Foto cedidaDavid Milward, Head of Loans at Henderson. Rediscovering European Loans
The European loan market has experienced something of a revival over the past 18 months. 2013 saw by far the largest volume of issuance for several years, while 2014 is on track to record an even higher total. Volume reached €50bn in the first half of 2014, a 16% increase on the same period last year.
Secured loans make up a significant and growing portion of the broader European loan market. Known as ‘secured’ because they typically have first priority over the assets of a company in the event of a default, secured loans are an important source of debt financing for non-investment grade businesses, alongside the high yield market. Despite the increased level of supply in recent months, demand for secured loans has remained strong. Investors have been attracted to secured loans in part due to expectations that short term interest rates will rise over time, given that loan yields are linked to these rates.
Issuance volumes in Europe have been driven by a mixture of refinancings from existing issuers, merger and acquisition (M&A) activity and private equity/management buyouts. The second half 2014 has started strongly, with a healthy pipeline of deals still due to come to the market over the next few months. While secured loan issuance is still some way off the levels seen previously, as shown in the chart below, it seems confidence in the loan market has returned from both issuers and investors.
Western European new institutional leveraged loan issue volumes
Source: Henderson Global Investors, Credit Suisse, S&P LCD, as at 30 June 2014.
In 2014 there has been a revival of large M&A deals in Europe, many of them funded by loans. Numericable, a French cable business, acquired SFR, a French telecommunication company, in the spring of this year. The financing included €5.6bn of loans alongside high yield bonds as part of a record €15.8bn debt package. Boots, a UK pharmacy, which is soon to be merged into the US firm Walgreens, previously held the record for the largest loan-funded leveraged buyout.
Other well known companies to tap the loan market this year include Formula One, the motor sport operator, and Saga, a UK based insurance and leisure company.
The increase in issuance has allowed the secured loans team to selectively add new loans to their portfolios this year, focusing on larger businesses with predictable cash flows and a proven track record throughout economic cycles.
Some strategists have argued that we are in a long-term period of low interest rates. The Fed has an incentive to keep interest rates near zero indefinitely. Unemployment and underemployment rates exceed historical norms. The national debt will keep the United States as a net borrower and gives the government reason to minimize its cost of borrowing. The pundits that have been calling for rising interest rates have erred for two years running. The predictions have been dead wrong. Interest rates have declined, not risen. Aren’t we in a new paradigm of permanently low interest rates? Don’t believe it.
The long-term direction of interest rates is up. The current interest rates for the 10-year Treasury and the 30-year Treasury are 2.37% and 3.12%, down approximately 65 basis points and 85 basis points from 3.02% and 3.97% on January 1st. The interest rates of the 5-year Treasury and short Treasury issues have changed little. The temporary declines in long-term interest rates have resulted from a change in perception, partly because of a harsh winter, which caused a seasonal drop in GDP. At the beginning of the year investors feared that the Federal Reserve would raise the Fed Funds rate in early 2015. The consensus expectation has now moved into the third quarter of 2015. The question is not whether interest rates will rise, but when.
Interest rate forecasts from major investment banks all indicate rising interest rates in 2015 and beyond. Economists surveyed by Bloomberg project the 10-year Treasury will reach 3.46% by the fourth quarter of 2015. Strategists at other investment banks agree. In August economists at Nomura and Barclays both predicted a rate increase by June 2015. Their colleagues at Merrill Lynch cited a similar time frame.
A naive forecast would expect the yield on the 10-year Treasury to at least remain close to 3.46%, if not significantly exceed it, in 2016 and beyond. The reason is that interest rates follow long-term, 25-year to 35-year cycles. We have been in a period of declining interest rates since 1981. Between 1946 and 1981 the yield on the 10-year Treasury rose from 2% to 15%. Between 1920 and 1946 the yield declined from 5% to 2%. As we seem to be at the end of a long-term period of low interest rates, it would be logical to expect interest rates to increase over the next ten years or so.
Within these long-term cycles the Fed manages interest rate policy over the shorter-term economic cycle. The boom-to-bust cycle usually lasts five to seven years. This present recovery is longer than most because of the depth of the 2008-2009 recession and the weakness of the ensuing expansion. Now the economy is finding its legs with GDP growth of4.2% in the second quarter. Once it starts to hike interest rates, the Fed is likely to continue to increase them. This pattern has prevailed throughout its history. No examples exist where the Fed increased interest rates only one time. The probable scenario is for the Fed to increase interest rates for two years or more. Economic necessity requires the Fed to manage inflation and to prevent labor markets and the economy from overheating. The impetus for the Fed to change course from its current zero interest rate policy to a non-zero policy would be a realization that stimulative monetary policy no longer serves the interests of the economy.
After six years of expansion we are close to that inflection point. Forecasts of economic growth and inflation suggest that the Fed will need to be wary. Consensus forecasts show an expanding economy and rising inflation. Economists at Barclays and BNP Paribas forecast that GDP will increase from 2.0% in 2014 to 2.7% and 2.8% respectively in 2015. The median forecasts of GDP growth among 78 economists in a Bloomberg survey are 3.0% in 2015 and 2.9% in 2016. Inflation is likely to increase too. Barclays forecasts the CPI will rise from 1.9% in 2014 to 2.1% in 2015. A strengthening economy and higher costs will put pressure on the Fed to act sooner rather than later.
According to most economists, the recent meeting of the Fed in Jackson Hole marked a turning point in Fed policy. Although her comments were balanced, Janet Yellen’s speech indicated a shift toward policy normalization, an end of the low volatility policy framework, and an emphasis on data dependence. In short, if the economy expands, as most economists expect, the Fed will raise interest rates. The speech also suggests that markets should see increasing volatility in interest rates as the risk of a Fed hike has moved forward in time.
Treasury yields over two-years out have already widened by 10 to 15 basis points in September. I would expect the yield on the 10-year Treasury to keep increasing from now on. Given the recent GDP numbers, the speed at which interest rates will change could surprise people. I could easily envision the 10-year Treasury exceeding 4% by late 2015 and 5% by mid 2016. We have just begun a long, upward march that will continue for the next few years.
What do higher interest rates mean for high yield bonds? Overall, higher interest rates will cause some erosion in value. The effect will depend on what happens to the credit spread – the interest paid to investors for assuming credit risk. If the credit spread narrows, the overall effect may be slight. If it widens, the market could be hit with a double whammy. Historically, the credit spread has narrowed when real interest rates have gone up. This time could be different. Investors in Merrill Lynch’s September 15th Credit Survey expect credit spreads to widen over the next 12 months. That should put pressure on high yield.
Even so, high yield offers a safe harbor versus other fixed income assets. It yields more and reacts less to interest rate movements. Some sectors, however, offer better protection than others. As with investment grade, longer-duration high yield bonds are the most vulnerable. Lower quality bonds are also less interest sensitive than higher quality bonds so that “B” bonds should outperform “BB” bonds. Default rates and inflation should remain muted for the next year or two. The best bet is to target short-duration, lower quality high yield bonds. This sector should remain relatively immune whatever happens to interest rates.
Thomas P. Krasner, CFA – Principal and Portfolio Manager at Concise Capital Management, LP
Photo: Eric Fischer. Opportunities Shift From Domestic to Global Europe
Macro headwinds, but domestic improvement
There have been some tangible signs that confidence is slowly returning to Europe, although recent gross domestic product (GDP) numbers and industrial figures have been lacklustre. The unemployment rate for Europe, while still at elevated levels compared to historical averages, has begun to fall. New car sales are also rising – job security makes a new car purchase a far easier decision. There are, nonetheless, a range of significant hurdles to overcome, not least the consequent impact of the escalating crisis in Ukraine.
Growth still remains fragile in Europe and the European Central Bank (ECB) recently implemented a package of measures aimed at helping to shift growth up a gear. While ECB intervention could stimulate a slow and stuttering recovery, it may not be the ‘silver bullet’ that many commentators are hoping for. Inflation has remained stubbornly low; due in part to the strength of the euro, and this has fuelled fears about the risk of deflation. But Europe is not alone in struggling to address the structural issues that are impeding growth; it is a global problem. The ECB will certainly be hoping to see some currency weakness in the second half of 2014, which would aid exporters.
Fresh opportunities to access global leaders
It is easy for investors, particularly in other parts of the world, to read the news, look at the uncertain macro backdrop and panic about Europe. But we believe that this is the wrong response. Uncertainty creates mispricing in the market, providing an opportunity for active stock pickers, such as ourselves, to generate alpha.
One of Europe’s strengths remains the fact that companies in the region are in many cases global leaders. Such companies include Roche, the Switzerland-based pharmaceuticals company, a leader in oncology and haematology, and German tyre and vehicle components manufacturer Continental, which is benefiting from a long-wave cycle of growing demand for active safety components in cars.
The global reach of European companies and the breadth of their sources of revenue allow European equity portfolios to be adjusted towards companies with exposure to those regions with the most compelling opportunities. Over the past 18 months we have focused more on ‘Domestic Europe’; holding attractively valued companies with more domestically focused operations. Recent economic uncertainty, however, has led some macro investors to cut their exposure to Europe and we believe that this has created a fresh opportunity to invest in global names at appealing prices.
Corporates looking to put cash to work
On the corporate side, we are seeing pressure grow on cash-rich companies to spend capital on merger and acquisition activity, or to return it to investors through dividends. We would not be surprised, in this late-stage, but still very strong bull market, to see a boom in merger and acquisition activity in large-cap stocks. This, combined with the separation of macro and micro, leaves us particularly constructive on the potential for equity markets to move higher in the coming months.
Rewarding environment for stock pickers
Following the financial crisis, Europe saw a rise in the correlation between the performance of the winners and losers of European equity markets. Good stocks and bad stocks moved in unison, largely irrespective of quality or value. This eroded the value that fund managers could add through strong stock selection. Since early 2012, however, as chart 1 here shows, this trend has reversed, with stock pricing correlations falling back towards their longer term average. This has created better conditions for active managers to outperform through good stock selection.
Source: BofA Merrill Lynch European Investment Strategy, Thomson Reuters DataStream, as at 13 August 2014. ‘1yrMvgAvg’ refers to a one-year moving average of pricing correlations in Europe.
The lower correlation is understandable. As the crisis recedes, less attention is paid to the macro picture and more focus is given to corporate fundamentals, not the least of which is earnings. The re-rating in European equities has so far been driven by the ‘price’ in the price to earnings (P/E) ratio, but the margin expansion story has largely run its course. We have yet to see the highly anticipated growth in earnings that would justify further gains. Earnings growth was disappointing in 2013 and we expect that market direction will ultimately be driven by whether or not the optimistic estimates for 2014 and 2015 (Citi consensus estimates at 8 per cent and 13 per cent respectively) can be met. While we wait for confirmation, our portfolio remains constructively positioned to try and capitalise on the opportunities provided by ‘global Europe’ and cash-rich corporates.
Opinion columns by John Bennet, Portfolio Manager of the European Selected Opportunities Strategy, Henderson Global Investors.
Escudo de armas del Reino de Escocia - foto de Chabacano. Implicaciones del Referéndum de Independencia de Escocia
Background
In 2013, the governments of Scotland and United Kingdom passed the Scottish Independence Referendum Bill inviting all United Kingdom residents living in Scotland and aged 16 and over to vote on the referendum question “Should Scotland be an independent country?” On 18 September 2014, 4.3 million registered voters will vote “Yes” or “No” on Scottish independence. A simple majority is required to gain independence.
Implications
Our base case view has remained that Scotland will vote “No” and view the possibility of a “Yes” vote as a low-probability (< 20%) tail-risk event. Recent opinion polls, suggesting that the outcome to the Scottish independence referendum will be close, have caught us by surprise. However, we view the narrowing of the gap in light of similar events which have resulted in spikes in the “Yes” votes. Here, we note the distinction between voters who feel the responsibility to vote and have registered to do so, and those who will actually end up voting. This could potentially swing the vote in favour of Scotland remaining a part of the United Kingdom.
In our view, there are three possible outcomes at this stage. Regardless of the results of the referendum vote, we believe that Prime Minister Cameron’s political strength has been significantly impacted.
No result due to a lack of voters voting, in which case uncertainty will prevail in financial markets until another referendum is organised
A “No” vote, which would have no impact on financial markets
A“Yes” vote would result in a slow and long transition towards an independent Scotland with broad and deep consequences for financial markets.
The main concerns surrounding a vote in favor of Scottish independence are around the management of currency and monetary arrangements; more specifically the choice of currency regime, management of deposit/capital outflows and capital controls. The choice of the currency to be adopted remains the predominant concern where the options are to continue with the Sterling as part of a formal currency union, using the Sterling but not in a formal currency union or “Sterlingisation”, joining the Euro currency bloc or creating Scotland’s own free-floating currency. The significant costs associated with creating a new currency may make this final option the riskiest and hence the least favorable.
Adopting the Euro may be Scotland’s favored option at this time, but may not be a likely outcome given the opposition from anti-Euro supporters as well as costs of currency conversions. Scotland would also need to become a member of the European Union first before it can adopt the Euro currency. In this case, it would still need to create a national currency which would have to remain stable for at least another two years before it is allowed to join the European Union. The probability of a formal currency union being accepted is low – the Bank of England and the Treasury have advised against this due to the lack of fiscal oversight. Hence, the only remaining option is for “Sterlingisation”. This could be damaging to financial markets as a lack of a formal commitment to a currency union could lead to a capital flight from Scotland.
Conclusion
Despite recent polls, we believe that the vote will swing in favor of “against” Scottish independence. However, we do expect short-term volatility to persist and have a negative impact primarily on equity and currency markets.
As a result, in terms of our asset allocation we have closed the long exposure to GBP versus EUR, taking advantage of the position, and maintained the hedges on our equity exposure.
Foto: "Railing May 2014-1" by Alvesgaspar - Own work. ¿Es la baja duración sinónimo de bajo riesgo? No necesariamente
To protect their portfolios from rising interest rates and volatility, many high-yield investors have headed for short-duration strategies. We think some of the more popular approaches may expose investors to bigger hazards than they realize.
It’s no secret that overall yields on high-yield bonds—and their yield advantage over government bonds—are near historic lows. That means investors receive below-average compensation for the risk they’re taking. And with the US Federal Reserve almost certain to start boosting official interest rates in 2015, the potential for those spreads to widen—and prices to fall—is high.
Still, even at today’s rich valuations, high-yield bonds offer more income than most fixed-income assets, making many bond investors reluctant to pull out of the sector altogether. Often, they choose short-duration funds. Short-duration bond prices are less sensitive to changes in interest rates than longer-duration bonds. Over time, short-duration high-yield bonds have generated returns close to those of the broader high-yield market with less volatility.
Shortening Duration: Easier Said Than Done
The most straightforward way to shorten—or reduce—duration is to buy bonds with shorter maturity dates. The problem is that there aren’t many actual short-maturity assets available out there. The typical high-yield bond is issued with a 10-year maturity, although many issuers can “call” the bonds much earlier by taking it back and paying the investor a specified price.
To get around this short-maturity shortage, one popular strategy has been to build exposure: buy high-yield bonds of any maturity and combine them with short positions in government bond futures contracts or interest-rate swaps, hedging much of the interest-rate risk. Contrary to popular belief, we think this approach can reduce returns and increase risk, particularly if there’s a broad sell-off in credit assets.
According to Barclays data, the US high-yield market has returned an annualized 7.5% since 1997 with 9.4% annualized volatility. Using interest-rate hedges on a similar portfolio over that period would have cut returns to just 1.8% while boosting volatility to 11.1% (Display).
To be fair, this strategy underperformed largely because interest rates fell, and that lengthy period of low rates may well be ending. Many economists and market strategists expect US rates to climb in the years ahead. If that happens, those hedges would indeed enhance total returns.
Watch Out for the Double-Edged Sword
But here’s one thing that’s worth keeping in mind. Rates are likely to rise, but they may not rise quickly. And the potential for higher volatility could increase the risk of losses. That’s particularly true if the high-yield market were to hit a rough patch, prompting yield spreads to widen.
If there’s a credit selloff, investors tend to rush out of high yield and into government bonds and other higher-quality assets. This would cause government bond yields to fall, and investors could see both sides of their portfolios take a hit: the high-yield bonds would suffer and the interest-rate hedges would lose value as Treasury yields fell.
We think there’s a better approach to build a low-volatilityhigh-yield allocation: buy individual bonds that do have short-term maturities and bonds that are likely to be called in the near future. This effectively shortens duration and provides the attractive return profile we described. We think it’s also important to avoid the riskiest credits. In a credit-sell-off, a short-duration portfolio that sidesteps these potential pitfalls is more likely to outperform the market.
Of course, this approach isn’t risk free. Once rates start to rise, an issuer may decide not to call its bonds when expected. In that scenario, investors would see the duration on their bonds grow at the worst possible time—we call this extension risk. One possible way to reduce this risk is to target bonds trading at prices well above their call prices. It would take a dramatic rate increase to keep the issuer from calling the bond—and we don’t think that’s likely.
Other strategies to reduce extension risk include using credit derivatives to replicate high-yield bonds, as these come without the call option built into most high-yield bonds. All of these approaches require careful security selection. But we think they’re likely to offer more effective protection against rising rates, higher volatility and the possibility of future credit market duress.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Ivan Rudolph-Shabinsky is a Portfolio Manager of Credit at AllianceBernstein
After the 2008-‘09 financial crisis, we have been in a long and slow moving economic and market cycle, where immense amounts of money creation from global central banks have flown to the more liquid areas of the capital markets. This long and slow dynamic has been characterized as the “turtle cycle,” with a recovery that inches forward, pushed by consistent flows of created capital. As the Fed ends quantitative easing in October, we think the European Central Bank will start quantitative easing very soon, prolonging this “turtle cycle” for at least another two or three more years.
This “turtle cycle” fueled by extraordinary money creation has inflated financial assets, especially the most liquid and mature markets. It is difficult to detect clear value in the three traditional assets classes going forward, in particular in the fixed income space. Our Investment Committee forecasts that a moderate risk traditional portfolio will have a return of 4-5% over the next 10 years. Cash yields are negative in real terms; bonds offer limited value with record tight spreads and high valuations; and equities are approaching the “beginning of the end” of the bull market. We share Professor Siegel’s (from the Wharton School of Business) view that the market will peak at 18X versus the present 16X EPS. So where does this leave us? We are focused on finding “non-traditional” revenue producing assets which offer intrinsic value of 8-11% (i.e. real rates of 6-8%). We believe with time, liquidity will end up flowing into and appreciating the values of these non-traditional asset types, as investors recognize the opportunities. These non- traditional asset types constitute an opportunity for investors to position their portfolios for multigenerational wealth. Our Investment Committee forecasts that a moderate risk portfolio which includes non- traditional asset types will have a return of 6-7% over the next 10 years.
We’re looking at non-traditional asset types such as: revenue producing core commercial real estate; opportunistic hard money lending (against high quality assets); private debt; infrastructure and other niche asset types. Each of these briefly described below.
Revenue Producing Core Commercial Real Estate . While we started investing in CRE in 2009 right after the crisis, our focus has shifted from Trophy Assets/ Markets to Non- Trophy Assets or Trophy Assets in Secondary Markets.
Opportunistic Hard Money Lending. Another non-traditional asset type we like is hard money lending against high quality assets or Bridge Loans. Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing.
Private Debt . Private debt is often utilized by small and mid-sized companies looking for capital or financing. Because of their size, these middle-market firms have limited access to liquid capital markets, which have high minimum issuance sizes. Also, these companies historically have had access to funding from banks but this changed after the 2008 financial crisis. Regulations such as Basel III were enacted, forcing banks to clean up their balance sheets and focus on core tier assets. As a result, many banks stopped lending to middle-market companies. In 2013, the majority of these loans were provided by non-banks, an opportunity for third party private debt suppliers (i.e. Shadow Banking). We see an opportunity for our clients in private debt, as the risk premium of over 5% above comparable high yield bonds compensates nicely for the illiquidity of this asset class.
Infrastructure. Assets Infrastructure assets are loosely defined as “the facilities and structures essential for the orderly operations of an economy.” Examples of infrastructure assets include transportation networks, community facilities, and water and energy distribution systems. Investments in shale oil and gas, are examples of infrastructure assets. Typically, infrastructure assets offer non-correlated returns as the underlying assets have a different sensitivity to economic cycles than typical financial assets have. They also benefit from growing demand for essential services provided, and monopoly-like characteristics of high barriers to entry in their markets. Infrastructure investment shares some of the characteristics of fixed income (long-term steady income stream), real estate (physical assets) and private equity.
To read BigSur Partners’ complete report, please use this link.
Photo : Thomas Bresson . “The Dow Will Trade Significantly Below its Current Level at Some Point Over the Next Five Years”
We compare the rise in the Dow Jones Industrials index from its March 2009 low with increases after six previous bear markets involving a peak-to-trough fall of about 50%. (The Dow declined by 54% between October 2007 and March 2009.) As explained below, the current level of the Dow is slightly above the top of the range spanned by these prior rises.
The six bear market troughs considered in this analysis occurred in November 1903, November 1907, December 1914, August 1921, April 1942 and December 1974. The Dow Industrials fell by between 45% and 52% into these lows. (The 1929-32 bear market was excluded because it involved a much larger decline, of 89%.) In each of the six cases, the trough of the bear market was rebased and shifted forwards in time to align with the March 2009 low. The subsequent rises were then traced out and an average calculated – see chart.
The current rise broadly tracked the “six-recovery average” until late 2011 but has since diverged positively, standing 39% higher as of yesterday’s close. The average remains below the current Dow level through end-2019.
The Dow is 4% above the top of the range spanned by the prior rises. The range top is defined by the “roaring twenties” increase from the August 1921 trough – black line in chart. The equivalent month to August 2014 was March 1927. If the Dow were to replicate its performance then, it would rise to 18,000 at end-2014 and 22,000 at end-2015 en route to a peak of 39,000 in January 2017, corresponding to September 1929.
As noted, the 1929-32 bear market wiped out 89% of the Dow’s peak value, returning it to the equivalent today of 4,000.
The historical analysis, therefore, suggests that the Dow will trade significantly below its current level at some point over the next five years. A further substantial rise first, however, cannot be ruled out.
The “monetarist” perspective here is that bear markets are normally triggered by money supply expansion falling short of the needs of the economy – such a shortfall crimps future activity and is associated with a withdrawal of liquidity from markets. Annual real narrow money growth moved well beneath industrial output expansion from late 1928, signalling a deteriorating liquidity backdrop. The real narrow money / industrial output growth gap remains positive currently, both in the US and globally.
Please note: references to individual companies or stocks should not be construed as a recommendation to buy or sell them. These are the fund manager’s views at the time of writing and may differ from those of other Henderson fund managers.
I recently returned from two eye-opening weeks in southern Thailand to visit an American friend who had been living there. The beauty of the islands and the friendliness and hospitality of the Thai people made for a wonderful first experience in Asia.
I had already been planning to make this trip to see my friend when the country’s military seized control of the country in a coup in May. My friend assured me I should go ahead with my plans since she still felt completely safe—aside from the occasional electrical brown-outs. In fact, the coup was actually helping tourism in some ways, particularly with the regulation of Thailand’s taxi system.
Signs posted in airports and hotels warn visitors to take metered taxis only, and offer phone numbers for placing complaints should a taxi driver try to overcharge you. All of this is well and good, but once visitors leave the airport or hotel, virtually no metered taxis can be found. In Thailand, where haggling is a way of life for those in the tourism industry, everything from tailored suits to trinkets can be bargained down to surprisingly low prices. But private taxis, or gypsy cabs, (often controlled by crime groups informally known as the “taxi mafia”) tend to be an exception to the bargaining. And, unfortunately, metered taxis in Bangkok and Thailand’s southern islands are few and far between.
This leaves tourists to pay much higher rates for transportation. For example, I took a metered taxi from my hotel in Bangkok to the backpacker mecca of Khoa San Road to do some souvenir shopping. The fifteen-minute, roughly 4.5 kilometer ride cost me 45 baht (~US$1.50). For my return, however, I had to go to a stand (purportedly for taxis), and ask an attendant to help me get a ride back to the hotel. While many attendants did not seem willing to haggle, I managed to talk down one attendant from a 600-baht (approximately US$19) fare to 250 baht (~US$8)—better, but still almost six times the amount the metered taxi had cost me for the same distance. The attendant told the driver where to take me and told me how much to pay the driver, and then the driver handed the attendant what appeared to be his share of the fee (about 20 baht).
Both prices were cheap compared to what I’m used to paying in the U.S. and I could certainly afford both fares, but getting “taken for a ride” in more than one way did not sit well with me, nor does it for most of the other travelers and foreigners living in Thailand I spoke to about this issue.
During our stay in the resort city of Phuket, we were never able to find metered taxis once we left the airport. Even our hotel couldn’t help us. To put the high cost of taxis into perspective, a one-night stay at our beautiful four star hotel in Karon Beach cost us just 500 baht (roughly US$15). When my friend and I went to Patong Beach, a 10-minute drive away, the round trip cost—by private taxi going there and a tuk-tuk on the way back—was 800 baht (US$25).
Most of these drivers are actually legal metered taxi drivers, however, I was told that they are so worried about the backlash from the “taxi mafia” that they go along with the informal system.
In early August, the Thai military issued a threat to police officers that do not protect metered drivers from the taxi mafias and demanded that they track down and arrest the leaders of these operations. The military has also promised legal drivers protection from any retribution.
Locals told me that since the coup, there appear to be more efforts to tame this practice of gypsy cabs. Ex-pats living in Thailand told me that they have recently seen an increase in metered taxis, and are hopeful that the military’s intervention will improve fares and the country’s overall taxi system.
By Jessica Feller, Online Marketing Coordinator; Matthews Asia
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
Caroline Maurer, Fund Manager, Henderson Horizon China Fund. Chinese Equities — Positioned for a Rebound?
As forecast earlier in the year, China’s economic growth seems to be stabilising due to better macroeconomic management. The gross domestic product (GDP) growth in Q1 and Q2 was 7.4% and 7.5% year-on-year, respectively. The central government remains confident that annual GDP growth will stabilise at 7.5% for 2014, with the expectation that Q3 growth will exceed 7.5% since it is a critical quarter for economic activities. To achieve that objective, the monetary policy must remain accommodative and fiscal spending must stay robust.
We believe the following three themes will also have a significant impact on China’s short to medium term growth:
Realisation of the Shanghai-Hong Kong connectivity
The Shanghai–Hong Kong stock connectivity scheme was initially announced on 10 April and the official launch is expected to happen in October this year. The scheme allows investors mutual access to the Hong Kong and Shanghai stock exchanges subject to a quota restriction, although we believe this quota will be increased overtime. We expect fund flows will flourish for both markets as a result benefiting stock exchanges and brokers on both sides. Companies with unique market positioning that are listed on only one exchange currently, such as Tencent and Kweichow Moutai, will surely attract investors on the other side.
Continued progress in SOE reforms
State-Owned Enterprises (SOEs) in China contributed significantly to the country’s investment-driven economic growth in the past three decades. At the same time, such economic structure has also led to issues such as misallocation of limited financial capital, excessive management focus on scale instead of return on asset, and insufficient incentive to innovate. As growth momentum slows, these embedded problems are becoming more evident. We believe the SOEs with improved operating efficiency can help offset some of the short-term negative impact and contribute to China’s economic growth. More importantly, over the long term, these reforms should invigorate private sector investment and help revitalise the economy by creating a fairer business environment.
Year to date, SOEs that made positive progress in restructuring, such as Sinopec, Datang Power and Sinotrans Limited, have outperformed the overall market. As more SOEs go through various phases of restructuring, we expect to see further divergence in performance across sectors and stocks. Although it is difficult to quantify the net impact of SOE reforms, we expect any marginal improvement to surprise on the upside since investors are generally sceptical about the potential benefits.
Cost savings from anti-corruption measures
The anti-corruption campaign thus far has hurt discretionary spending, especially high-end goods and catering services. Fortunately mass market consumption, supported by stable employment conditions and wage increases, has helped partially offset the negative impact. Therefore, the anti-corruption measures will likely improve investor returns in the medium term as SOEs reduce cost and improve efficiency through the process
We believe the following companies are poised to benefit from these themes:
Sinopec is looking to sell 30% of its marketing division to private investors by the end of Q3. Perceived as a pioneer SOE reformer, this asset sale will serve as a showcase for mixed ownership programmes. We expect the company to make material progress on this front in Q3 and Q4, and the current stock price does not seem to fully reflect the upside potential.
Hong Kong Exchange is a major beneficiary of cross border trading. The much anticipated mutual connectivity between Hong Kong and Shanghai exchanges will likely result in increased trading activity in the Hong Kong market if the quotas are expanded. If the connectivity proves successful, we expect to see a significant boost in the company’s earnings for 2015 and 2016.
Baidu seems well positioned to profit from the trend of Chinese users increasingly relying on their mobile devices for internet searches. The mobile division’s share of total revenue continues to rise, helping to drive robust top-line growth. We expect the company’s profit margin to bottom out this year after spending heavily on sales and marketing. The stock valuation is cheaper than peers such as Tencent.
Looking ahead
We believe the short-term bias toward accommodative monetary and credit conditions along with continued government spending on infrastructure — especially railways and public housing — will help support the growth outlook for this year. On the backdrop of a stabilising macro environment and positive reform momentum, we believe Chinese equities are positioned for a rebound in the remainder of the year because they are undervalued on various metrics.
Opinion column by Caroline Maurer, Fund Manager, Henderson Horizon China Fund
Note: References to individual companies or stocks should not be construed as a recommendation to buy or sell the same
When Prince Akeem, aka Eddie Murphy, came to America in the hit 1988 film, investment immigration opportunities for the wealthy could be challenging despite having deep pockets. As other countries began to make it easier for wealthy foreigners to immigrate, America started examining its policies and created the EB-5 program. The EB-5 visa for Immigrant Investors is a United States visa created by the Immigration Act of 1990.
America continues to be the “go-to” country for foreign individuals with high net worth who are seeking immigrationopportunities. Many countries have programs which allow individuals and families to immigrate based on financial commitments, but America’s program is slightly different. It has a two-step process.
Potential immigrants who have examined investmentimmigration opportunities, or “EB-5,” are also familiar with I-526 and I-829. The I-526 and I-829 are the forms, or applications, which investors complete during the EB-5 procedure.
The I-526 is submitted to the U.S. Citizenship and ImmigrationService (USCIS) for a green card which permits a two-year window of access to the country. When the 24 month “conditional” period is successfully completed, then the individual can file an I-829 which removes the conditions and grants the individual indefinite and permanent residency.
Currently, Chinese investors are dominating the EB-5 visa market with applicants from South Korea trailing far behind. However, InvestorVisa.ae reports record level of applications submitted by Middle East investors.
Previously, little has been documented about those that reached the second, or I-829, level in the process. Data released by the USCIS seem to show that Chinese applications are running at record levels. In fiscal year 2013, Chinese applicants totaled 49 percent of all I-829 applications stamped approved. The trip from the initial investment to permanent residency can be rocky for many potential immigrants looking at the EB-5 agenda.
Stages
To take part in the American plan, investors must be willing to invest a minimum of $1,000,000. If they are willing to invest in “target employment areas,” the amount of investment required is halved. An investment in a target employment area qualifies if a minimum of 10 jobs is created within the first twenty-four months and the investor must have invested in projects operated by USCIS approved centers.
To make it past the I-829 stage, the individual must document that their initial investment remains invested in the project as well as document the creation and continuation of the required jobs.
At the first stage, the I-526, the government normally gives approval based primarily on the business plan and projected costs. The I-829 stage requires the USCIS getting involved and confirming the job-creation requirement. Basically, approval requires that the investor be able to prove that the business plan was accomplished.
How Long Does It Take?
The permanent green card is not necessarily issued precisely after the I-526 has been approved. The two-year calendar only starts when the individual is actually admitted to America and not upon approval of the I-526.
Processing times and dates will vary based on investments and applications. Some individuals may be ready to head to America immediately after filing while others make take longer to complete the journey. The longer an individual waits before traveling to America, the longer the wait for the start of the two-year countdown.
Processing times for both I-526 and I-829 have changed as well. As immigration investment becomes more known and utilized, processing times have gone from several months to often over a year. The USCIS has reacted to this crunch by hiring and training more staff to process the application, but a wait time close to twelve months could still be often expected.
The Future
The number of investors has jumped from 1992 to 2008 according to the USCIS. One example is that of Chinese applicants. In 2008, Chinese applicants made up 13 percent of I-829 approvals. By 2011, that figure had jumped to 40 percent and, as of August, 2014, Chinese applicants account for 86 percent of approved I-829 applications.
Regardless of country-of-origin, every application has a family story behind it. The family wants to build its future in America and each puts their security and future at risk when beginning the process. The final stamp of approval on an I-829 application is a victory.
