Wednesday, August 20, 2008

Emerging Markets Funds Flow & China Post-Olympics Blues





Fund Redemptions - If you remember the rankings of year to date performances of various markets, the emerging markets have been hit pretty hard. Now we know that last week saw fund redemptions from emerging market equity funds totaling US$1.9bn, which was the biggest outflow in 5 weeks. That on top of the 5 weeks of continued outflow of funds. In total the total fund redemptions was almost US$20bn on emerging markets funds.

The situation was reversed for US equity funds where US$13.3bn flowed in over the past 10 weeks. To me, the outflow from emerging was collateral damage from the massive unwinding and deleveraging by speculators, hedge funds and commodity funds. It was not fundamentally driven. As they unwound, the emerging markets were being sold down to cash up for overal anticipated redemptions. The reversal now seen in commodity would establish some platform for emerging markets to find their feet again.


China Post-Olympics' Blues
- The generally accepted fact is that China will see a slowdown following the successful Olympics. Many consider the infrastructure development would slow dramatically. Let's get real for a moment. The total investment in infrastructure which was related to the Olympics totaled between US$40bn-50bn. Now, let's take the China's actual budget for its 5 year plan already announced for 2006-2010:

Transportation Infrastructure US$554bn

Power Grid Projects US$1,000bn

Even if you average it over 5 years, that easily US$300bn a year (or 6x the Olympics related budget on infrastructure). This is one of the main reasons why I think the commodities upcycle is far from over... and this is just China. In fact, infrastructure projects would speed up after the Olympics as these projects may have had to take a backseat to allow the Olympics related projects to be rushed for completion.


p/s photos: Yamasaki Kimami

8 comments:

Datuk said...

When a ship sailing in a stormy sea with an invisible front side the captain need to apply his common sense that guilded by his previous experiences as well as taking into consideration of the on the spot factors for moving forward to the planned destination.

Thus, the experience (history) and common sense (objectivity of view point) are two helpful gurus for guilding us to sail through the current economy sea.

In my opinion, there were 2 aspects of inter-dependent spending in china, namely consumer spending and infra and capital investments. A strong consumer spending derived from the strong confidence which in turn influene the capital/infra spending and vice versa.

China as we known is a typical export orientated economy. This is to say that the growth factor in CHina for many years has been driven by its "factory of the world" due to it cheapest cost relative to other countries.

However, the comodities boon for the past 3 years had changed this scenario. The external demand has already sunk prior to the olympic games. Apprently, the world is unable to absord and live with this inflation.

To make the matter worst, the deflationary way fo doing business in china has no longer valid in tandem with the comodities hike as well as the implementation of new labour law.

In my recent visit to china...the landscape in the textile industry has almost collapse and is the stories i hear were very scary....

The similar trend can be seemed in the housing industry....not too far from the impact of subprime to the housing indutry in USA !

The plunge in equity market and its mutiply impact to the consumer confidence need not elaborate further !

The crux of the problem ahead is after the Beijing....the real story of the economy illness in China will uncover one by one.

I can't interpret the impacts and its chain reactions to the 'HOT Money" in the comodity investment circle....

It's indeed a scary one...

lsb said...

Everyone has been wrong on China since Deng opened up including myself. The leaders understood that the strength of a country is in its middle spending class, and China today has over 200m.
China can trade and spend within itself for a period of time while the world stabilized. It has the reserves to do so.
China will continue to confound conventional wisdom.

Anonymous said...

datuk,
please share with us your scary textile stories.

i still have 1 biji bonia, dunno whether wanna cut loss o not.

Datuk said...

What i meant by "the deflatinary way of doing business in China" is the companies there simply rushing to take in orders without giving much thoughts to the cost incurred.As a result, most of the manufacturing base companies in China operate at less than 5% gross profit; especially in textile OEM companies.

When the organization operate with too thin margin, any changes in the externalities will impact the bottom line directly.

For instance, the RMB appreciation and the changing in labor law had caused nearly 95% of OEM companies operate at loss; not to mentioned the cost hike in the petrol and electricity.

For your info.....when i joined the trade conference in Shanghai in July 2008, i came to know that most of the export orientated companies in the furniture, electronic All were running at loss with the visibility in order not longer than aug end !

I think Bonia is not an OEM company. In the short term the sales and margin might be affected by the lower disposible income of our families in Malaysia. The scenario might not be so bad admist the tougher operating environment ahead.

In my opinion, cast is the KING. Get out from the market now!

Don't follow bursa until it hit 600 points as the current weightage in big cap are still in the high end valuation point.

Anonymous said...

Whats your view on TM/TMI dear datuk/dali? Im holding some options from the ESOS scheme and am looking at a good time to offload them, they expire in a year's time.

ash said...

I often wonder. If the world consumption drops, and China is unable to export its products to the US and Europe, then who will buy them? Products made for the US and Europe markets...are they consumable by the Asian and CHinese markets? Factories fitted with the latest technology at high cost and producing high end products, can these expensive products be sold to fellow Asians and CHinese? Will asians and chinese buyers afford them? Will it suit their taste?

ninja turtle said...

datuk, with the US, UK and soon EU in recession, KLCI in 600,and China unable to sell her products, what is the best thing to do ? Do you suggest to hold Cash or put in FD.

The Rock said...

China also has a very serious funding issue now. Many of the businessmen just could not raise enough loans or equity ! Many are fighting fires by selling assets. Some are asking for as low as PER of 3 -4 X only. But do you dare to buy as a foreigner?

I've seen so many deals in the past few months from China alone - it is scary. The Chinese banks are not able to grow their loan books. why?

Perhaps their losses or NPL are already hitting them so hard that they don't dare to increase their loan books anymore. Perhaps there is some better reason [i cant think of any]

Without money, how to grow the business? Well honestly I won't know how China would turn out in the short term. They are going through a bit of recession and need to go through structural adjustment to their economic activities as their cost go up. Just like what happens to Malaysia and SIngapore. If you dont adjust, you die..

Singapore did well while Malaysia is still wondering !