Author: eastwestmarkets

Hong Kong Based Hedge Funds Show Positive Outcome in 2012

Oasis Management Hong Kong, along with many other Asia-based hedge fund managers, are generally pleased with the rewards which were reaped during the past year. Analysts were able to conclude that despite some of the risks endured over the course of 2012, the final outcome was of a positive nature.

Observers noted that all of the strategic mandates came out ahead in December with the best hedge funds in the multi-strategy category, posting gains of 2.37 percent for the month and 8.55 percent for the year.

Hedge funds finished the year on a positive note in general, with all regions showing in-the-black returns in December, and Asian funds outperforming other regions.

A recent AsiaHedge report showed that total assets in hedge funds in the Asia-Pacific region amounted to $144 billion as of June 2012. This is approaching the peak seen in December 2007 of $192 billion before the tough year for hedge funds of 2008.

US Economy Has to Get off the Cliff

If America fails to deal with its economic issues, the fiscal cliff will turn into a fiscal abyss.  According to China’s Xinhua news agency, America’s politicians need to take a more active role in sorting out its $16 trillion debt.  Clearly they are afraid of becoming unpopular by reducing spending and increasing taxes.  Instead, they are seemingly ignoring the issue and just getting into more debt.  It is for this reason that the abyss is feared.

America’s economic issues are obviously going to impact other countries.  One of them is China since around two-thirds of its holdings are invested in American dollar assets.  America is also a major export for China.  And it’s not just China.  There was an increase in stock markets around the world last week.  This was due to what the world perceived  America did to thwart the rise in taxes and cuts in spending that could have been the straw that broke the economy’s back.  But since America has been so near the edge of the financial cliff, it does not bode well for ensuring it will be able to climb out of an abyss.

As a reflection of Chinese administrative thinking, Xinhua also put out a demand to America to “live up to its global economic responsibilities” and pointed out that the reason it was in such a “mess” was because of its badly-functioning political system.

UK Firms and India Investments

 

Mayor of London Boris Johnson recently said that companies in the UK should have greater access to “India’s booming markets.”  For this to happen, India needs to loosen its small business protective laws. This would facilitate the process for British businesspeople seeking to makes sales to the up-and-coming Indian middle class and would also lead to poverty alleviation through the provision of cheaper goods.

Right now, there is a situation whereby many large UK corporations (such as John Lewis and Tesco) cannot work with the market in India because of laws preventing retailers from selling more than one branded product.  Even though exclusive boutique labels such as Gucci and Ralph Lauren will be able to open up shop in India since they sell their own label exclusively, larger foreign markets and stores will not be able to follow suit as they are more inclined to sell more than one branded goods. 

Ultimately, the law was established to protect India’s large amount of small businesspeople, trading at market stalls at each and every corner.  Johnson also pointed out that British businesses would be able to save the Indian consumer money through larger-scale sales.  India, he believes, has many more opportunities to “experiment with more openness.”  If an insurance company in the UK can lower their household and medical insurance premiums for an Indian with a modest income, they will be able to put a significantly greater amount of money in other areas, boosting those industries.  In other words, once multiple brand retailers give people greater access to cheaper basics (like food, household goods etc.), there is more chance of there being an escalation of wealth for some of the country’s poorest populace.

It is for this reason that Johnson visited India – to “make the case for openness and partnership.”  He believes he made great progress in this realm.

Expanding China-Europe Business Co-operation

It seems that growth in China are resulting in all sorts of developments for the region, vis-à-vis other countries.  According to Song Tao, China’s Vice Foreign Minister, one of these developments is increased co-operation with Europe.  Indeed, there has been such significant progress that Song is hopeful that the long-term future will witness a “China-EU free trade area.”  Currently the countries have plans in place to work together in the areas of finance, urbanization, sustainable development and trade and have already been united on a variety of global issues.

China and Europe have had a comprehensive strategic partnership in place now for close to a decade.  While Europe was undergoing its substantial debt crisis, it was China which provided significant support, mainly through its $43bn IMF contribution.  As well, it helped Europe buy European bonds and escalated imports from the region.  China has also been supportive of Europe’s integration process.

Despite Europe’s assistance, China is still not completely out of the woods.  Naturally, its weakened position has impacted its relationship with China.  For example, according to China’s Ministry of Commerce, there was a reduction in foreign direct investment (FDI) from the EU to China by 6.3 percent year-on-year from January to September to $4.83bn. In addition, China’s exports to Europe plummeted 30.3 percent over the same time period.

Thus, according to Haitong Securities Co. Ltd.’s Deputy GM and Chief Economist, Li Xunlei, China’s general FDI situation is decline as inflation has rendered its environment for FDI somewhat less attractive than it has been in recent years. The fact that China’s economic growth has slowed in recent years hasn’t helped the situation much either.

So while Europe has been instrumental in assisting China’s development, there is still much to be done on the east’s end to really get it back in an attractive investment environment for foreigners.

Made in America

 

Economics and Politics

Historically, it’s been China where manufacturers have felt most comfortable.  It’s traditionally been a huge financial saving. But this could be changing.  Already many are moving their business out of China and back home as noted in a previous post.

And now, as part of his campaign, Barack Obama is claiming that since manufacturers are coming home, this is clear evidence that the country’s economy is back on track.  He is using this argument to point out that Mitt Romney was one of the early proponents of encouraging US corporations to outsource blue-collar jobs to low-wage economies overseas.

At the same time, Obama – along with other proponents of doing business in America – is claiming that taking business abroad is becoming more expensive.  In addition, workers in America are becoming increasingly more efficient, and it’s thus making more sense for businesses to come back to the States.

So it seems that the household phrase Made in China could very soon be replaced by Made in America.

Focus Media Holding Ltd. Subject of Largest Chinese Leveraged Buyout

Analysts and investors in the Chinese economy are carefully taking notes as the largest leveraged buyout in China proceeds.

Private equity firms, including the Carlyle Group, are bidding on Focus Media Holding Ltd, a Chinese advertising company. As of mid-August the bidders have made only a “non-binding” offer of $27 for each ADR (American Depositary Receipt) or share. This offer represents a 15 percent increase in the value of Focus Media’s stock as of August 10th.

Other Chinese companies have seen increased values in their own ADRs as short-sellers showed interest in them as well. The bidders on Focus Media include Citic Capital Partners as well as the CEO of Focus Media Jason Nanchun Jiang. Their offer values the company at $3.5 billion.

Sachin Shah, a special-situations and merger-arbitrage strategist at New Jersey-based Tullett Prebon Plc said that this offer

“is another example of how Chinese are taking more and more of their companies private. The U.S. market isn’t properly valuing them and doesn’t know if the offer price is right, allowing the management of the companies to possibly win in getting the assets at lower valuations.”

Increase in Israeli Tax Rates

In recent news from the Israeli Knesset and the Israel Tax Authority with Gidi Bar Zakay, the Law for Deficit Reduction and Tax Burden Shifting was recently passed. The new legislation increases the Israeli tax rates and will have an impact on middle and higher annual incomes.  The changes actually make the Israeli tax burden one of the highest in the west, and will certainly have an impact on many Israelis.

As of January 1, 2013, the new personal income tax rates will be as follows:
NIS 0 to NIS 62,400 per year: 10 percent
NIS 62,400 to NIS 106,560: 14% (unchanged)
NIS 106,560 to NIS 168,000: 21% (unchanged)
NIS 168,000 to NIS 240,000: 31%
NIS 240,000 to NIS 501,960: 34%
NIS 501,960 to NIS 800,000: 48% (unchanged)
Over NIS 800,000: 50%

Is China Bidding the US Farewell?

While for the last few years China has been yearning to sell its shares in the US market, this trend looks to be changing.  For example, Focus Media Holding Ltd. chairman announced its intention to buy back its American traded shares, privatizing its Shanghai-based advertising company.  And this is not the only company moving in this potential direction; smaller companies seem to be following suit while receiving help to ensure this happens.  Indeed, according to one source, the China Development Bank is even shelling out $1bn in loans to help companies abroad seal the deal.  Further, a few months ago, a traffic management technology company – China TransInfo Technology Corp – said it would be going private with the support of the bank’s branch in Hong Kong.  And Harbin Pacific Electric Company withdrew from Nasdaq with a CDB loan.

So the question is, why is China losing faith in America?  One argument is that there have been accusations of questionable accounting alongside a Catch-22 between Washington and Beijing over whether American regulators have the capacity to supervise their China-based auditors. These concerns have also resulted in decreasing share prices, costing several billion dollars to investors.  Moving out of America – these Chinese companies believe – would result in much less investigation. Right now, there is speculation over whether US inspectors will be given the authority to investigate the work of the China-based audit firms. For example, while Washington is pushing auditors to hand over paperwork on the companies being investigated, the authorities in China are refusing to release part of this.  If this doesn’t get sorted out, audits from the firms might be rejected by the SEC which will make companies find new ones.

China’s Increased Stability

China’s economy is something it can be proud of these days.  Indeed, according to KPMG LLP, it looks like this stability trend will continue during the second part of the year.  In somewhat contrary recent foreign investment news, Chinese-based companies are transferring their merger and acquisition ambitions to EU and US markets, primarily in energy, mining and power industries.  As well, Sinopec – China Petrochemical Corporation – a few months ago acquired a third share in American-based Devon Energy Corporation’s five shale gas assets.  According to analysts, this is quite a milestone for the company, since it is the first time it is venturing into gas and oil exploration and development in America.  As well, China is very much looking toward attracting foreign investment (such as that from the US) due to how its capital inflow is structured, moving in the direction of industrial optimization, improving business conditions to companies from abroad.

It’s not all bad news for America’s economy though.  Due to government support, both China’s and America’s sector has been encountering a boom.  With competitive international wage rates, a weaker dollar and an increase in emerging markets, things are on the up.

Is China Moving to Europe?

Now the question is, if China is taking its investments out of the US, where is it going?  Some would argue that Europe is benefiting from the issues the eastern superpower is having with America.   For those investors moving out of energy and into finance and technology, Europe is more attractive than the US, irrespective of the region’s economic problems.  Indeed, according to a survey conducted by Ernst & Young, 32% of Chinese companies felt that the best investment opportunities would be in western Europe over the next three years. That’s almost a third.  The region offers an open business environment.  But still, it’s not all going to be plain sailing since a lot of private equity fund projects could not offer investor protection – something potential Chinese investors need to consider.

Ultimately while America might currently be less attractive to China than it has been in the past and Europe is becoming more attractive, there are pros and cons to both regions that potential eastern investors need to bear in mind before putting their money with their mouths are.

 

Fortune Global 500: Asia and America

In a Fortune Global 500 list on the world’s largest companies based on revenue, in an unprecedented move, China came in higher than Japan.  Despite this achievement, American firms still took the most positions on the list.  Indeed, a staggering 132 companies from the United States were featured, with China as number 2 on the list, featuring 73 companies and Japan with 68.

Europe’s Impact

While Europe lost 11 companies in 2011 on the list, China gained 12.  Nonetheless, as Fortune pointed out, even though there is a financial crisis in Europe, and Japan has encountered many disasters, the big international companies have continued to escalate in both profit and revenues.

Despite its lead position, America shouldn’t be sitting back on its laurels.  The superpower should be aware of the fact that it was the only country to lose so many companies on the list over the last 10 years, having lost 65 headquartered companies throughout that timeframe.  In addition, companies in China were showing post-crisis success in 2009, with a move to gas and alternative energy and away from oil.  After a hard 2011 vis-à-vis investments, so far 2012 is going well, in America especially, but also noteworthy throughout the world.

East-West Currencies

Clearly connected to all this news is the fact that trading companies are not as enthusiastic about converting the American dollar to the Chinese Yuan.  Indeed it is the US dollar that companies want to accumulate since it is strengthening.  What happened was, that at the time the Yuan was increasing, rather than buy the US dollar and sell the Yuan to pay for imports, companies would borrow US dollars from banks so as to pay for imports, which shorted the US dollar, which was good since it was anyway the US dollar was weakening.  Today the opposite is the case; traders are hanging on to US dollars for longer which impacts China’s monetary condition since its inflows force central bank intervention.  China thus finds itself in a strange place, with its domestic economy requiring easier monetary condition but flows leading it in the opposite direction.

Global Economic Leader: China or US?

Perceptions Versus Reality

Even though more people see China as the global economic leader, the truth is, America is still way ahead of this eastern superpower.  A survey carried out by the Pew Research Center this year found that a mere 36 percent of (over 26,000) respondents (spanning 21 countries) regarded America as the leading economic power – a drop from 45 percent in 2008.  Why? Probably because many people still see America’s economy as being in turmoil, due to the western recession that impacted it the most.  However, even with all of that, it is still ahead of China.  In addition, the fact that Europe’s economy isn’t giving anyone anything to smile about, is not helping matters either.

Indeed, regarding figures for China’s economy just a couple of months ago, the situation doesn’t look good.  However, it’s not all doom and gloom since according to Dow Jones Newswires and Reuters, industrial production increased 9.6 percent in May (compared to figures from May 2011).  In addition, between January and May, fixed asset investment in urban areas increased by a little over 20 percent.  Vis-à-vis inflation, wholesale and consumer price gains eased much more than expected.

China’s Economic Windfall

It should be noted that China has experienced significant outbound investments.  In the first quarter of 2012, the level of acceleration reached $21.4 billion (following a standstill in 2011), boasting assets in the resource sector and South America being the most popular commodity pool operator.  As well, data from the Ministry of Commerce shows China attracted nearly twice as much inward investment as the $60.1 billion it sent outbound in 2011.

Approximately 50 percent of China’s attempted foreign forays ended in failure last year.  In addition, there was a sharp increased enjoyed in the country’s imports and exports in May.  So, the question begs, with all this good news and the economic forecast in America not looking all that hot (especially vis-à-vis the country’s “faltering” job market), why is the perception that China is doing better than its western counterpart, not the reality?  Indeed, as JPMorgan Chase economist, Michael Feroli, noted, America’s most recent economic data has been “decisively disappointing.”

The truth is, even with the optimistic economic data coming out of China, caution is still being recommended.  In response to a poor economic performance for China in May, policymakers China’s slashed interest rates for the first time in over three years.

Ultimately, while both China and America are currently facing their various economic challenges, the perceptions are that China is doing better, but the reality is the opposite.