What a difference a month makes….we thought that complacency was getting dangerous in March and took some protection in the form of cash and volatility hedges, but did not expect quite such an abrupt turn in sentiment. The talking heads on CNBC who were waxing lyrical about strong US corporate profits and the ‘strong fundamentals of the global economy’ (I kid you not) in March are now staring into the abyss and recommending cash. Yet we fail to see what is dramatically different in the current environment versus that of two months ago. The ECB bailout of Greece has weakened the Euro and this is a minor positive for global growth (if not US multinational profits) due to the asymmetry of sensitivity to the level of the currency between the US and the Eurozone. The bankruptcy of a Spanish Caja (savings bank) can be no surprise to anyone who has had access to any form of media over the last eighteen months, and the revelation that the South Korean frigate that sank earlier in the year was torpedoed by the North dates back to March. The reality is that the economic ‘recovery’ in the West will remain anaemic. Central banks are moving explicitly to counter the deflationary threat of fiscal tightening with aggressive money printing. Asia will suffer much less, though the exporters will face some headwinds. The Chinese will not send their economy into a sharp slowdown by regulation. They will also continue to buy resource assets round the world, and if they are cheaper so much the better (thank you Mr. Rudd). Volatility is likely to remain a feature of the markets for the foreseeable future, but one should take advantage of this in a contrarian fashion. Remember the Chinese characters for ‘crisis’ incorporates those for both danger and opportunity……

At the beginning of the year we were inundated with investor concerns about the Chinese bubble. Now the worries centre upon Beijing braking too hard and thus compounding the “growth scare”. It appears that Goldilocks is a blonde and therefore can never be Chinese!!

As media coverage shifts from evidence of ‘the Chinese property bubble’ to evidence of price falls in major cities and a sharp reduction in sales volume country-wide, we cannot help concluding that this is clearly the desired outcome for the Chinese Government. But just as Beijing did not want a bubble nor does is it keen for the property market to implode. Luckily, and in stark contrast to the West, a stable property market is to a large degree in the Government’s gift. This is because the downturn – and the rebound last year – has been driven by changes in regulation, not economics. Regulation in China can, and does, change overnight. This is a very different situation to the excess leverage/negative equity situation in the West, which is not amenable to rapid change. The majority of Chinese property purchases are still done with 50-100% cash, and banks’ attitudes to granting credit are not pro-cyclical as in the UK or the US.

“Why should Beijing stop tightening and why now?” As to “Why?” well, the tightening has now had an effect (see above) and this will be seen explicitly in the official figures that will be published in the coming weeks. As to “Why now?” we interpret Premier Wen’s recent exhortation to his regulators that the time has now come for “more coordination between departments” as a clear signal to give their tightening policies a breather.

Property stocks in the region are now very oversold and at large discounts to NAV. We are selectively buying the quality names in Hong Kong, Taiwan and Singapore (sold off primarily as collateral damage to the Chinese developers, exacerbated by some minor changes to selling practices in Hong Kong), and starting to look at the quality end of the Mainland Chinese developers.

In order to sell the Euro to a sceptical German public, the farcical ‘Growth and Stability Pact’ was conceived a decade ago to constrain European budget deficits to 3%. The Germans now want a rule to prevent any deficit more than .35%. One does wonder what planet they are living on. Nevertheless, the ECB’s decision to push the ‘inflate’ rather than the ‘self-destruct’ button will have significant consequences in weakening the Euro and making European exporters more competitive – a good thing as it helps offset the fiscal contraction. Unfortunately it won’t be enough to prevent a Greek default down the track, but the macro path is now clear. The Bundesbank has been out-manoeuvred, and inflation is coming. Disaster for bonds, selectively better for equities, great for precious metals and Asian currencies.

So why have Asian currencies depreciated vs the USD over the last few weeks? We can only assume it is a function of risk aversion, as it would be very hard to characterise the fiscal position of the US as materially better than much of the Euro-zone periphery. We are inclined to think that this presents a buying opportunity, particularly for the Australian Dollar, where the fundamentals – immaterial sovereign debt, a large interest rate differential and a budget realistically forecast to be in surplus in the next few years – are immeasurably superior. The recent adoption of a few anti-mining recommendations from the Henry tax review has cast a near-term pall over the perception of investment in the country, but we note that corporate activity continues and the reality is that there is unlikely to be a sufficient majority to pass the legislation in any case. From the perspective of the mining equities it appears that a worst-case scenario was immediately priced in, making the risk/reward equation much more favourable. We have removed most of our short positions and taken off our partial hedge of the A$ vs the US$.

For a week in late 2009 we all became experts on the Middle East as Dubai’s finances imploded (hands up all those who had to look up the other five emirates apart from Abu Dhabi and Dubai). Cue a $5bn ‘gift’ from next door and nobody cared anymore – until the next bond is due, anyway. Now the same story is being re-run with Greece playing the part of Dubai and the EU the part of Abu Dhabi. It is not new news that Greece is a financial basket case – nor, for that matter, that Portugal, Ireland, Spain and Italy are all in the mire. If the UK was in the Euro we would have the headlines all to ourselves, as our deficit is the same as that in Greece, but the absolute amount of the financial black hole is so much greater. Nevertheless, we confidently predict that Greece will not be hogging the financial headlines in a week or two, as they produce a 5 year path to budgetary nirvana predicated on strong economic growth, increased tax compliance and a reduction in nominal spending on public services, which will be enthusiastically greeted by Brussels and banish talk of default and ejection from the Euro. The depressing fact that this budgetary opus is a work of fiction will be quietly ignored, and markets are likely to bounce, as they did after the Dubai crisis faded.

Unfortunately the carpet is beginning to show some unsightly bulges as more and more bad stuff is swept underneath it. The sad reality is that a 10% of GDP reduction in the deficit at a time of rising interest rates and with a large stock of debt to start with is virtually impossible in a » Read more: Problems in Euroland and implications for the Asian investor

Manage your expectations
Given the shenanigans of the last couple of days of the Copenhagen conference I thought that you might like to see the attached note that I sent out a couple of weeks ago. Our message was simple: manage your expectations. Whilst we were cynical about the effects of realpolitik we are positive that the general direction of policy is clear, even though the pace of it may be more unpredictable, and, most important of all, there are very good investible ideas out there from which investors can make money.

Several of these play a part in our portfolios, Copenhagen notwithstanding.

Allegations that scientists have been cooking the numbers on climate change appear to be stoking scepticism about man’s contribution to global warming. It is of course right and proper that Nigel Lawson and others are determined to hold the scientific community to account. Good luck to them.

Whatever the outcome of these investigations however, it seems clear to us that the faster we reduce our reliance on burning of fossil fuels the better. We believe that there are now a significant number of investible propositions for investors who share our view and want to capitalise on the opportunities.

Our Asian funds currently have a meaningful part of its portfolio in the sector, some of which are » Read more: Forget the Copenhagen hoopla and make some money!

With the December Copenhagen conference on climate change rapidly approaching, all eyes will be on America and China, the world’s two biggest greenhouse gas polluters, which combine to account for 40% of global carbon-dioxide emissions. Their commitment and leadership during the talks will be critical for laying the framework and principles for establishing a successor to Kyoto.

Whilst international agreements are undoubtedly important, the likelihood of targets being hit and the globe being saved will be just as dependent (if not more so) on the specific carbon reduction policies adopted by individual countries. With all nations embracing the adoption of renewable and alternative energy, but at different speeds, Tiburon Partners has recently launched a UCITs III compliant global long/short equity fund focused on alternative energy and natural resources to allow investors to benefit from these dynamic trends.

Tiburon Terra will focus its fundamental based investment process on identifying companies expected to benefit and/or suffer from environmental and climate change issues. Tiburon believes the long/short approach is best suited to » Read more: The case for traditional and alternative energy

“China’s exports have to suffer with the western consumer flat on his back. And the problem is that China is so dependent on exports”.

If we had US$1m for every time an investor laments in this way our funds would be at capacity by now.

We reckon that net exports are currently contributing some 10% of the growth in the Chinese economy. Forecasts range between 8% and 16%. So it is a significant part of the economy but it is not the major attraction as many people, who sit, surrounded by products all stamped “Made in China”, seem to think. It has been a higher percentage in the last 3 years and has obviously fallen since the crisis of Q4 last year but it has never been the critical factor in the China story (see the attached chart). Look at 2003 when exports made a negative contribution to the economy or 2001 and 2004 where they contributed less than 1% and yet in both years the economy grew 8%-10%.

The Chinese economic miracle has always been based on the domestic economy – consumption and investment have always been the main drivers since Deng Xiao Ping got the show on the road at the end of the 1970’s. Again this is often forgotten given the obsession the West has for the level of Chinese savings: Chinese savings are high therefore domestic consumption is low and domestic consumption is a critical piece of the domestic economy goes the argument. But take another look at the chart.

China is a domestically driven economy and the domestic sector has just had the biggest shot of adrenalin in history.

Recently a number of economists have argued that due to Asia’s quasi-pegged currencies, easy monetary policies, and high savings rates (which drive investment and thus maintain a wide output gap at the same time as they generate high growth) , the region can see strong asset price appreciation (perhaps even a bubble). Furthermore, nothing can (or will) be done to stop it due to the economic and political importance of the export sector.

In other words, for fear of having to move the currency, monetary policies will not be adjusted enough to compensate for underlying economic strength. Sterilizing the excess liquidity that arises from exchange rate intervention will also be insufficient unless it pushes up interest rates – and this would merely expand the interest differential and cause further hot money inflows. I have also seen similar arguments made for Emerging Markets as a whole and for China specifically.

I also recently had a chance to see a number of global macro/asset allocation type of presentations, and they were all basically saying that » Read more: China is not Brazil but this is still interesting…

With markets roaring ahead and economists muttering about strong growth in the Western economies, one feels a little churlish in pointing out the Panglossian nature of these pronouncements, but we do feel compelled to dwell on a few of the less positive economic issues that seem to have been temporarily forgotten by the newly emboldened investor. First and foremost, it’s Government. Yup, the institutions that belatedly saved the world economy by spending your children’s taxes have run out of cash and the ability to write credible IOUs , otherwise known as bonds. Ponder on California letting convicts out of prison because they cannot pay the wardens anymore if you think ongoing debt issuance will be painless – and that is while Central Banks are artificially depressing rates. The official prognostications for deficits are scary enough, yet we know they are predicated on a politician’s make-believe world where » Read more: Reality check

All property investors love a bargain, and six months ago one was spoilt for choice. Opportunities to buy a dollar of assets for 50 cents – or in some cases, 15 cents – abounded. This was a geographically widespread phenomenon, which has recently disappeared in most countries as market prices have soared and dilutive equity issues have proliferated. There is one glaring exception, and ironically in a country with very little oversupply of commercial property and a resilient economy.

Australia is the last bastion of discounts to NAV, somewhat ironically as the sector has historically traded at a big premium, unlike the UK or US where the newly arrived premia are » Read more: Australian property still a bargain