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June 4, 2009 China Won't Save the World FALLS CHURCH, Va.--Deals recently entered into or proposed will have long-lasting implications for investors around the world. First was the sale of General Motors' (NYSE: GM) Germany-based Opel division to Canada-based auto parts supplier Magna International (TSX: MG/A, NYSE: MGA); the deal is being financed mainly by Russian money through the country's premium private bank Sberbank. Then came the announcement that a China-based company has agreed to buy Hummer from GM, which GM bought 10 years ago. The deal--one of the biggest overseas car-making acquisitions by a Chinese group--is expected to close this year. Finally, it was reported that Singapore's Temasek Holdings, the investment arm of the government, and Hong Kong tycoon Richard Li are close to joining a consortium that's the front-runner to buy AIG's (NYSE: AIG) asset management business for around USD500million. The potential move by the two Asian investors would be a boost to the consortium, which is in exclusive negotiations to buy the insurer's asset management unit. AIG is selling the business, which has some USD85billion in assets, to raise capital to repay government aid.
Note that Richard Li is the son of Li Ka Shing, the Hong Kong tycoon who is purportedly the richest person of Chinese descent in the world; he does rank among the richest on the planet with estimated wealth of more than USD16.2 billion. It's quite easy to see that the current crisis is allowing entities with big pockets to step in and buy quality assets at reasonable prices. Expect this to continue, and for the buyers to be concentrated in or aided by emerging economies. The majority of companies in such markets had relatively little to do with the financial engineering that drove the developed economies' financial system to the brink of collapse. This trend is another indication that the world is indeed changing--and consequently the investment process will also change. It will soon be almost impossible to make any successful investment move without having a clear understanding of global developments. As for Asian economic issues more short-term in nature, the region's exports are recovering from last year's catastrophic levels. Asian exports were up 8.8 percent in April compared to the first quarter performance. China remains the main driver of this timid recovery, as its imports from the rest of Asia have jumped now for the third month in a row. (See the chart below.)  Source: Bloomberg Note, though, that China was never expected to be instrumental in helping economies avoid recession, contrary to an idea floated by people not well informed regarding the Chinese economy. What China could contemplate--and is in fact now doing--was to make sure its own economy would do well while contributing as much as possible to the avoidance of a total collapse of the financial system and the world economy. By buying US Treasuries and supporting the US dollar, China has clearly done that. A lot of this demand is for domestic consumption because China's exports haven't yet turned convincingly up. It seems, therefore, that this year's GDP growth in China will come from domestic investment and consumption, which is what the Chinese government had hoped for when it launched its stimulus efforts late last year. For the rest of emerging Asia, exports to the US, EU and Japan could boost growth even more, though. These numbers are depressingly low. If these economies see growth later this year, and given the return of trade financing in the marketplace, then the Asian exporters (mainly the small open economies of the region) will start putting up respectable numbers. This is the reason why you should buy these markets on dips. As things stand, any pullback in the current rally (especially in the 8 to 10 percent range) should be viewed as an opportunity to enter these markets. Singapore is one such market; the easiest way to gain exposure is through iShares MSCI Singapore Index Fund (NYSE: EWS). Looking a little further out, once investors realize that the expected economic recovery in the US will be a lot milder than currently anticipated, the larger Asian markets--China, India and Indonesia primarily--will be the place to be. As for Indonesia, one event to watch this summer is the presidential election in early July. President Yudhoyono is expected o be re-elected to a second (and final) five-year term, with the technocrat Boediono serving as vice-president. In the recent general election's Yudhoyono's party performed extremely well, indicating broad approval by the electorate of the president's policies. The most visible of these policies are budget reallocation toward social spending and reforms of the civil service and the judiciary. The consumer will be the big beneficiary of such reforms.
The easiest way to gain exposure to Indonesia is through PT Telekomunikasi Indonesia (NYSE: TLK), which offers solid growth. A strong balance sheet and steady cash flow should allow it to maintain its capital expenditure budget; its peers won't be able to compete on this metric. PT Telekom offers a superior network and similar tariffs to those of its competitors. The company also has a share buyback program in place and offers a 6 percent dividend yield. Resources I've been quite cautious of late regarding the resource sector, metals in particular. And the news that Aluminum Corp of China (Chinalco) is set to walk away from a USD19.5 billion deal with Rio Tinto Plc (NYSE: RTP) hasn't been taken positively by the market. The market has it right; Chinalco had the money to put into the deal, and getting it done would have been a good way for China to further integrate into the global economy. Nevertheless, resources continue to look overstretched short-term. Stabilizing economic conditions and healthy Chinese demand have been the triggers for renewed investor interest in the sector. Talk of inflation has also been instrumental for commodity strength, and consequently stocks have rallied strongly with the underlying commodities. There's a case to be made that commodities have reached the bottom of the cycle and that what we're seeing is the beginning of a new multi-year up-cycle. I have no problem with this thesis, and have always recommended exposure to the sector. Shorter term, though, the global economy is still weak, and it seems too early to offer a legitimate outlook for 2010. I continue to recommend taking profits off the table and holding big, diversified names. | ||||
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Emerging Markets Speculator - China Won't Save the World
