Tiburon Partners LLP

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

The sharp sell-off in the U.S. bond market has been interpreted in different ways but the consensus seems to be emerging that it is a ‘good’ steepening of the yield curve, anticipating a strong economic recovery next year aided by the extension of the Bush tax cuts and turbocharged by a further reduction in payroll tax. While this interpretation appeals to the bulls, we remain sceptical. The Eurozone may be geographically removed from the US and an ‘old’ story, but the cracks in sovereign and bank funding are running faster than the ECB can put sticking plasters over them, while the grim reality of the need to show fiscal responsibility is being shown across the pond at the State level, where draconian cuts are already underway and there is increasing talk of defaults in the Muni market. The Fed and the ECB may want short rates to remain near zero for the foreseeable future, but the bond vigilantes in the West and the Central banks in the East (which are now nearly all in tightening mode) will ensure that the global cost of capital rises. For Western economies on fiscal and monetary life support, this is not a positive development. However, from the perspective of the Asian investor there is a silver lining, as funds flow back to the developed markets and start to leave some interesting value in the wake of their departure. » Read more: Mark Fleming – December 2010

The strong global equity rally since August has allowed Japan to recover from an exceptionally oversold level. Investors have belatedly realized that corporate profits are less affected by the strong yen given material cost-cutting and maintenance of strong underlying competitiveness. Valuations, especially PE, had fallen to multi year lows and with the threat of a double dip in the US receding, this paved the way for a strong rally aided by a partial return of the foreign investor, the only marginal buyer. Furthermore the more proactive policy initiatives from the BOJ, not a surprise to us, have helped to calm investor anxiety and it would be wrong to underestimate the significance of the asset buying programme which may well be expanded given official scepticism over the QE policy undertaken by many leading central banks.

As regards the outlook, the picture is mixed. Strong corporate earnings trends should continue into March 2012 provided there is no sudden deterioration in the global economy, which looks less likely at this point. » Read more: Rupert Kimber – December 2010

Anyone who thought China was moving inexorably towards a free market economy received a shock over the last few weeks as it became clear that inflation was becoming a major political issue, and as usual, treatment of the symptoms a.k.a. price controls has become the preferred ‘quick fix’ as opposed to a more holistic but longer term solution of increasing supply and reducing demand. Plus ca change. The good news is that some of the consumer stocks that we do want to own for the longer term have become cheaper, and in some cases may even be short term beneficiaries if they buy staples but sell luxuries which are less likely to have price restrictions slapped on them. Nevertheless, it does add to our caution on the near-term upside for the broader market. A recent visit to Shanghai and Wuxi also raised the bar for us when considering Chinese property stocks that are involved in the upper end of residential development. Although we do not worry about the systemic risk posed by the state of the property market (lack of leverage) the scale of the building is breathtaking and as one drives round at night the lack of lights on in city centre apartments is also somewhat disturbing. We have no doubt that most of these have been sold and many for cash or using minimal leverage. We are also fully aware of the premium that unoccupied flats command in the secondary market. Nevertheless stocks exposed to this sector would be vulnerable: in the event of a glitch in the broader economy (which we do not think is imminent) there would be an awful lot of supply that might come onto the market.” An amber light, perhaps.

Corporate governance is always a hot topic, and the mining sector has had an interesting month in that regard. In Australia, we have the unedifying spectacle of two Chinese groups – both customers – owning 40% of Mount Gibson Iron Ore but now controlling the board. A pretty clear conflict of interest here. The London listed Vallar has found a target – Bumi Resources – but we would say they have become the victim » Read more: Mark Fleming – November 2010

Dissipating fears over a potential double dip in the US economy have highlighted the valuation attractions of Japanese equities and we sense this trend will continue. This better tone has been reflected in the dollar index which provides some comfort: analyst forecasts had been downgraded to assume Y80 yet the most recent bout of anxiety over the euro has not resulted in material yen appreciation. This is significant and is in marked contrast to what went on in the early summer. The significant underweight of Japan in institutional portfolios looks set to narrow as a result.

From the micro perspective, there continue to be further examples of MBOs, strategic alliances and significant share buybacks which collectively provide further support to equities whilst recent company interviews reveals managements showing no sign of easing up on the current ongoing cost cutting strategies. We remain surprised that » Read more: Rupert Kimber – November 2010

Tiburon Terra gained 1.8% for the month. Although performance was generally spread across the sectors, coal was the best performing sub-sector and posted the top three largest gains in the portfolio: Bathurst Resources (35%), Riversdale Mining (27%) and Linc Energy (33%). Adumus Resources (25%), a West African emerging gold producer also performed well. As a result of the high volatility exhibited by the general market due the Irish meltdown, net exposure was dynamically adjusted throughout the month and ranged from a low of -18% (mid month) to a high of 50% (early November). Over the past 6 months, the Fund has taken a more active approach in adjusting net market exposure in accordance with general market conditions.

There is certainly a lack of hype surrounding this year’s climate conference in Cancun, Mexico. Overall, the alternative energy sector has performed abysmally, with the S&P Clean Energy Index (SPGTCED) down over 33% YTD. Although we do not expect any meaningful results to emanate from the conference, the low expectations of this year’s participants may provide a nadir in terms of investor sentiment and » Read more: John Payne & Steven Miller – November 2010

Ssshh…whisper it quietly, but we think the Fed may be about to buy some more bonds – or had you heard that already? Five months and 30% on from the lows of May, animal spirits have returned. The dollar can only depreciate, a double-dip recession is impossible and an emerging market bubble has only just started. This is the current zeitgeist, and market participants have positioned themselves accordingly. The New York Times of the 18th October stated boldly that ‘the stock market will almost certainly rise’ as a result of the launch of the good ship QE2. Recent surveys of institutional investors show massive enthusiasm for emerging market assets. For example – Vimpelcom’s 2013 Dollar bonds yield 4.7%. This is an oligarch-controlled Russian telecom company which is in the process of taking over Orascom which will result in some $20bn of net debt on the balance sheet. While we have no view on the prospects or management of this company as we view Russia as uninvestable at any price, we would venture that even less prejudiced investors than ourselves are not being paid to take some very obvious risks.

On the other side of the risk coin, we find the Australian utility sector. Gearing has been reduced, peripheral assets sold and distributions cut to a level comfortably covered by cash flow. Trading near multi-year lows, with a regulated earnings base that challenges the analytical community not to be able to predict earnings several years out, one may be surprised to find that the current yields (and with distributions likely to rise) are around 10%. It may be more exciting to follow Russian politics, but » Read more: Mark Fleming – October 2010