‘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

The inflation/deflation debate is becoming more polarised by the day, with the bond bulls pointing to ‘core’ CPI (which is largely a fiddled imputed rent number) as evidence that there is nothing to worry about. While we feel that this is a dangerous and overly sanguine view, it also misses a more immediate point pertaining to the general health of the economy. Consumers who drive, eat and heat or cool their houses are suffering a major income squeeze. In places such as the UK this has been exacerbated by increasing taxes, but even in the US which has yet to smell the aroma of mandatory deficit-reduction coffee, it presents a clear and present danger to the consensual ‘strong US economy in 2011’ view. Consumption remains around 65% of U.S. GDP, and it is statistically impossible for a corporate capex or housing rebound to offset a material fall in consumption. So we need fast job growth, rising wages and a confidence-inspired voluntary reduction in savings rates to meet current expectations. We do not believe that this is a likely outcome.

Some near-term relief from high input prices may be at hand, however. Unfortunately this is likely to come from a rising cost of funding puncturing the speculative financial bubble in commodity pricing or a hiccough in China, prompted by tighter monetary conditions. » Read more: Mark Fleming – February 2011

Ongoing foreign investor interest has continued the recent market rally despite the expected selling by domestic financial institutions ahead of the end of the fiscal year in March. Strong economic data in the US has added further momentum to the global cyclical recovery. Clearly the unrest in the Middle East is a concern and will remain a factor in the coming weeks, possibly months, but investors seem prepared to cope with this uncertainty unless a further escalation sends oil prices considerably higher. Strong recent corporate results in Japan have provided further illustration that even at current exchange rate levels, profits and crucially margins continue to recover sharply and valuations appear still reasonable on global comparatives. Although we are not currency forecasters, the yen appears to have reached a peak and recent yen purchasing by manufacturing companies appears a more seasonal pattern which should dissipate. The longer term yen outlook is likely to be determined by the timing of an end to QE2 and any credible deficit reduction policies. Of greater importance near term will be how the current political impasse plays out in terms of passing the budget and the proposed reduction to the corporate tax rate.

Inside Japan there have been several signs of improvement in liquidity. The recent MBO emergence would appear to have been triggered by looser lending standards by the banks who are seemingly prepared to offer funding at 6x EBITDA as opposed to 4x historically. Domestic equity investment trusts appear to be experiencing a slight revival after a protracted period of outflows. » Read more: Rupert Kimber – February 2011

The Indonesian market has fallen 10% from its peak in less than a month despite Wall St and commodities remaining on an upward trajectory. Most of the liquid market bellweathers are down at least 20%. This fall preceded the eruption of political unrest in Egypt. Why? Interestingly, there does not appear to be an easy answer to that question as there were no macro economic or corporate triggers to catalyse the sell off. We think it is the first dead canary in the risk mine as market perception switches from glass half full to half empty and the exit door becomes a very crowded place. On a recent marketing trip to the U.S. we were struck by how many times we were asked about Indonesia rather than China, and it had clearly become a very popular trade. The idea that the Central Bank had suddenly got behind the curve in not raising rates as chilli pepper prices soared seems rather fanciful to us, especially at a time when Western Central Banks have given up on price stability altogether and are now actively encouraging inflation. » Read more: Mark Fleming – January 2011

Early concerns over a reemergence of another Euro problem quickly dissipated on news that both China and Japan would provide financial assistance. Emerging unrest in Egypt proved nothing more than a distraction. Hence global markets remained focused on further signs of improvement in the US economy and Japan proved an immediate beneficiary as cyclical shares rose very sharply, given modest valuations and increasing foreign investor appetite. In addition the prevailing view that the yen appeared likely to be turning weaker on the back of better sentiment towards the US provided another catalyst. For global investors the worrying inflation data especially in emerging markets and the subsequent weak equity markets provided a further stimulus to encourage the recent trend for asset allocators to shift weightings in favour of the developed markets whilst rising global bond yields prompted a shift from bonds to equities. » Read more: Rupert Kimber – January 2011