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Sun, 25th June 2017

Anirudh Sethi Report

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Archives of “Investment” Tag

Goldman Sachs: 60% chance MSCI includes China’s A shares in emerging market index

MSCI will make an announcement on June 20 on whether China is included in the EM index

GS say there is a 60% probability of inclusion. The firm cite as a “key argument” supporting inclusion:
  • China has the 2nd largest equity market in the world
  • Its representation in global benchmarks is low relative to its economic influence
GS says inclusion would likely see funds inflow of around $210 billion into Chinese stocks over the next five years
Chinese press is bullish for inclusion. The China Securities Journal citing regulatory changes, improved connections between HK and China markets as reasons in favour.
Reuters also have a piece up, with more detail and background, and it also addresses the thorny issue of stock that have been suspended from trade, with this gem:
  • Embarrassed Chinese regulators are also moving to discourage whimsical suspensions
Whimsical suspensions … yeah that’s what you want to read (not) when investing in China

$ 16 Billion : Global bond funds enjoy largest weekly inflow since 2015

15BILLIONInvestors poured nearly $16bn into global bond funds in the week to June 7, the largest weekly inflow to the asset class in more than two years, as portfolio managers stared down the UK election, European Central Bank meeting and the closely watched testimony of former FBI director James Comey.

The figure was propelled by billion-dollar plus inflows to US and Western European sovereign bond funds, according to EPFR. Investors added roughly $9bn of the $16bn to US government bond funds.

Cameron Brandt, the director of research for EPFR, said that the investors “put safety over returns” ahead of the trio of potentially market moving events.

The 7-Trading Rules

Here are the rules – they are not unique or new. They are time tested and successful investor approved. Like Mom’s chicken soup for a cold – the rules are the rules. If you follow them you succeed – if you don’t, you don’t.

1) Sell Losers Short: Let Winners Run:

It seems like a simple thing to do but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.

2) Buy Cheap And Sell Expensive:

You haggle, negotiate and shop extensively for the best deals on cars and flat screen televisions. However, you will pay any price for a stock because someone on television told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run – overpaying will end in misery.

3) This Time Is Never Different:

As much as our emotions and psychological makeup want to always hope and pray for the best – this time is never different than the past. History may not repeat exactly but it surely rhymes awfully well.

4) Be Patient:

As with item number 2; there is never a rush to make an investment and there is NOTHING WRONG with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue – it is a good way to keep yourself out of trouble.

5) Turn Off The Television:

Any good investment is NEVER dictated by day to day movements of the market which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to correct – then the day to day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.

6) Risk Is Not Equal To Your Return:

Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the LEAST amount of risk possible.

7) Go Against The Herd:

The populous is generally right in the middle of a move up in the markets but they are seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons – generally something else happens. However, this also cedes to points 2) and 4); in order to buy something cheap or sell something at the best price – you are generally buying when everyone is selling and selling when everyone else is buying.

These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals in the long run. You most likely WILL NOT outperform the markets on the way up but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing – it is impossible to replace lost capital.

As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but how you manage the inherent risk.

 
 

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

 

China debt ‘could prompt $7.7 trillion asset sale’

China’s mounting bad debts might constitute a nightmare for Beijing as it tries to ensure more stable growth. But they are also fueling an emerging market that could be worth at least $3 trillion for foreign buyers of distressed assets.

Key sources feeding the growth of this market are state–owned enterprises, privatization of which is necessary to put China back on a sustainable growth path, according to Citigroup’s chief China economist Li-Gang Liu.

 Liu believes the process, if carried out seriously, will unleash 52 trillion yuan ($7.7 trillion) of assets into the market, assuming state ownership were to be sold down to between 40% and 50% in exchange for fresh funds needed for debt repayment.

“More than half of the funds could be supplied by China’s own savings. The remaining [funding] probably will have to rely on foreign investors,” said Liu, speaking at a Thursday conference in Hong Kong organized by market intelligence provider Debtwire. He noted that China’s saving ratio currently stood at 47% of the country’s gross domestic product.

“China will have to either open up its equity and capital markets for foreign participation … or continue with the old ways to allow their enterprises to list in Hong Kong, Singapore, New York and elsewhere,” he added.

 

Read More 

How Hedge Funds Play The OPEC Deal Extension

We’ve had a good two-way crude oil market since the first of the year which has helped hold crude oil in a relatively narrow range as aggressive traders continue to play the long side, in anticipation of a balance between supply and demand.

This year began with an oversupplied crude oil market, but with a bullish tone set by OPEC when they decided to start reducing output in an effort to trim supply and stabilize prices. On paper, the idea seemed bullish. What they didn’t expect, however, was the surge in U.S. production that skewed their forecasts and timetables for global supply and demand to reach a balance.

For nearly six months, traders have been pelted with stories nearly every day telling them about OPEC supply cuts and increased U.S. production. The stories seem to have neutralized the markets to a point where crude oil prices have become range bound.

In order for a market to become range bound, some major market player has to be selling enough crude oil to stop a rally and some major market player has to be buying enough crude oil to stop the decline.

However, inside the trading range we’ve seen several pockets of volatility and these moves can only be blamed on the speculators and namely, the hedge funds.

If you’ve traded speculative markets, I’m sure you’ve noticed that markets come down faster than they go up. Essentially, this is because speculative buyers tend to be very careful about where they buy or enter the market, but when it’s time to sell, they don’t care what they pay to get out.

China banks’ shadow assets exceed Mexico’s economy

It may be too soon to say that glimmers of hope can be seen in the quality of Chinese bank assets, considering they have off-balance-sheet assets that are collectively larger than the world’s fifteenth-largest economy.

The country’s six biggest commercial banks revealed this week that their off-balance-sheet assets — likely held through trusts and wealth management products — were worth 7.78 trillion yuan ($1.13 trillion) as of March — more than Mexico’s 2016 nominal gross domestic product of $1.06 trillion, or about a tenth of China’s economy.

 Bringing these previously hidden assets to light immediately boosts their already substantial balance sheets by 7-9%, and smaller banks’ by 11-13%.

The six are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China.

Yet these “second” balance sheets also prompt questions on the significance of banks’ reported declines in nonperforming loan ratios as well as the sufficiency of their capital, since they were all under pressure to set aside more provisions for losses on impaired loans.

Peter Lynch’s Rules

Find your edge and put it to work by adhering to the following rules:

  • With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
  • Pay attention to facts, not forecasts.
  • Ask yourself: What will I make if I’m right, and what could I lose if I’m wrong? Look for a risk-reward ratio of three to one or better.
  • Before you invest, check the balance sheet to see if the company is financially sound.
  • Don’t buy options, and don’t invest on margin. With options, time works against you, and if you’re on margin, a drop in the market can wipe you out.
  • When several insiders are buying the company’s stock at the same time, it’s a positive.
  • Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
  • Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
  • Enter early — but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you’re taking an unnecessary risk. There’s plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
  • Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
  • Buy small companies after they’ve had a chance to prove they can make a profit.
  • Long shots usually backfire or become “no shots.”
  • If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
  • Investigate ten companies and you’re likely to find one with bright prospects that aren’t reflected in the price. Investigate 50 and you’re likely to find 5.

French election results soothe investor fears

Investors breathed a sigh of relief following the first-place showing of centrist and pro-European Union candidate Emmanuel Macron in the first round of France’s presidential elections Sunday, sending the Euro to a five-month high relative to the dollar. Populist Marine Le Pen ranked second in the voting.

Why it matters: The results make it more likely that Macron will be France’s next president, keeping France in the EU. That should have a positive impact on both French stocks and the U.S. economy.

 Paris rising: High Frequency Economics’ Carl Weinberg predicts that French stocks will rally in trading Monday, and that interest rates on French government debt will fall. France isn’t out of the woods, however. Weinberg writes that Macron will have a tough time corralling a divided Parliament to implement pro-growth reforms.

Domestic affairs: A Blackrock Investment Institute note to clients calls Macron a “business friendly” candidate that will not get in the way of Europe’s improving economy. The U.S. economy has seen the benefits of faster growth in Europe—political stability across the Atlantic is good for business here.

Caveat: David Zahn of Franklin Templeton Investments warns that “it’s not a done deal yet,” and that the push and pull of a high profile election will cause “markets to remain volatile in the run-up to the final round of voting on May 7 and potentially even beyond.”

Chinese shopping spree for NYC properties could end in bust

Chinese investors are gobbling up Manhattan office towers at sky-high prices, fueling speculation that they eventually will get burned — just like Japanese buyers who snapped up U.S. real estate in the 1980s and later were haunted by those properties.

Chinese conglomerate HNA Group will acquire a prime Park Avenue skyscraper for a whopping $2.21 billion, it was reported in late March, in one of the most expensive deals ever for a New York office building. The news follows HNA’s October announcement of a $6.5 billion purchase of a 25% stake in Hilton Worldwide Holdings from investment firm Blackstone Group. The Chinese group has snared other office buildings in midtown Manhattan as well.

 Industry giant China Life Insurance made headlines last year when it invested $2 billion in Starwood Capital Group’s hotels, while also getting stakes in other skyscrapers.

Anbang Insurance Group bought the iconic Waldorf Astoria Hotel in New York for some $2 billion back in 2015, and Chinese investors have remained on a shopping spree for U.S. properties ever since.

Chinese companies poured a staggering $33 billion into overseas properties in 2016, up 50% on the year, with $13.4 billion going to the U.S., according to real estate investment firm JLL. Though Beijing has tightened regulations to block capital from leaving the country, Chinese businesses continue to make big investments into office towers and hotels, a JLL officer said.

Bill Gross: “All Asset Prices Are Elevated To Artificial Levels”

 

Bill Gross’ latest monthly outlook is divided into two sections: in the first, the world’s former bond king provides a revealing glimpse into his mind courtesy of six brainteasers (with answers to questions such as “If forced to choose between killing your favorite pet or an anonymous human being, what would you do?”); in the second he goes back to his favorite topic: slamming the Trump growth narrative Can the Trump Agenda recreate 3% growth?

The answer: he cites an IMF study which suggests that “unless there is an unforeseen technological breakthrough, productivity growth is unlikely to return to the higher rates of the 1990’s for advanced economics or the early 2000’s for emerging economics. In other words, their warning speaks to a global productivity slowdown, not just a U.S. based phenomena. They warn that increasing tariffs and developing restrictions on immigration will only exacerbate the slowdown. Global growth, and of course U.S. growth, will be lower than average, they forecast.”

Which then leads to the following, not unexpected conclusion about assets prices:

 Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.