Tiburon Partners LLP

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

Another dramatic period of Japan underperformance compared to world indices can be largely attributed to ongoing domestic cross-shareholding unwinds whilst the foreigners remain enamoured by the delights of emerging markets and indeed certain developed markets. This buyers’ strike renders valuations in the near term irrelevant and explains the sharp decline in certain index subsets such as smaller companies. Whilst the yen is often cited as the main negative catalyst this is actually misleading judged by corporate profitability and indeed share prices where certain exporters have done well despite the most recent yen appreciation. The latter makes some sense given the strong shift to overseas production and the still pre-eminent position globally of certain manufacturing companies that have retained the interest of global investors.

The key to the market therefore remains any possible alleviation in the poor supply/demand dynamics and on this point we sense a ray of light. The recent announcement by the BOJ in early October relating to the purchases of ETFs is worth some debate. » Read more: Rupert Kimber – October 2010

During the month the fund celebrated its one year anniversary and is up 2.7% since inception. While outperforming most of its peer group and related indices over this same period, volatility has remained relatively muted at 14% annualised. In October Terra’s rare earth exposure did particularly well with Lynas and Molycorp the best performing stocks.

After an exceptional September, markets have been more range bound this month in anticipation of the Fed’s QE2, which now looks fully priced in by the market. Since many markets appear over bought technically, the Fund looked to reduce risk by decreasing net exposure throughout the month. We have taken profits in rare earth stocks, some of which are up nearly 100% in less than 3 months, by reducing position sizes. The Fund has also reduced positions in solar and wind and increased shorts in mining. We believe the sell off in the USD looks over extended and could well reverse in the near term causing equities and commodities to sell off. In addition, we have hedged 75% of Terra’s AUD exposure. The Fund will continue to maintain a cautious approach until we see more attractive valuations and a better risk/reward trade-off. » Read more: John Payne & Steven Miller – October 2010

Much is made these days of declining standards of mathematics in schools, but it is particularly sad to see that George Papaconstantinou (the Greek finance minister) seems incapable of basic arithmetic, despite his august heritage of Euclid, Pythagoras, Archimedes et al. For a country with debt to GDP of over 100% and 3 year money costing over 11% a primary surplus of well over 10% is required to merely stabilise the debt situation. This is about as likely as Wayne Rooney winning Mastermind. Yet the official line is that ‘default is not an option’. We agree. It’s a mathematical certainty unless Greek yields fall to German levels, and even then it will require a transformation of a tax base which currently recognises only six taxpayers earning more than Euro 1m. The markets may have chosen to ignore the uncomfortable reality of Eurozone finances but they have not gone away despite a few ’successful’ auctions at such elevated levels that a restructuring is already priced. The deterioration in sentiment over the Irish situation despite an impressively austere budget is telling us something. » Read more: Mark Fleming – September 2010

All of the evidence continues to support the conclusion that China’s economy is in very robust health. September PMIs were strong, new loan extension continues to be healthy, and trade data is consistent with a (very) soft landing. The underlying dynamism of China’s economy continues to quietly reassert itself. This is consistent with the message we get from listed companies, with expansion plans proceeding and, in a number of cases being slightly accelerated or upgraded from previously over-conservative levels. If there are any concerns, they are that inflation remains somewhat elevated, and hot money inflow is picking up slightly, but both of these appear to still be within acceptable and controllable parameters for Chinese policymakers. The outlook appears to be “more of the same” – a reacceleration in growth driven by inventory restocking, the end of power cuts, and accelerating private investment. Monetary tightening will continue but, given the lack of consensus on the outlook for the global economy, seems likely to stay at least modestly “behind the curve”. » Read more: Jeff Coggshall – September 2010