After decades of failing to spot the blindingly obvious, the ratings agencies are trying to get ahead of the curve. S&P has taken to making misleading and price sensitive announcements during market hours, while Moodys has gone for a box-ticking governance screen that comes to the earth-shattering conclusion that listed Chinese companies have some risks attached. We wonder how they rated Newscorp prior to the hacking scandal. Anyway, the market impact of Noddy’s guide to Chinese stocks has been substantial as investors, sensitised by the Sino Forest farrago, sold first and never bothered to ask questions. Opportunity knocks for those prepared to do the most basic research, as price falls have been substantial. In many cases they have come from lowish starting points and have been for completely spurious reasons. The Chinese economy has decelerated a tad in recent months, though given the furious debate on how much steel the country produces ( 7% difference between high and low estimates, and this is something you should be able to measure accurately) we attach little importance to GDP numbers. Nevertheless there is anecdotal evidence of a selected slowdown and given that local government finances seem to be a weak point and that they fund themselves primarily from land sales, there is a good case for a less restrictive property regime. We would also posit we are nearer the zenith of the monetary tightening cycle than the nadir and that the markets should be looking forward to fewer worries over interest rates. Cheap valuations and the prospect of more liquidity should encourage some buying once the European soap-opera returns (albeit temporarily) to the back-burner. » Read more: Mark Fleming – July 2011

Corporate Japan continues to display a remarkable resilience with impressive corporate earnings despite major headwinds including the yen, the impact of the earthquake and a slower global economy. Managements deserve much credit for the aggressive and ongoing cost-cutting policies that they have adopted. We remain surprised that many foreign investors still seem overly sceptical about this progress. The most encouraging recent newsflow surrounds the future plans at many companies to address peripheral and in many cases loss-making divisions as this reduces the risk to future earnings from any decline in topline sales growth. Hence the valuation argument for Japan still looks favourable and more so when investors accept that their Asian competitors enjoy multiple advantages, not least of which are the lower corporate tax rates. Balance sheet strength, as indicated by recent statistics, has shown a marked improvement, albeit that we are not expecting much if any of the cash to be returned to shareholders, perhaps the most legitimate gripe of the foreign sceptics.

We continue to believe that the forthcoming steel merger between Nippon Steel and Sumitomo Metal carries enormous significance for the domestic industrial landscape as this will accelerate the consolidation in many domestic sectors and should continue to underpin further improvements in corporate margins » Read more: Rupert Kimber – July 2011

As a general rule, when matters of a global financial nature dominate the mainstream media, and even the average tabloid reader is dimly aware that his favourite holiday destination is bust, markets will have discounted the near term bad news. Yes, Greece is bankrupt. It’s been bankrupt for years – a known unknown if ever there was one. Asian market sentiment has soured, and many trading indicators now suggest that a bounce in markets in the near term is more likely than further falls. This is not to suggest that the immediate prospects for the Eurozone look bright, and we would not advocate buying European banks (unless you have an unusually high tolerance for rights issues) or even anything much that depended on the Western consumer. We remain in a parlous state, and this is unlikely to improve on an investable timescale. However, we invest in Asia, and the prospects there remain a lot brighter than at home, even if recent market performance has been undifferentiated.

The other main concern of markets is the recent ‘growth scare’, with pundits assuming the same causality for recent nervousness over Chinese and Indian growth as for the US and Europe. Yet aside from the ‘tax’ of higher energy and food prices, the two have very different characteristics. The Asian ‘slowdown’ is engineered – China, India and Australia have tightened policy significantly, and it’s working. » Read more: Mark Fleming – June 2011

Japan continues to perform well in the context of global markets for justifiable reasons, primarily as initial corporate earnings forecasts now increasingly appear too conservative. Furthermore unlike many parts of the global economy the economic growth rates should accelerate as the impact of the domestic reconstruction packages progressively take hold over the next 12 months.

Within the market the domestic sectors, that represent the best value at this stage, have just started to perform and we continue to believe that they represent the prime investment opportunity as opposed to the more global manufacturing sectors that have already partly priced in the faster than expected recovery in production levels. Sentiment remains very depressed towards the market, reflected by low trading volumes and we expect this to change once greater clarity emerges on issues such as Tepco and the extent of any financial losses associated with related bonds as well as any further loan requests on the banks. We still await confirmation over the funding of the reconstruction packages and of particular interest to us is the extent to which the BOJ participate or whether the onus will be largely placed on the private sector through higher taxation. This does matter as we need to confirm that domestic consumption patterns will not be excessively depressed as this would undermine the economic growth expectations and obviously corporate earnings. We remain heartened by recent newsflow confirming that certain domestic industry changes are continuing as the consolidation expectations are a key component of our stock selection. » Read more: Rupert Kimber – June 2011

‘Do as I say, not as I do!’ We have all heard this from parents or teachers at some stage in our lives but in the investment world it pays to do the opposite. Li Ka Shing may warn about property speculation, but is a buyer of his stock in the market. The Kuok family has just announced a privatisation of Allgreen, their listed Singapore property vehicle. The stock market stopped celebrating QE2 as an Asian reflation trade six months ago, and is now paranoid over HK mortgage rates rising 1% from recent lows. Yet the physical market makes new highs every day, and recent land auctions show a high degree of confidence in future pricing from the real estate community. Commercial rents are bouyant, and recent activity in the retail letting arena is verging on the exuberant – but then retail sales are growing at 25% plus. This is a more important driver of NAV than residential pricing for virtually every listed property company, whether classified as an investor or a developer. Stock prices are assuming a material fall in property prices on the basis of a well-proven tendency to mean revert to the average discount. Risk/reward is thus asymmetric in the buyer’s favour….a feature that we always appreciate in our portfolios. As an interesting counterpoint we would point out the ludicrously optimistic rating of the UK REITs, which have never been more expensive….yet are facing a well documented headwind of weak consumer demand and interest rates that must rise if the Bank of England is not to become more of an international laughing stock. We see a 20% fall in property share prices as rather more likely in the UK than in HK. » Read more: Mark Fleming – May 2011

Despite considerably more resilient corporate earnings forecasts than expected, the market has suffered from another bout of overseas jitters, weak US economic data and renewed anxiety over the Eurozone. In a perverse sense the better earnings forecasts together with further net buying by foreigners has made the market vulnerable to such external problems. We are not unduly alarmed however, as we continue to see terrific value in the more domestic section of the market and are therefore less concerned by the slowing economic data overseas. Conversations with company management and public newsflow do continue to suggest that we should see a much faster pace of industry consolidation in light of the earthquake. It is to be hoped that the Fair Trade Commission do not attempt to derail the forthcoming steel merger, again a real positive catalyst for certain share prices which will make life difficult for the sceptics who argue that domestic Japan remains devoid of change. As previously noted, the anecdotal evidence confirms the notion that Japan has recovered from the earthquake at a faster than expected rate although it is possible that the summer months may result in a lull as the temperature gauges start to rise.

We still await the next response from the BOJ who continue to rule out the purchase of reconstruction bonds whilst publicly acknowledging the requirement for additional easing of monetary policy. » Read more: Rupert Kimber – May 2011

One might be forgiven for having a “man bites dog’ moment when reading recent coverage of the debate over the U.S. budget deficit. Tim Geithner and George Osborne seem to assume that a cross-party consensus on there being an unsustainable overspend is an automatic prelude to actually doing something about it. The current thinking seems to be along the lines of the usual, massively over-optimistic extrapolation of fast economic growth, followed by gradual fiscal tightening post the next Presidential election and some automatic ’stabilisers’ to reduce spending post 2015 if it isn’t happening already. Tax rises are clearly anathema to the Republicans, who continue to push for tax cuts. This is clearly all an economist’s version of Alice in Wonderland, with the GOP in charge of the Mad Hatter’s tea party. Remember the E.U.’s ‘Growth and Stability Pact’, designed to ensure fiscal rectitude in the Eurozone? That’s the fiscal straitjacket that was initially breached by Germany, and of course subsequently ignored as why would you want to pay fines when you are in recession already? One does not need to dwell on the current Euro-mess to see that any political solution projected into the future is liable to go the same way – think the continuation of the Bush tax cuts. The market, Bill Gross and even the ratings agencies are voting with their feet, pushing the dollar down and risk assets up as investors focus on the positives (corporate profits) and ignore the yawning macro economic canyon below.

A weak dollar means a strong Euro and strong Yen. The U.S. is in a bind, but so is everybody else. Default (in reality, if not in name) is a given for 3 Eurozone economies. The Finns, the Germans (and even the Brits) are objecting to picking up the bill. Yet the alternative is another banking crisis as one can rest assured that the stress tests get nowhere near the reality of the collateral damage that comes with marking down sovereign debt. » Read more: Mark Fleming – April 2011

A robust US earnings season and some resilient Japanese results have helped to stabilise the Japanese market and perhaps pleasantly surprised the more bearish forecasters in Tokyo. Within the market there remains a sharp divergence between the multinationals and more domestic stocks with the latter continuing to see weaker share price trends. To our mind this represents the opportunity over the next 12-18 months, especially from a valuation perspective as it appears optimistic to assume simply that world economic growth will be continuing at current levels in 2012 when Japanese manufacturers recover from the problems of 2011. It is worth noting that senior executives from Siemens, UPS and even Ford are expressing some uncertainty over the H2 2011 outlook. We continue also to be sceptical that rising input costs can continue to have a negligible impact on margins for industrial companies and hence the recent results, whilst clearly impressive, might represent the summit in terms of operating profit margins. In an era of such profound lack of interest in bonds we do not rule out the possibility of further near term gains for the major indices. Given the sensitivity of the Japanese market to near term earnings trends we are sceptical that the market is set for a strong rebound until investors have confirmed that the earnings headwinds have passed. » Read more: Rupert Kimber – April 2011

We had been expecting a wobble in equity markets for a while. Complacency over economic recovery in the West has been growing while geopolitical tensions in the Middle East, sovereign debt worries in Europe and commodity cost push inflation had been largely ignored, outwith some of the Asian markets which had become too frothy last year (India and Indonesia). The wobble that shifted the Japanese land mass 8 feet and that has, potentially, given rise to the worst nuclear disaster ever (due to the density of Japanese population compared to Chernobyl) is clearly a ‘left field’ event that will have some longer term economic ramifications beyond the appalling social and environmental cost of the tsunami and its immediate consequences.

Advocates of nuclear power are now clearly on the back foot, and will remain so for some time. In the near term the absence of Japanese nuclear generation will significantly exacerbate the demand for conventional hydrocarbons and push the oil price higher. If tensions in and around the oil producers of the Middle East and North Africa stay elevated – our central thesis for the foreseeable future – there is a risk of a real spike in energy costs. » Read more: Mark Fleming – March 2011

The appalling loss of life and the aftermath of the earthquake has yet again presented Japan with a major challenge but as always it would be dangerous to underestimate the nation’s capability to address such an event. A cash rich corporate sector certainly has the resources to cope and there will be no shortage of government funding for the heavy costs of reconstruction. After a brief period of intense alarm, resulting in a precipitous decline in the equity market, share prices have recovered very strongly, assisted by tremendous foreign buying interest, on expectations of a fast resolution to the current problems. Central bank intervention has steadied the foreign exchange markets that were troubled by unsubstantiated rumours of Japanese repatriation of overseas funds. In this sense the easy part of the trade has probably run its course for now.

Our slightly more cautious near term outlook rests on the uncertainty over the impact on the corporate sector and the likely ongoing shortage of power. Clearly the stockmarket and analysts assume that any earnings disruption will be short lived but this remains to be seen given limited disclosure to date and the unknown impact on balance sheets arising from damage/reconstruction costs that is largely uninsured. » Read more: Rupert Kimber – March 2011