sector and should be recommending a new play next week. Stay tuned.
Company News
Alternative Holding Ayala Corp (Philippines: AC, OTC: AYYLF) reported a 33 percent rise in profit for 2007 as net income totaled USD395 million.
Ayala owns property developer Ayala Land, the largest Philippine property developer. It also controls the Philippines’ second-largest phone company (Globe Telecom), one of its largest lenders (Ayala’s Bank of the Philippine Islands) and water utility Manila Water. Ayala Corp is a buy.
The energy market remains extremely active. Quality Energy Petro Holding International, which is owned by a member of Abu Dhabi’s Al Otaiba family, announced that it plans to build a USD13 billion oil refinery in the United Arab Emirates using Iranian crude as feedstock.
Quality Energy will also start building a USD4.5 billion refinery in Russia’s Chelyabinsk in 2009. Portfolio holding Lukoil (Russia: LKOH, OTC: LUKOY) will join forces with two other companies to supply 1 million tons of oil per month, with 75 percent of the output going to India, China and Japan. Lukoil remains a buy.
OAO Gazprom (OTC: OGZPY) has agreed to help Iran develop two or three blocks of the South Pars gas field, as the two countries with the biggest reserves of the fuel increase cooperation in energy. France’s Total is also involved in the deal. Together Russia and Iran also produce almost a fifth of the world’s oil. OAO Gazprom is a Long-Term Holdings favorite and remains a buy.
Fresh Money Buys
The investment process is constant. So 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 portfolios on the left-hand side of your screen for details.
- Russia (energy, telecommunications)
- Hong Kong (banking, real estate, infrastructure)
- South Korea (banking, electric power)
- Philippines (telecommunications, real estate)
- India (pharmaceuticals)
- China (consumer, telecommunications, coal, e-commerce, oil, water)
- Singapore (banking, telecommunications, industrial)
- Taiwan (telecommunications, ETF)
- Malaysia (ETF)
- Europe (communications equipment)
- Japan (banking, industrials)
How Silk Works
The Silk Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent.
The Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I also offer some direction in an effort to assist with the decision-making process in the Fresh Money Buys.
In this section, I rank countries and sectors so readers will have a guide at all times. The ranking changes often, so pay attention.
The ranking starts with the countries I prefer and then lists specific sectors you should look into. When I mention a sector, it’s assumed that the first pick will be from the Long-Term Holdings. Then, if more exposure is warranted, additional picks will be from the Alternative Holdings.
Of course, if a country isn’t represented in the Long-Term Holdings, refer to the Alternative Holdings for a selection (which is the case for Macau).
Portfolio recommendations should be taken at face value. For instance, if a stock is recommended as a buy and trades below the price indicated in the portfolios, the recommendation stands for newcomers as well as longer-term readers.
Occasionally, I recommend that long-term readers take profits off the table by booking any gains while letting the initial capital invested. The same is implied when a country or a sector is moved down in the Fresh Money Buys.
In other words, I expect investors to look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they needed to sell in order to take those profits off the table.
If you’re not a long-term reader, chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stock outright indicates that it remains a good, long-term holding.
Silk has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Look first to the Long-Term Holdings for asset allocation in the markets covered here.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons, and they represent additional exposure to favored investment themes. For example, Lukoil provides extra exposure to a favored theme: Russia and energy.
On the left-hand side of the Web site’s main page, under Portfolio Performance, you can get a snapshot of the Portfolio’s return compared to other major indexes.
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. I plan to enhance the portfolios with extra features and welcome comments and suggestions.
Many new readers have also asked, “What do we do when the market drops substantially?”
Since Silk’s inception, I’ve been skillful and lucky enough to have booked profits before precipitous falls, in which case I recommended sitting still through the turmoil. I’ll also get word to you via Flash Alert if events turn too quickly.
Silk is built around a set of core themes. I often revisit those themes or certain analyses through a link to a previous article or by reproducing relevant paragraphs. You can also read previous issues in the Archives to gain an understanding of the investment philosophy of the publication.
Or you can ignore my advice and try to find the next big hitter the Portfolio will produce. You may succeed, but be aware that I don’t play that game; “fast guns” are wasting their time with this publication, as well as Asia and the rest of the international markets as an asset class.