Quarterly Newsletter - July 07
Major Indices (as of 1/7/07)
* PE ratios as of May 07 (based on 1 year estimate
Commentary – Past 3 months
Fourth Quarter 06/07 financial year saw share markets globally boom
despite large volatility in the overvalued local Shanghai A market
(mainly on the downwards side). A 15% fall in June was triggered by
the Chinese Government increasing stamp duty on share transactions
from 0.1% to 0.3% in an attempt to cool the sharemarket. Fears over
sub-prime mortgages in the USA and a slowing US economy (read housing
market) caused little worry on global markets, however recent increases
in long term US bonds have caused a small market pullback .This has
been most noticeable in those sectors that are most sensitive to increasing
interest rates such as listed property and infrastructure.
World oil prices have risen again in recent months currently at around
USD $71 /barrel. Other resources prices have remained high, in particular
Copper and Uranium. Copper is trading at a 6 month high trading at
USD 3.58 /pound. Uranium also has continued it’s meteoric rise
and has most probably peaked at around USD 1.40/pound. Finally iron
ore has continued it’s strength helped by the Indian iron ore
tax (making Indian ore more expensive), and Nickel has at last dropped
back to some sort of reality.
Commentary – Forecast next 6 months
In USA we are unlikely to see further interest rate rises this year, and in Australia we may get one more small (0.25%) rise. The European Central Bank and the Bank of Japan, started this process of rising rates later than the US and Australia, and are generally expected to continue on their path of raising interest rates gradually over the period ahead. Having said that, an increase in inflation due to say an oil price spike, may suddenly cause rates to rise. Also, I would not be surprised to see further increase in US long term bond rates which will hurt interest rate sensitive areas such as bonds, property and infrastructure. It will also slow the borrowing to invest mania of the last few years, which means global liquidity and some asset prices should decrease somewhat.
Most expectations are that the world economy will continue to grow at an above-average pace in the year ahead. While growth in the United States is expected to remain weak, this is being offset by very strong Asian, Eastern European and South American growth. Perhaps a sign of this is that Mexican telephone tycoon Carlos Slim has now overtaken USA’s Bill Gates as the world’s richest man with wealth of USD 68 billion. Growth in the Chinese economy has remained around10 per cent (and India around 8%), and there has been a significant improvement in conditions in the euro area since the beginning of the year. The expansion in Japan is continuing, and strong growth rates are being seen in a range of emerging economies in Asia and elsewhere.
The main areas to be cautious about at present are:
Those regions of the world that have strong GDP growth and are valued reasonably will do well, whilst areas that are overvalued or that have weak growth will do poorly. My favourites regions currently include Venezuela (PE 7.7), Korea (PE 13.4) and Brazil (PE 13.4). Additionally playing China through the better valued Hong Kong market will continue to be a good play leading up to the Beijing Olympics in August 2008. Areas to avoid continue to be USA largely due to their massive debt and the likelihood of continuing weakening currency, overvalued industrial shares in Australia, and most western countries residential property which is still overvalued.
Remember that emerging markets are growing on average at twice the rate of the developed markets and the numbers of population involved is staggering (emerging countries make up over 2/3 of the world population).
An example is mobile phone penetration rates in the following
Finally I expect the Aussie dollar to continue to strengthen relative to the US dollar.
I expect the Australian share market to underperform Asian markets over the next 6 months, due to a weakened property market and a fully valued sharemarket. Home affordability in Australia is still at record lows and building activity is at recessionary levels. Tourism is not performing well, leaving mining to prop up the Australian economy.
We have just had a massive liquidity boom that will start to slow and the Industrial sector which is somewhat overvalued (PE of around 19) may well stall or fall, however I expect the Resources sector to continue to prosper and it is still the hidden gem within Australia trading on a ridiculously low PE of around 13, at a time when there is a massive demand for resources, and soon we will see the Chinese buy more resource companies perhaps a large one such as BHP, Rio or CVRD.
Overall continue to expect financial services, energy (in particular biofuels) and resources to do well and property trusts overvalued industrials, and some infrastructure companies to struggle.
The Australian share (ASX 500) market historical PE ratio is at 18.0, suggesting a market correction of 10% is looking likely in the next 3-6 months. Again this is most likely in the industrial shares where many are trading at lofty PE ratios around 30.
A Sovereign Fund is a country's investment fund, usually using their foreign surpluses to invest into shares and property all over the world, and causing asset prices to boom as a result. Britain did this in the early 1900’s, Japan in the 1980’s, Singapore (Temasek) in the 70’s, 80’s and 90’s , and now it's China and the oil surplus nations (Saudi Arabia ,Russia) turn. The only difference is this time it is on a scale the world has never seen. For example, China’s foreign account surplus last year was 9.5% of GDP, more than double the highest ratio ever achieved by the Japanese in their hey day.
Lou Jiwei is the head of China’s new State Investment Corporation (SIC). He recently placed $US 3 billion with the private equity firm Blackstone to invest on behalf of China. This is just the beginning of an avalanche of Chinese Sovereign Fund investments who will have part of the massive $US1.2 trillion Chinese current account surplus to invest. The Chinese will remain linked to the US by way of their US treasury bond investments (usually around 70% of foreign reserves), however this is thought to be capped at around $US 1 trillion. That leaves $US 200 billion available for SIC to invest initially and with China’s foreign reserves growing around $US250 billion pa , they would have over a trillion US dollars to invest in less than 5 years. Now that can massively move markets.
So where would they invest these funds?
will the Chinese place these funds?
So, in conclusion, be ready for a new wave of massive Chinese, Russian and Saudi Arabian money that will push up prices of shares and property throughout the world over the next 5-10 years. A great period to own resource companies and in all likelihood most quality assets around the world, as the savers of China push up the values of overseas assets, similar to what we have already seen in the local Chinese property and share markets this last few years. The big question will be what assets overseas do the Chinese most desire? Once you answer this question you will become very rich indeed.
Latest Government Changes
From Budget night (8/5/07)
From July 1,2007
Summary of where the Budget Surpluses (next 4 year plan) will go:
NB : High Net Worth Financial Advising attempts to enhance overall return for clients by investing in undervalued regions of the world and undervalued asset classes, that have positive growth stories.
NB : The contents of this newsletter does not constitute personal
advice and is general in nature ,please see your adviser for
suitable to your own needs and objectives.