|
Comparisons between the Japanese example, exhibited from 1990-2005, and
what the U.S. and Europe are experiencing.
When trust is misplaced
The world needs faith and trust to
function. We put our money in banks. We trust that the banks will still be
operating 20, 30 years from now and that our money will always be there as
and when we need it. Manufacturers buy from various suppliers. They trust
that the suppliers will deliver parts that meet their quality requirements
and do so on time. The suppliers, on their end, deliver the goods first and
trust that the manufacturers will pay them within a stipulated time.
Exporters ship their goods overseas. They trust that the letters of credit
they received will be honoured by the banks and that they will eventually be
paid. Banks deal with one another. They trust that their counterparties will
be around tomorrow, and that they will honour the trades done.
In short, trust is at the foundation of
the functioning of a modern economy. In his 2004 book, The Company of
Strangers, Paul Seabright, a professor at the Toulouse School of Economics,
explored the roots of this trust. One is the capacity to weigh the costs and
benefits of trusting others. Allied to this is an instinct to return favours
in kind, and to seek revenge when trust is betrayed. When workers are
treated generously, they work hard; when customers are swindled, they
express outrage. When suppliers bilk their customers, they gamble the
rewards of future commerce for a short-term gain.
Prof Seabright concluded that people
place their trust in others because it is less risky than the alternative.
'Self-sufficiency is fantastically risky,' he concludes. If we try to grow
our own crops and they fail, we will go hungry. If we try to build our own
homes, the foundation may not be strong enough and the houses may collapse.
'Integration with others massively reduces risk,' notes The Economist in a
recent article entitled 'The faith that moves Mammon'. 'Trust in strangers
may be at odds with some of our instincts, but it is a price worth paying
for a richer life.'
However, recent events have shown that
perhaps we have gone overboard with trust and faith. In many instances, we
were not so adept at weighing the costs and benefits of trusting others.
Trusting unbridled capitalism was clearly misplaced, as was the assumption
that the pursuit of individual self-interest will always result in social
welfare. Witness the recent melamine scandal in China. Regulators misplaced
trust in industries when they assumed they were capable of self-regulation.
Witness the excessive risks taken by the financial sector. Meanwhile,
individuals misplaced their trust in the so-called experts: the wealth
advisers, the fund managers. Witness the Lehman Minibonds debacle and
Bernard Madoff's Ponzi scheme.
Perhaps such reckless trust grew from a
relatively long period of stability. It led everyone to let their guard
down. The lesson for all now has to be: trust must be bestowed
discriminately, and with verification. It pays to be more questioning, even
suspicious, especially when it comes of one's life savings.
- BUSINESS
TIMES
Increased Global Risk
Going
down: global exchanges have nosedived over fears that Dubai’s financial
crisis will contaminate other markets
Economic, political, and market risks
will be higher in the coming decade than in the 20 years before the recent
crisis, says Tony Tan, deputy chairman of Government Investment Corporation
(GIC), Singapore's biggest sovereign wealth fund. As a result, he feels SWFs
have an important role to play as suppliers of capital and expertise,
something that has also been noted
by others.
Speaking on Saturday at the Asia-Pacific
Economic Cooperation CEO summit in Singapore, Tan first outlined his view of
the global economy. While global depression appears to have been avoided and
the short-term economic outlook is positive, significant risks remain, he
said, reflecting bearish views
he has expressed in the past.
Moreover, the global economic and
financial environment has changed "in at least three significant ways,
which will increase uncertainty and potential for volatility", Tan
says.
First, economic activity in major
over-leveraged developed countries, especially consumption in the US and the
UK, is unlikely to recover as robustly as in normal recessions. It could
take several years for these economies to fully recover from the crisis,
says Tan, and they will emerge with much higher and more worrying public
debt levels.
Second, economic growth will be
distributed unevenly, with key emerging economies outperforming their
developed counterparts. On the positive side, an emerging middle class in
the developing world will demand new products and services.
But emerging-market performance will also
differ. Economies with larger domestic markets and more market-orientated
and consistent policies, such as China, Brazil and India, will be better
placed to grow than others. And there will be challenges: over time the rise
of emerging markets -- especially China, India and Russia -- could, together
with competition for limited natural resources, lead to higher geopolitical
risks.
Third, Tan expects higher stagnation risk
in the medium term to be followed by higher inflation risk. "Over the
next one to three years, weak growth and excess capacity will be strongly
disinflationary," he says. "However, over the next five to 10
years, policy errors or political pressure could lead central banks to
accommodate higher inflation. In addition, robust emerging-market growth
could put huge pressure on natural resources and the environment."
All of this is happening in the context
of ageing populations, says Tan, especially in developed countries, which
dampen growth and savings and put pressure on much-reduced public finances.
"In short, over the next decade it
looks like economic, political, and market risks are going to be higher than
the last 20 years before this crisis," he says.
As a result, there are three important
roles for SWFs, says Tan. First, SWFs are investors that have a long-term
horizon that, in the wake of the consolidation of the global financial
system, will become important suppliers of global capital. In the future,
there will be a premium placed on investors who can look beyond shorter-term
performance, he adds.
Second, SWFs have a strong interest in
ensuring the global economy and financial system recovers and grows in a
vigorous and sustainable manner. They can therefore provide credible
insights and analysis of developments in financial markets and economies,
says Tan, particularly on issues concerning the restructuring of the global
financial architecture.
Third, SWFs want to be responsible market
participants and are not out to make quick returns by cutting corners or
seeking to contravene legal and regulatory regulations. Tan says SWFs such
as GIC -- through their regular interaction with policymakers and regulators
worldwide -- can help use their influence to shape policies for better
outcomes.
He also highlights the expertise GIC --
and other SWFs - provides. Via their private equity investments, they
partner with experts who provide managerial and other skills to companies.
"This could be in distressed assets, restructuring and workout
situations," adds Tan, "or in emerging markets where companies are
growing but talent is thin."
(In its annual
report published in September, GIC said it increased its
allocations to alternative investments, such as hedge funds, private equity
and property, to 30% from 23% in the previous fiscal year. It also
indicated that it plans to convert more of its cash holdings into
investments in emerging markets and natural resources.)
But all this rests on keeping
capital markets open. "If governments close their capital markets to
SWFs," said Tan at the Apec summit, "recipient countries will face
higher capital costs while SWFs will see their opportunity set
decrease." - 2009
November 16 FINANCE
ASIA
Bags of money to be made as tai-tais hock
their handbag
Chanel, Gucci, Hermes and Louis Vuitton
handbags are no longer just the best friends of tai-tais and socialites; a
money lender is also targeting the luxury items as collateral in a first for
the personal-loan market.
A television advertisement screened in
the past three weeks shows a cheerful woman walking out of Yes Lady Finance
with a cheque after pledging her baguette handbag for a personal loan.
These are a gimmick to make our name
heard," Tung said. "It is only the beginning of a bigger
business - property mortgages."
Escaping unscathed from the global credit
crunch, Tung and Yiu saw a business opportunity in the cash-strapped and set
up money-lending firms Yes Lady Finance and Yes Man Finance in April.
Targeting luxury handbags, Yes Lady assesses the value of popular handbags
and offers to lend up to 70 per cent of their market value, charging
interest below the industry average.
For example, for a Louis Vuitton handbag
valued at HK$20,000 in the second-hand market, Yes Lady will lend 70 per
cent of the value to the owner - HK$14,000 - and charge interest as low as
28 per cent a year. This means the owner will have to pay interest of HK$979
a month over a three-month maturity. By the due date, the owner has to
settle the outstanding loan or forfeit the handbag.
The government caps the interest
pawnbrokers can charge at 3.5 per cent a month (42 per cent a year). The
rate offered by Yes Lady is cheaper, and way below the maximum legal
interest rate of 60 per cent.
"It is a good fund-raising option
for some tai-tais," Tung said. "They may not want to sell their
handbags, which may be a gift from husbands and mean a lot to them."
However, Tung conceded that handbag
finance was limited by fashion trends and economic scale. His ultimate
business model rests on home financing, aiming to capitalise on the
government's decision last month to restrict bank lending to luxury-home
buyers. The maximum mortgage on a luxury home worth more than HK$20 million
was lowered to 60 per cent of the home's value, down from 70 per cent.
Despite Yes Lady's innovative strategy,
competition is punishing in a city with too many finance companies and banks
chasing borrowers.
Billy Mak Sui-choi, an associate
professor at Baptist University's department of finance and decision
sciences, said Yes Lady Finance could undercut its rivals by targeting
female borrowers and charging lower interest because it had handbags as
collateral, which meant its risks were relatively lower. "Its operation
is like a pawn shop. It may lead to some copycats opening up a new market
through collateral of laptops, luxury watches and lighters."
Partly because of high credit card
interest rates, finance companies thrive in Hong Kong, with the fray
dominated by major banks such as Citibank, HSBC and Standard Chartered and
other operators such as Aeon Credit Service (Asia), United Asia Finance,
Promise (HK) and Prime Credit. Some money lenders do not take any assets as
collateral and charge higher interest, but still lower than credit card
issuers. - 2009 November
2 SOUTH
CHINA MORNING POST
Not all real-estate magnates took a
beating, however, as the family of Singaporean tycoon Ng
Teng Fong moved up to join the top 100. Ng's family, who controls
Hong Kong developer Sino Land (0083), now has a combined wealth of US$5.5
billion.
Cheung Kong (Holdings) (0001) patriarch Li
Ka-shing, who was the fourth- richest person in Asia on the 2008
list, ranked as the second-richest person in Asia this year, behind Reliance
Industries chairman Mukesh Ambani. Li's global ranking fell to
No 16, from 11 last year, after his wealth shrank 39 percent to US$16.2
billion.
The
Kwok family of Sun Hung Kai Properties (0016) plunged to No 32 in the
global ranking, from 23, after US$9.4 billion of their riches disappeared,
leaving them with a measly US$10.5 billion.
Lee
Shau-kee, chairman of Henderson Land (0012), dropped to No 43 from 29
after US$10 billion of his wealth evaporated. He is left with US$9 billion.
- 2009
Crisis
over? Fund managers don't think so
Investors concerned leverage that caused
original problem has not been reduced
Senior fund managers around
the world are saying that the financial crisis still isn't over, despite the
improving economic data.
Over 150 leading institutional investors
from more than 15 countries, with over US$2.8 trillion of equity funds under
management, were interviewed over the past month by global business advisory
firm, FTI Consulting, Inc.
Almost two-thirds of them said they did
not believe the financial crisis was over, while 31 per cent said the crisis
was over, and 5 per cent were undecided.
Investors from the UK, the US and
Australia were the most pessimistic - 73 per cent of those from the UK, 76
per cent from the US and 80 per cent from Australia felt the crisis had not
ended.
Continental European and Asian investors
were slightly more optimistic with 59 per cent and 62 per cent,
respectively, saying the crisis was not over.
'Anecdotal evidence gathered during the
survey suggests that across the globe investors were still concerned that
the amount of leverage in the system that caused the original problem has
not been reduced,' said FTI's president & CEO, Jack Dunn.
'The prevailing view was that there has
been so much economic stimulus that markets cannot help but go up. The
concern was what would happen when government money runs out.'
He added: 'There is no doubt that the
on-going uncertainty is having follow-on effects throughout the global
economy. Among US companies alone, approximately US$163 billion of corporate
speculative grade debt is due to mature in 2010, with approximately US$266
billion set to mature in 2011, according to Standard & Poor's research.
These enormous financing requirements amidst still-fragile credit markets,
and weak demand apart from government stimulus, put a premium on a company's
ability to effectively manage both public perceptions and the underlying
business.'
Mr Dunn believes that this uncertainty
has driven many companies to look at alternative funding avenues - such as,
sovereign wealth funds, the equity markets, or more exotic capital raisings.
'For policy makers, it has meant
reassessing the regulatory environment and executive incentives that have
driven the market for many years,' he said.
Still, he added: 'These findings suggest
a paradox, in that despite the negative outlook, global equity markets have
rallied significantly in recent months. This indicates a willingness of
investors, for now at least, to focus on factors beyond the fundamental
issues that caused our current economic crisis.'
One-fifth of the investors surveyed were
based in the UK, another fifth in the US and yet another fifth in Asia -
including those from Hong Kong, Singapore, Korea, China, Australia and
India. Slightly more than a third of those surveyed were based in Europe,
with the rest being based in Australia.
- 2009 September 15 BUSINESS
TIMES
MEANWHILE
still:
In Canada, some Redemptions frozen
Investors are trying to bail out of
commercial real estate funds, but are finding it's not so easy, as Canada's Great-West
Lifeco Inc. becomes the latest money manager to freeze redemptions from
mutual funds that invest in buildings.
London Life Insurance Co.,
an arm of Great-West, said that investors won't be able to redeem their
investments in the $1.56-billion London Life Real Estate Fund because it's
impossible to sell buildings fast enough to meet requests. The Great-West
Life Real Estate Fund, with almost $3.16-billion in assets, was also frozen.
With markets in disarray, investors are
pulling money out of almost every asset class, but are finding that with
real estate, whether in fund or concrete form, it isn't always possible to
get out quickly. London Life's move follows a similar freeze on Friday by
UBS AG, which said clients could no longer get at their holdings in a
$6-billion (U.S.) property fund.
While the moves no doubt leave some
investors dismayed, they are unavoidable and help preserve value by avoiding
fire sales of the buildings owned by the funds, said Dan Hallett, who runs
an investment research firm.
"If it comes to a point where you've
got so many redemptions, you really do want them to freeze
redemptions," Mr. Hallett said. "Do you want to be in a position
when it's a forced sale of assets? Probably not. It's probably the best step
to take."
Putting assets that are hard to sell,
such as commercial real estate, into a mutual fund structure creates the
potential for such freezes, and that's one reason that there are only a
handful of such funds in Canada, Mr. Hallett said.
During the last big real estate downturn,
in the early 1990s, some funds converted to real estate investment trusts to
eliminate the problem, he said. Because REITs are publicly traded, an
investor who wants money back can sell units to another investor, meaning a
REIT doesn't have to sell assets to fund redemptions.
"It really boggles my mind why you'd
put such an illiquid asset in such a liquid structure," he said.
"It's really a mismatch. "
Both the London Life and Great-West funds
invest in all types of real estate, but most of their assets are office
buildings.
The commercial real estate market in
Canada has held up well so far, compared with other markets in the world,
but with new buildings under construction as the economy slows, many in the
industry expect building prices to slump and rents to soften.
- 2008 December 17 GLOBE
& MAIL
New US crisis brewing: mall, hotel
foreclosures
The same events poisoning the housing
market are now at work on commercial propertiesThe
full scope of the US housing meltdown
is not clear and already there are ominous signs of a new crisis - one that
could turn out the lights on malls, hotels and storefronts across the
country.
Even as the holiday shopping season
begins in full swing, the same events poisoning the housing market are now
at work on commercial properties, and the bad news is trickling in. Malls
around the United States are entering foreclosure. Hotels in Tucson,
Arizona, and Hilton Head, South Carolina, also are about to default on their
mortgages.
That pace is expected to quicken. The
number of late payments and defaults will double, if not triple, by the end
of next year, according to analysts from Fitch Ratings Ltd, which evaluates
companies' credit.
'We're probably in the first inning of
the commercial mortgage problem,' said Scott Tross, a real estate lawyer
with Herrick Feinstein in New Jersey.
That's bad news for more than just
property owners. When businesses go dark, employees lose jobs. Towns lose
tax revenue. School budgets and social services feel the pinch.
Companies have survived plenty of
downturns, but economists see this one playing out like never before. In the
past, when businesses hit rough patches, owners negotiated with banks or
refinanced their loans.
But many banks no longer hold the loans
they made. Over the past decade, banks have increasingly bundled mortgages
and sold them to investors. Pension funds, insurance companies, and hedge
funds bought the seemingly safe securities and are now bracing for losses
that could ripple through the financial system.
'It's a toxic drug and nobody knows how
bad it's going to be,' said Paul Miller, an analyst with Friedman, Billings,
Ramsey, who was among the first to sound alarm bells in the residential
market.
Unlike home mortgages, businesses do not
pay their loans over 30 years. Commercial mortgages are usually written for
five, seven or 10 years with big payments due at the end. About US$20
billion will be due next year, covering everything from office and condo
complexes to hotels and malls.
The retail outlook is particularly bad.
Circuit City and Linens 'n' Things have sought bankruptcy protection. Home
Depot, Sears, Ann Taylor and Foot Locker are closing stores. Those retailers
typically were paying rent that was expected to cover mortgage payments.
When those US$20 billion in mortgages come due next year - 2010 and 2011
totals are projected to be even higher - many property owners will not have
the money. Some will survive, but those property owners whose loans required
little money up front will have less incentive to weather the storm.
Refinancing formerly was an option, but
many properties are worth less than when they were purchased. And since
investors no longer want to buy commercial mortgages, banks are reluctant to
write new loans to refinance those facing foreclosure.
California, New York, Texas and Florida -
states with a high concentration of mortgages in the securities market,
according to Fitch - are particularly vulnerable. Texas and Florida are
already seeing increased delinquencies and defaults, as are Michigan,
Tennessee and Georgia.
The worst-case scenario goes something
like this: With banks unwilling to refinance, a shopping centre goes into
foreclosure. Nobody can buy the mall because banks will not write mortgages
as long as investors will not purchase them. -
2008 Novmeber 29 AP
|
'ongoing economic turmoil this FINANCIAL TSUNAMI
|
As at 2008 September 20 - BUSINESS
TIMES
- More
than 10,000 local investors holding Lehman Minibonds are affected by the
New York-based bank's collapse, with most losing between HK$500,000 and
HK$3 million. >> BLOOMBERG
- Value
Partners, (one of HK's top fund managers - V-nee Yeh [Mira's hubby] &
Cheah Cheng Hye) are down $1 bln USD since July >>
Reuters
Anxious Depositors Withdraw Cash From
Asian Bank
 
ANALYSIS
US$900b aftershock seen hitting US, Europe banks
They
face rising premiums as debts mature amid frozen primary market
(NEW YORK/LONDON)
The financial
earthquake that shook Wall Street last week may be followed by a US$900
billion aftershock as bank debt comes due in the next year.
US and European banks face soaring
premiums as a mountain of debt matures at a time when the primary market
remains frozen. As much as 150 billion euros (S$313.7 billion) in
euro-denominated debt is due in the next six months, according to Barclays
Capital, and US$673 billion of US dollar-denominated financial debt is set
to mature through the end of 2009, based on Morgan Stanley data.
That means banks, already suffering from
the worst credit conditions since the Great Depression, will be forced to
re-issue bonds at a steep price to roll over borrowings and raise fresh
capital or seek other options including reduced loan growth.
'Either they will have to pay up to get
it done or they will have to do other things, such as asset sales, which is
also difficult,' said Olivia Frieser, a bank credit analyst at BNP Paribas,
in London.
In Europe, there is cash to be put to
work and investors are expecting hefty discounts on senior debt. A 1.75
billion euro UBS five-year bond was launched at the end of August, for
example, at a 19-basis-point premium over secondary spreads and 125 basis
points over its credit default swaps.
'We're underweight on the financial
side, but senior paper is one area we would be looking into in the medium
term,' said Christian Doppstadt, head of corporate credit investment at
WestLB Asset Management, in Dusseldorf, Germany.
Wall Street's landscape changed
dramatically last week with the US government's US$85 billion loan to AIG,
once the world's largest insurer based on market value; the bankruptcy
filing of Lehman Brothers Holdings Inc, the parent of the fourth-largest US
investment bank, and the fire sale of Merrill Lynch, the largest US retail
brokerage, to Bank of America.
Uncertainty about how and when the US
government's planned US$700 billion rescue of the financial sector,
announced last weekend, will be implemented also means that credit spreads
remain near record wide levels.
'You've got to look through the
short-term uncertainty and put this in the context of what it is: It may not
be the end game but it's certainly a step in the right direction for risk
and for reopening the primary market,' said Simon Ballard, senior credit
portfolio manager at Fortis Investments, in London.
'When the market can stabilise and get
some confidence will be key to getting liquidity going, and that will become
a self-fulfilling prophecy as the new issuance will garner confidence,' Mr
Ballard said.
But ultimately higher borrowing costs in
the banking sector will be passed on to corporates.
The extra yield, known as the spread,
that investors demand to hold risky high-yield bonds over US and European
government bonds, also widened to record levels on Sept 18, a sign of rising
risk for those securities. Spreads narrowed the next day, which was last
Friday, on optimism over the federal mortgage bailout plan.
Those costs have deterred some borrowers
from issuing debt, but some may not have a choice now as the terms of
existing cheap bank credit facilities, negotiated before the credit crisis,
get used up or need to be renegotiated.
Global investment-grade corporate bond
sales fell to US$1.67 trillion, year-to-date, versus about US$2 trillion for
the same period last year and compared to a record US$2.6 trillion in 2006,
according to Thomson Reuters data.
Global high-yield bond sales dropped to
US$37 billion year-to-date, versus US$131 billion for the same period last
year and a record US$185 billion for all of 2006, Thomson Reuters data
shows. There have been no high-yield deals in Europe for well over a year.
'High-yield issuance is on track to be
down 50 per cent from last year,' said Martin Fridson, chief investment
officer of New York-based Fridson Investment Advisors, during the Reuters
2008 restructuring summit in New York on Tuesday. 'If anything, the
year-over-year decline will be a bit greater than that, as the issuance has
slowed to a trickle recently.'
Mr Fridson noted that financial paper is
not a material factor in the high-yield new-issue market, so refinancing for
those companies has more to do with how the investment-grade market for new
issues holds up.
In Europe, Barclays estimates that 50
billion euros worth of non-financial redemptions are due over the next six
months.
- 2008
September 26
Reuters
Impact of US crisis could worsen: Wen
He also said that China would aid any
international bid to defuse turmoil
(UNITED NATIONS) Cash-rich China weighed
in on the US financial crisis on Wednesday, with Premier Wen Jiabao warning
that its international impact could become 'more serious' and stressing the
need for concerted efforts to contain the turmoil.
He indicated that China, the world's
biggest holder of foreign reserves and second-biggest holder of US treasury
bills, was ready to help in an international bid to defuse the turmoil that
has rocked financial markets around the globe.
'The ongoing financial volatility, in
particular, has affected many countries and its impact is likely to become
more serious,' Mr Wen told the UN General Assembly.
'To tackle the challenge, we must all
make concerted efforts,' he told the UN meeting at the tail end of his
address, which touched on various issues, including a pledge to push ahead
with reforms to fuel growth in the world's most populous nation.
US president George W Bush, who is also
attending the UN General Assembly, had telephoned Chinese president Hu
Jintao on Monday to brief him about the financial turmoil and his
administration's bid to stage a US$700 billion Wall Street bailout to stem
the crisis.
Mr Hu told Mr Bush that China welcomed
Washington's efforts to stabilise the US financial markets and hoped that
they succeed, according to Beijing's state media.
But as Mr Wen spoke on Wednesday at the
United Nations, the Bush administration remained locked in a dispute with
the US Congress over the massive bailout package aimed at buying distressed
mortgages and mortgage-related securities from financial institutions.
Mr Wen hinted that China would help in
any international bid to defuse financial contagion arising from the US
crisis, saying that this was not the time for 'hostility' or 'prejudice'.
'So long as people of all countries,
especially their leaders, can do away with hostility, estrangement and
prejudice, treat each other with sincerity and an open mind, and forge ahead
hand in hand, mankind will overcome all difficulties and embrace a brighter
and better future,' he said. 'China, as a responsible major developing
country, is ready to work with other members of the international community
to strengthen cooperation, share opportunities, meet challenges and
contribute to the harmonious and sustainable development of the world.'
Mr Wen said that given the global nature
of issues threatening the world, including environmental problems,
terrorism, diseases, natural disasters and financial troubles, 'no county
can expect to stay away from the difficulties or handle the problems all by
itself'.
The premier also touched on global
concerns about China's direction after hosting the Olympics last month,
saying that Beijing would remain committed to 'peaceful development' and
'unswervingly pursue reform and opening-up'. He said 'only continued
economic and political restructuring, and reform in other fields can lead to
sustained economic growth and social progress, and only continued opening up
in an all-round way can lead the country to greater national strength and
prosperity.' - 2008 September
26 AFP
Beijing steps in to Boost Markets
China's government announced plans to buy shares and take other measures
to halt its plummeting stock market, a program analysts said will surely
boost investor sentiment, but at the cost of reintroducing other long-term
risks.
An arm of China's $200 billion sovereign-wealth fund intends to increase
its shareholding in three of the nation's largest banks with direct
purchases on the market, while other government entities will be encouraged
to load up on stock in listed companies that they control, according to
Chinese government statements Thursday. In addition, authorities canceled a
0.1% tax on stock purchases, although sellers will still have to pay the
tax.
Already the principal shareholder in three of China's largest banks,
Central Huijin Investment Co., will buy additional stock in Industrial
& Commercial Bank of China Ltd., Bank of China Ltd. and China
Construction Bank Corp., according to the state-run Xinhua news agency.
The report said the buying began Thursday and aims to "shore up their
share prices amid stock market slumps." No specifics on the planned
purchases were announced.
"It is absolutely a market-rescuing message from the
government," said Mao Nan, a strategist at Orient Securities Co. in
Shanghai.
The announcement came on a day when other Asian governments were taking
more technical and less blunt steps to support their financial systems, such
as adding cash to money markets. But that policy option would have limited
impact on China's economy given the immaturity of its financial system.
By buying shares directly, Beijing will employ its most powerful tool to
halt a painful market decline that has erased 64% this year from the
benchmark Shanghai Composite Index. The move also marks perhaps a last
chance to resuscitate the confidence of tens of millions of investors, and
appears to reflect a recognition in Beijing that its strategy to carefully
phase in market-oriented policies hasn't convinced the public that stocks
are a suitable place to put their $4 trillion in savings.
A sixfold gain in the Shanghai Composite Index between 2005 and late last
year made Chinese companies among the most valuable on the planet. The
Chinese market at its height was capitalized at almost $5 trillion. Much of
that value vanished in less than a year, as the index fell about 70% from
last year's all-time high of 6124.04 to Thursday's low point of about 1816.
The purchases will deepen China's government ownership of a market that
by some estimates is still about two-thirds controlled by state interests.
That state of affairs threatens to sustain a decade-long fear that big
shareholders will ultimately dump their stock, a factor that many blame for
this year's collapse and a previous grind earlier in the decade that erased
more than 40% of market value.
It is unclear whether the stock-market intervention suggests Beijing will
suspend its hunt for investments overseas. Chinese entities haven't entered
the fray to shore up Wall Street firms in recent weeks. Still, even as the
market bailout was being announced on Thursday, Bank of China said it would
pay 2.3 billion yuan ($336 million) to buy about 20% of Cie. Financičre
Edmond de Rothschild, the French arm of the LCF Rothschild Group headed by
Baron Benjamin de Rothschild. Word also emerged Thursday that China
Investment Corp., Huijin's parent, was negotiating to possibly increase its
investment in Morgan
Stanley.
Policy makers debated for months whether to pull the trigger and buy
shares, a person with knowledge of the situation said Thursday.
For much of the year, proponents of freer markets appeared to be winning
with their argument that authorities shouldn't target price levels. They
advocated instead building a credible trading system of fair rules, robust
infrastructure and trustworthy participants that would make the stock market
a base on which to build a fuller financial system.
But as the market rout continued, Beijing's credibility was on the line.
Investors, who had opened more than 100 million trading accounts, said the
market's biggest investor -- the government -- had a duty to defend it.
Others argued that authorities should invest at home, in what remains the
world's fastest-growing major economy, rather than gambling government money
with investments in overseas firms like Blackstone Group LP and Morgan
Stanley that so far appear unwise. More recently, the unprecedented bailouts
by the U.S. government of its financial companies have provided ammunition
to those calling for official stock buying by Beijing.
As part of the new effort to boost stocks, the central-government entity
that indirectly controls a vast array of major state-owned companies
indicated Thursday that repurchases of shares in listed companies would soon
begin. Among the companies in its stable is oil giant PetroChina
Ltd., the largest stock on the Shanghai exchange.
Gao Lingzhi, an analyst at Great Wall Securities in Shenzhen, said if the
market doesn't sustain the now widely expected rally when government
entities start buying stocks, investors will clamour for more support.
Key in the process will be five-year-old Huijin, established to hold
chunks of China's state-owned banks at the start of a complex restructuring
process that transformed them from deeply indebted institutions into some of
the biggest and most profitable publicly listed lenders in the world.
Huijin owns about 68% each of Construction Bank and Bank of China.
Together with China's Ministry of Finance, it holds 70% of ICBC.
Huijin's buying is likely to have a significant impact, because financial
stocks are the biggest companies on the market. Only a small percentage of
the banks' shares are listed on the stock markets, giving any purchaser
outsize ability to boost the share price. ICBC is the second-largest stock
on the Shanghai Stock Exchange, while Bank of China is No. 4. The banks all
trade on the Hong Kong stock exchange, too. -
2008 September 19 WALL
ST JOURNAL
"We
seem to be in the midst of a 'perfect storm' leading to more bankruptcies:
high levels of debt, high energy and raw materials costs and weakness in the
U.S. economy,"
An end to credit crisis: focus on how,
not when
It's time to look
back to the Asian crisis for a road map to the current crisis
The most consistent question I've
encountered with clients over the past year has been: 'When is it going to
be over?' Unfortunately, the answer to that question remains uncertain.
However, a question as important for investors to understand, we believe,
is: 'How will the credit crisis come to an end?'
The answer to this question provides
investors with not only a time window for action but also a road map that
they can follow as the next stages unfold in coming months.
Fortunately, for those of us who
experienced the Asian crisis in 1997-98, this question is one in which we
have specific insights into the answer.
While the credit crisis in the United
States began with words and acronyms that were foreign to many of us
(including sub-prime, CDOs, CLOs, leveraged loans, and auction-rate
securities), the nature of the crisis shares many similarities with the
Asian crisis.
Banks and borrowers over-leveraged
themselves, with borrowers purchasing over-valued assets (real estate),
which, when their prices stopped going up and eventually began falling,
resulted in declining collateral for loans and large losses among banks.
The situation in the US today is very
similar, albeit the leverage of the securities and the size of the US and,
increasingly, the European financial system involved greatly outstrip that
seen during the Asian crisis. So, looking back to the Asian crisis for a
road map to the current crisis, the keys to the end of the Asian crisis
centred on three areas: recapitalisation of the banking system,
de-leveraging of borrower balance sheets, and recovery in a demand source.
In the case of Thailand, Korea and
Indonesia in 1998, recapitalisation and demand recovery were external events
with the International Monetary Fund and local governments providing capital
to the local banking system, while the US rate cuts of 1998 provided a
catalyst for accelerating export growth to support demand in Asia while
domestic economies repaired themselves.
De-leveraging of Asian balance sheets
proved to be a longer-term project with debt-to-equity ratios, which peaked
at 200-400 per cent in 1997-98, taking six years before stabilising in the
30-50 per cent range.
The US appears to be following a similar
path to recovery. According to Bloomberg, global banks have raised US$354
billion in new capital since July 2007, beginning the recapitalisation
process among global banks. However, losses to date among the same banks
have totalled over US$500 billion, according to Bloomberg, suggesting that
ongoing recapitalisation through new equity issues or asset sales will
continue to be needed in the months ahead.
While potentially painful for existing
shareholders in some banks, the pools of capital at sovereign wealth funds,
private equity, hedge funds, and a handful of banks untouched from the
global credit crisis bring confidence that funding for this recapitalisation
process exists globally.
Like in the Asian crisis, a key component
to the recapitalisation process was banks selling distressed loans to
'workout funds' or distressed asset managers. In the current crisis, we
expect this process will be key as well. As important as recapitalising the
financial system will be a return of a demand driver for US/global growth.
During 1998-99, distressed Asian economies benefited from a re-acceleration
in US growth allowing the export sector of local economies to grow while
domestic sectors (real estate and banks) could de-leverage and repair
balance sheets.
Indeed, this is the path the US economy
is currently following, according to colleagues in the US. Since the onset
of the credit crisis, US exports have been a key offset to declines in
residential construction (see chart), much like seen in Asia during its
crisis.
With the European and Japanese economies
more recently succumbing to the global slowdown, global demand drivers
increasingly rely on developing economies. Even with the expected slowing in
growth in developed economies, Citi expects emerging markets growth to
remain strong, though decelerating to a forecast GDP growth of 6.1 per cent
in 2009. As a result, fiscal stimulus in global economies appears to be a
key component to the recovery path from the global credit crisis. This will
serve as a stabilising factor for slowing export demand in emerging
economies while supporting developed market export demand.
With this support from emerging market
demand, developed economies will still need to do their part as well. Fiscal
stimulus in developed economies will be important to stabilising domestic
demand (like seen in Japan post-1989), especially given the size of
developed domestic economies relative to their exports.
With recapitalisation of global
financials looking set to continue and a rebalancing of growth within
economies ongoing, we expect one last similarity to emerge between the
current period and those seen in the post-Asian crisis and post-tech bubble
periods. During these other periods of repair, a persistent increase in
volatility characterised the market environment, creating opportunities for
traders capable of trading a variety of asset classes on both the long and
the short side.
So, for investors navigating the current
environment, while the answer to the 'when' question remains difficult,
clarity on the question of 'how' leads us to believe that attractive
opportunities for investors looking forward are focused on taking advantage
of the recapitalisation of global bank balance sheets via distressed asset
funds.
Indeed, historically, distressed asset
funds have provided attractive returns in difficult market periods in the
light of their role in repairing US bank (as in 1990-1992) balance sheets
and US corporate balance sheets (as in 2001-2003).
Looking longer term, investors will have
an opportunity to capitalise on the fiscal stimulus that we expect to emerge
in developed and emerging economies, in particular focused on upgrading
infrastructure globally. Private equity opportunities in this area appear
best suited to match the long-duration nature of the opportunity and to
mitigate the impact on investor returns of downward, cyclical pressure on
construction exerted by the current global economic slowdown.
Lastly, while we expect growth in
emerging economies to outpace those in developed markets, valuations and
earnings risk in emerging markets leave near-term cyclical risk ahead for
investors. Investors may wish to capitalise instead on opportunities that
are emerging as a result of the current, high volatility environment.
However, given the limitations that most
individual investors encounter, especially trading on the short side of the
market and in non-traditional asset classes, global macro funds present an
attractive opportunity in the current environment. -
2008 September 3 BUSINESS
TIMES The
writer is head of research & strategy, investments, Citi Private Bank,
Asia-Pacific
Asian market fallout set to get far
worse
Property, stocks will be hit bad as
foreign capital is pulled
Fallout in Asian financial markets and institutions from the sub-prime crisis could
become more serious now as foreign capital, from the US and other leading
markets, is withdrawn, speakers at a symposium in Tokyo predicted yesterday. Asian
property markets - in China and Vietnam especially - are likely to be hit
hard while stock markets could take a battering, along with banks and other
financial institutions, they suggested.
'There
may be a sudden shift in capital flows as a result of fallout from the
sub-prime crisis,' warned South Korea's former commerce minister Duck Koo
Chung at the conference organised by the Asian Development Bank Institute (ADBI)
and the North East Asia Research Foundation (NEAR).
'Coming
weeks will be crucial' in this regard, Mr Chung later told Business Times.
ADBI
dean Masahiro Kawai, who told the conference that 'global financial turmoil
may continue longer than hoped for', suggested to BT that a flight from
Asian property market investment by banks, investment funds and various
stock market vehicles could damage these institutions as the property boom
unwinds.
The
warnings came as a sobering counter to the widely held view that Asian
markets and institutions are likely to escape relatively unscathed from the
sub-prime credit crunch that has wrought havoc upon major investment banks
and others in the US and Europe. The theory of a 'decoupling' of Asian
economies from outside problems has similarly been shattered by recent
events.
Recent
weeks have seen the collapse of a series of property development firms in
Japan as US and other investors pulled funds from them. The most recent
collapse - developer Urban Corp - marked Japan's biggest corporate
bankruptcy this year and the implication of yesterday's warning at the
conference was that firms elsewhere in Asia could be facing a similar fate.
Mr
Chung told BT that property markets in China and Vietnam are especially
vulnerable, while South Korea's property market is also facing problems
along with those of other East Asian economies. 'There will be another round
of credit crisis in developing economies', as money is 'pulled', he said.
Foreign direct investment as well as portfolio investment in many Asian
economies has been directed into property, added Mr Chung, who is now
chairman of NEAR.
The cause of the US dollar's strength in recent weeks has been partly to do with
the repatriation of investment funds from overseas, and this process could
accelerate now as a fresh credit crunch threatens, in spite of injections of
financial liquidity by the US Federal Reserve, Mr Chung commented. 'This
will lead to a further correction in asset markets' in Asia and elsewhere,
he suggested.
'We
have been planting the seeds of the current crisis for many years,' said Mr
Chung, who noted that Asia had supplied much of the financial liquidity that
fed asset bubbles in the US and elsewhere. Now that US credit markets have
seized up, the Fed is having to pump liquidity but this 'can only jeopardise
the anchor position of the dollar' in global financial markets.
Recent
Fed actions 'imply an expectation of continuing stress in financial
markets', and meanwhile, economic slowdown has hit both Japan and Europe, Mr
Kawai noted at the conference.
- 2008 August 29 BUSINESS
TIMES
Lessons
for financial regulators
The most recent issue of The Economist
has an article titled 'Confessions of a Risk Manager'. It provides an
insight into how US financial institutions built up so much exposure to
collaterised debt obligations (CDOs) and other asset-backed securities.
First, the risk managers were lulled by
the most benign risk environment in 20 years; they couldn't see where the
problem could have come from. Second, while default risk was priced in,
liquidity risk was not. Thus, that the price of an AAA asset with virtually
no default risk could fall by 20 per cent seemed inconceivable - but it
eventually did. Third, CDOs and other asset-backed securities were fairly
new concoctions. Hitherto, risk managers had focused on loan portfolios and
classic market risk. Rigorous credit analysis was done on loan portfolios to
minimise loan loss provisions. Meanwhile, equities, government bonds and
foreign exchange, and their derivatives, were well managed in the trading
book and monitored on a daily basis. CDOs and other asset-backed securities
sat between market and credit risk. In the words of the risk manager: 'The
market-risk department never really took ownership of them, believing them
to be primarily credit-risk instruments, and the credit-risk department
thought of them as market risk as they sat in the trading book (which are
marked to market).' Finally, the explosive growth and profitability of these
structured credit products cowed the risk department into continuing to
approve these transactions. To the bankers and traders, risk managers don't
bring in the dough, yet they have the power to say no and prevent business
from being done. They were seen as obstructive and a hindrance to bankers'
ability to earn high bonuses. So risk managers came under tremendous
pressure to not spoil the party.
All this happened in many financial
institutions. In due course, their books were overflowing with CDOs and
asset-backed securities. Through it all, the US Federal Reserve was more a
cheerleader than a stern enforcer of standards.
Time and again, we have seen how
financial institutions and markets - lured by the prospect of instant riches
- have built up excesses that eventually posed systemic risks. This is not
unlike a wayward child who gorges himself on sweets until he gets sick;
hence it is the parents' duty to set a limit. Likewise for financial
institutions and the markets, it is the job of risk managers and regulators
to be firm and put their foot down to curb the exuberance of money-grabbing
bankers.
To their credit, the Singapore authorities
have never shied away from enforcing standards or curbing market enthusiasm.
However, timing, as always, is a tricky thing to get right. But looking back
at the events of the last 12 months and with the benefit of hindsight, it is
safer for financial market regulators to err on the side of caution.
- 2008 August 15 BUSINESS
TIMES
Mountains of losses may bury markets
Financial
crisis is the worst the world has faced since the 1930s, crack panel tells
The Business Times
The global financial shock sparked by the US
sub-prime mortgage crisis is far from over, according to leading
international financial experts. There is still a major risk of a 'meltdown'
as economies battle what is shaping up as the worst slump since the 1930s, a
group of them - including financial guru Marc Faber and investment veteran
Mark Mobius - warned at a symposium organised by The Business Times.
Total losses suffered by financial
institutions worldwide in the wake of the sub-prime debacle will run into
trillions of dollars - possibly as much as US$10 trillion, rather than the
billions envisaged originally, some suggest. And the US budget deficit could
'explode' as Washington seeks to stem a real estate haemorrhage and restore
confidence
The experts' analysis (which appears
inside on Page 13) is a far more sobering assessment of the dangers facing
the world economy than has generally been presented so far. It comes as
markets are again suffering tremors - with the US Federal Reserve once more
forced to pump confidence-boosting liquidity into the financial system.
Equity markets are threatened with an
'avalanche' as financial system aftershocks continue, the expert panel
warns. And according to Mr Faber, this could turn into a drawn-out process
or 'water torture' bear market.
Former Wall Street executive and one-time
World Bank group official Ernest Kepper reckons stock valuations could fall
as much as 40-50 per cent from their peaks a year or so ago.
And Mr Mobius says: 'There is a big risk
of a meltdown of the (US) financial systems brought on by a lack of
confidence.'
Lehman Brothers' New York managing
director and chief US economist Ethan Harris rejects any suggestion that US
government debt is 'not safe' amid the crisis at mortgage giants Fannie Mae
and Freddie Mac.
But Mr Faber suggests: 'We are in the
midst of an unprecedented credit growth slowdown that will hit all asset
classes one after the other as liquidity tightens and deleveraging becomes
the order of the day.
'First, home prices came down. Then
financial stocks. And now, commodities, material and energy stocks. Bonds
will eventually tumble too. Even art prices will fall.'
Inflation is seen as the immediate threat
as food, fuel and other commodity prices soar. But governments may soon find
themselves battling deflation, the experts warn.
Mr Kepper says: 'As the financial
avalanche builds and recession hits oil-importing countries, the combination
of a severe US recession and a global slowdown will shift the focus away
from inflation to the slipping demand for real goods.
'This will lead to a reduction in prices
when supply exceeds demand. There will be downward pressure on labour
markets and rising unemployment, while at the same time, commodity prices
fall in accordance with reduced demand.'
William Thomson, a former vice-president
of the Asian Development Bank and now head of a financial advisory group,
says the sub-prime crisis is 'undoubtedly the worst in the developed world
since the 1930s'.
He reckons the only period remotely
similar is the bear market of 1973-75, which was driven by surging oil
prices and stoked annual inflation rates to around 20 per cent. 'That has
not yet arrived but may well be in the pipeline,' he says.
But he believes the situation is far
worse this time because the US financial system is extraordinarily stretched
and stressed.
'Last time, we only had the minor
bankruptcies of Franklin National Bank and Continental Bank to contend
with,' he says. 'Then, there were no derivatives. But now, they amount to
more than 10 times world GDP and a greater multiple of bank capital. Within
that total, the most toxic ones are those of unlisted, opaque,
over-the-counter variety amounting to over US$50 trillion - again multiples
of US bank capital. - 2008 August 1 BUSINESS
TIMES
Making sense of the bear market
PARTICIPANTS
Moderator: Anthony
Rowley, Tokyo correspondent for The Business Times.
Panellists:
- Marc Faber, an investment adviser and publisher
of the Gloom, Boom and Doom Report.
- J Mark Mobius, president of Templeton Emerging
Markets Fund Inc, and director and executive vice-president of Templeton
Worldwide Inc.
- Ethan Harris, managing director and chief US
economist at Lehman Brothers, New York.
- Ernest Kepper: A former official of the
International Finance Corporation and Wall Street investment banker who
now heads an Asian financial consultancy.
OVERVIEW
Since the sub-prime mortgage crisis burst upon the
US a year ago, there have been market rallies and claims that the worst is
over, only to be followed by fresh plunges in values and sentiment. Are we
near the bottom now, or just at the start of a long, slow meltdown? Our
experts take the latter view.
Where can investors find a safe haven in this sea
of trouble and uncertainty? Gold is still a good refuge, suggests one
expert, who expects the price go as high as $2,500 an ounce.
More fundamentally, our experts see developing
markets in Asia and beyond as the promised land that will emerge relatively
strong from a potentially massive destruction of wealth in the old world.
The needs of these emerging markets for food and natural resources will be
strong, so farmland and plantations could be good investments.
Anthony: I'm delighted to welcome such a
strong panel - a mark of how seriously you gentlemen view the current global
financial and economic situation. It's especially pleasing to welcome back
some old friends - Marc Faber, Mark Mobius and Ethan Harris.
Marc, let's start with you. Are we looking at a
financial system "avalanche" rather than a technical bear market,
in equities and bonds?
Marc: I believe that the secular bull
market in equities and bonds, which lasted from 1981/82 to anywhere between
2000 and 2007 has come to an end and that a water torture bear market has
begun. If an enormous quantity of money is printed by central banks equities
may avoid a severe bear market of say 40% to 50% but a trading range would
still follow and no net gains - certainly not in real terms - would be
achieved.
Mark: This may become the case in the US
where there is a big risk of a "meltdown" of the financial system,
bought on by a lack of confidence. However, emerging markets, equities have
corrected more due to poor market sentiment and contagion from what is
happening in the US, rather than any major deterioration in fundamentals.
Ernest: I say this is an 'avalanche.' I am
anticipating a fall in equity prices in the range of 40 to 50% relative to
the peak--- much more severe than the 25% fall which we see in a recession..
Two main reasons are that major economies other than the US will have severe
interruptions in growth and that the consumer - especially US. consumers who
most likely have gone further into debt than their credit cards would allow
by making a home equity loan or taking on the second mortgage will most
likely be under pressure to repay. It appears that the U.S. consumer's debt
burdened situation will put him in a "no way out" financial
quandary with a fall in home prices, fall in equity prices, rising inflation
and a reduction in jobs. I expect this scenario to unfold over the next 12
to 18 months.
Bill: In no way can this be seen as a
normal bear market. This is undoubtedly the worst financial crisis in the
developed world since the 1930s. The only period remotely similar was the
bear market of 1973-75, which was itself a part of the extended 1966-82 bear
market in US shares. That bear market was driven in part by a 13 fold
increase in oil prices from 1972 to 1980. This time we have had a 14 fold
increase in oil prices from the $10 low of 1999. Last time we had massive
inflation of 20 percent per annum. That has not yet arrived but may well be
in the pipeline.
However, in my view, the situation is far worse
this time since the US financial system is extraordinarily stretched and
stressed. Last time we only had the minor bankruptcies of Franklin National
Bank and Continental Bank to contend with. Then there were no derivatives.
This time, they amount to more than 10 times world GDP and a greater
multiple of bank capital. Within that total the most toxic ones are those
unlisted, opaque, over the counter variety amounting to over $50 trillion,
again multiples of US bank capital.
The revolution in market finance that began with
the deregulation of the 1980s may be about to eat its young, as we have seen
with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization
goes ahead the US visible national debt increases by $5 trillion and is
effectively double. The US would no longer qualify to join the Euro!
The US budget deficit could be on the verge of
exploding upwards. Including war costs, it is already over 4 percent of GDP.
The economic slowdown and Presidential candidate Obama's plans for
healthcare, whist noble and justifiable, even after tax increases, could
send the deficit north of $1 trillion or 7 percent of GDP by 2010.
Anthony: What do you think the total
"wealth loss" might be as a result of recent crises (in terms of
falls in market cap, sub-prime losses and other losses by banks and
investment banks, derivatives market losses in general)? Does anyone really
know - or is the whole thing too opaque to estimate?
Ethan: Estimating the losses of financial
institutions is extremely difficult, but something in the $500 bn to $1
trillion range makes sense. The good news is that much of that has already
been revealed at the major money center institutions and they have been able
to recapitalize. It is also important to not double count--when a mortgage
defaults the loss is the difference between the loan size and what is
recovered, and we should not add to that the individual pieces at each stage
of ownership of the loan. To put the loses in perspective, the total value
of assets owned by US households is $72 bn and the net worth of US
households is $56 billion. Moreover, many of the losses are borne outside
the US. Thus the second round losses--the drop in the stock and housing
market--is larger and a bigger threat to global growth.
Bill: When Chou En-Lai was asked by Henry
Kissinger if he thought the French Revolution had been a success he
responded 'it's too soon to tell'. That applies to the current situation.
But we could be looking at $6 trillion in mark downs of housing wealth, $3-4
trillion in stock market losses if we get a 25-35 percent mark down in the
market - and it could be worse - and then we have the losses of the banking
system. So we are talking about possibly $10 trillion as compared with a GDP
of $13 trillion. Proportionally, I would look for the UK to suffer
similarly. It's not chicken feed.
Marc: Right from the start my estimate of
the losses was about USD 1 trillion in the US alone. However, if we add the
losses from a decline in housing wealth and stock market wealth the losses
are a multiple of that.
Ernest: Overall, the fallout could easily
be in the many trillions of dollars. No-one really knows (especially central
banks and finance ministries) -- but if we quickly add some basic financial
areas where there are already are losses to those we can expect it is easily
2-3 trillion.
The two US mortgage backers losses are in the
trillions -- the loss to the 10 million privately owned real estate
homeowners is also in the trillions. When you estimate in the range of a US$
250 billion loss in each of the following sectors -- equities, consumer debt
instruments (such as car loans, credit cards and student loans which have
also been repackaged and sold as asset-backed securities), corporate bonds,
specialized insurance companies which guaranteed bonds and mortgages to
collateral mortgage instruments, the loss in tax revenue to states from real
estate taxes, the bankruptcy of a major broker whose revenue has been based
on charging fees rather than earning income from addressing and dealing with
credit risk, the bankruptcy on one or more hedge funds, construction company
losses and bankruptcies of and derivatives, it will be a multi trillion
dollar loss.
Anthony: Do you think that inflation or
deflation is the greatest threat facing the global economy - i.e. commodity
price inflation versus the collapse in asset values (real estate and stocks
etc).
Marc: We are in the midst of an
unprecedented credit growth slowdown and this will hit all asset classes -
one after the other, as liquidity tightens up and as de-leveraging becomes
the order of the day. First home prices came down, then financial stocks and
now commodities, material and energy stocks, and art prices will follow.
Bonds will eventually also tumble. In the meantime it is likely that
consumer price inflation will accelerate.
Mark: In view of aggressive monetary
expansion by the US, the risk of inflation is probably greater. In emerging
markets, another big risk is also the abandonment of the market economy
philosophy and a cessation of privatization of state owned companies.
Bill: This is the great debate. The losses
are deflationary but the monetary and fiscal policies are hugely
inflationary. So far the secondary effects of wage inflation are the dogs
that have not barked yet, but the unions are clearly getting restive in
Europe and the pressures are so intense on US wage earners that it surely
must just be a matter of time before they try and restore some of their lost
incomes.
Ultimately, governments never repay their debts in
real terms. I look for the US to try and inflate its way out of its mess
whilst, all the time, denying it is happening and quoting the manipulated
inflation data. But one only needs to look at the private estimates of M3
growth to see that it has been growing at 18 percent per annum, double what
it was when they stopped publishing the information and double the worst
time in the stagflationary 1970s.
Ernest: Probably inflation initially. But
as the avalanche builds and recession hits oil-importing countries, the
combination of a severe US recession and a global slowdown will shift the
focus away from inflation to the slipping demand for real goods which will
lead to a reduction in prices when supply exceeds demand. There will be
downward pressure on labour markets, rising unemployment, while at the same
time commodity prices fall in accordance with reduced demand. Equity market
prices are presumably based on value, while commodity market prices are the
result of supply and demand.
As the Fed approaches a zero interest rate policy,
its ability to have an impact on the economy will be reduced. This is
because the Fed has been playing a bigger role in financial stability issues
rather than growth issues.
Anthony: How safe is US government debt as
an investment now, given the stress of financing financial system bail-outs?
Ethan: It is absurd to think that US
government debt is not "safe." The potential liabilities the
government is taking on are small relative to the size of government debt
and even in a worst case scenario, debt as a share of GDP is unlikely to
approach the highs of the US 15 years ago or in other major economies such
as Japan and Italy. Moreover, the Fedlearned its lesson from the 1970s and
is very unlikely to allow a sustained inflation acceleration.
The big challenge for US debt is not new: it is
the huge surge in costs as the baby boom generation retires. In terms of the
dollar, it is also wrong to focus on US government liabilities. What matters
to the dollar is the overall borrowing requirement of the economy--that is
the current account deficit. The current account deficit is improving as
exports surge and imports stagnate. The deficit is still too big, but at
least it is moving in the right direction. Looking ahead, further
improvement is likely as Americans rediscover the virtues of conventional
saving, rather than relying on asset price appreciation to accumulate
wealth.
Marc: Since the government can print money
US debt is 100% safe. What is, however, not safe is the US dollar. So,
investors may eventually get their money back in a currency - the US dollar
- which will hardly be worth anything.
Mark: Looking at the U.S. fundamentals, the
perceived safety of U.S. government debt is under stress which is why
central bankers have been diversifying their reserves. Of course in a
general loss of confidence then such debt could become risky.
Bill: You will be repaid in US dollars with
less purchasing power than when you subscribed. Whilst this crisis continues
and the management of the White House and the Fed remain unchanged, the US
dollar is a poor bet and a worse investment.
Ernest: While US. Treasuries have not been
particularly rewarding buys, mainly because of excessive debt loads, it is
default swaps and derivative products plus counter-party risk management
instruments and arrangements on the market by foreign countries that raise
concern.
Anthony: What is the safest thing to
"hold onto" in this avalanche - gold, other commodities, cash etc?
Marc: For the next three months the US
dollar should be fine. On weakness physical gold should be bought as it is
the only "honest" currency. I would avoid industrial commodities.
Farmland and plantations should also be relatively attractive.
Mark: I would still maintain that the best
strategy would be to have a diversified portfolio between equities, bonds,
commodities and cash. We continue to find fundamentally stock companies
trading at attractive prices as a result of the global market correction.
Ethan: Investors should remain conservative
in this environment. Even commodities are not a panacea. For example, the
surge in oil prices in the face of a clear weakening in oil demand, suggests
part of the run-up this year is unsustainable.
Bill: Gold, in my opinion, is the asset of
last resort. It is no one else's liability and has shown its value in crises
over the millennia. That situation remains unchanged. It is still cheap
relative to oil on a historical basis and is only 40 percent of its all time
high on an inflation adjusted basis. New supplies coming onto the markets
are constrained by high costs and a lack of mining skills after a generation
when no new graduates entered the sector.
Given the global geopolitical tensions added to
the banking crisis, gold remains a superb insurance policy. Before the
present cycle exhausts itself I would not be surprised to see gold reach all
time highs on an inflation adjusted basis i.e., $2500. Silver is also
interesting here since it is a minor precious metal with expanding
industrial applications. On an inflation adjusted basis it is even cheaper
than gold. There are an ever expanding range of instruments to tap the
commodity space with ETFs and ETNs - long and short. There are also natural
resource funds of hedge funds.
Anthony: Amongst equities and bonds, what
(if anything) is there to go for now? Emerging markets versus advanced
markets?
Marc: I think for the next three months the
US will continue to outperform emerging markets - as it has done already
this year - and this not because the US market went up but because it went
down less than emerging markets. I also think that Japan will outperform the
US and other markets. High yielding equities in Asia, including Singapore
REITs, should be okay but up-side potential is limited.
Mark: There's always something to buy.
While global growth is slowing down and inflation has been increasing,
emerging markets are still expected to grow at a much faster rate than
developed markets. They, thus, representing an investment opportunity.
Moreover, 'frontier' markets [those at an earlier stage of development than
established 'emerging' markets] are also looking interesting.
Bill: I believe we are entering a new phase
in the global economy, one with increased government regulation, controls
and spending. The old Thatcher-Reagan supply side revolution is likely to
take a breather and a return to modified Keynesian policies is a
possibility.
This is driven by the increased scepticism in
developed economies about globalization, largely because the rewards have
not been adequately distributed. This accords with the likelihood that the
36 year cycle in US Presidential elections will probably make the Democrats
the leading party of government in the coming years with all that means for
interference in the economy - and inflation.
The extent to which the growing scepticism of
globalization in developed economies affects the future growth of emerging
markets cannot be determined at this time. At the margins growth may be
reduced slightly but the fundamental factors changing the shape of the
global economy are too strong to be derailed. Emerging markets remain a
field of great opportunity, especially after recent declines in countries
like China, India and Vietnam. Others with essential commodities are
exciting. Powered by Chinese and Indian investment, Africa could have a
renaissance. Those with financial imbalances like those in Eastern Europe
should be avoided.
KEY POINTS
- This is the worst financial crisis since the
1930s and equity prices have more room to fall.
- All told, the total losses could run into
trillions of dollars.
- High inflation is likely to persist, at least
for some months.
- Investors can seek refuge in precious metals
and selected emerging markets.
- 2008 August 1
BUSINESS TIMES
Market crash: Hold on to your hats
For
the patient and disciplined investor such trying times also represent
excellent opportunities to pick up bargains
Most people in the investment world hate
the words 'market crash'. It's everything that investors want to avoid. But
because markets move in cycles, bear markets are inevitable - and we are in
a bear market right now. The US financial crisis that started with the
sub-prime problems has reached a new level, with the US Federal Reserve
having to assemble a rescue plan for Fannie Mae and Freddie Mac, two of the
largest mortgage lenders in the US.
The continued rise in oil and commodity
prices has caused inflation to surface as an additional problem, especially
in Asia. Markets have corrected sharply since October 2007, when some were
at or near historic highs. As at July 8, all markets shown in Table 1 have
crashed by more than 20 per cent over the eight-and-a-half months. Some
markets, like China and India, have fallen more than 40 per cent. What
should investors do?
A good idea is to look back at history -
to keep things in perspective. There have been massive sell-downs and
crashes in the past, caused by some event or another. Table 2 shows some
notable market crashes and the recoveries that followed.
Panic and risk missing out on the
recovery
Investors looking at Table 2 will note
that during most of these market crashes, economies were going through
recessions, the Asian financial crisis, and in the case of the US, World War
II. But despite how gloomy things might have seemed at the time of the
crashes, the markets recovered, and the subsequent recoveries resulted in
those markets going up 100 per cent or more.
Therefore, it is important that investors
do not panic and dump everything they hold when they are caught up in a
market crash. The impulse to sell in such circumstances is understandably
high. In all the cases mentioned here, some major crisis/war/recession that
had happened. It gave common investors all the reason they needed to scream
'sell', resulting in massive drops.
However, a very important point to note
is that the crash has already happened. Markets are already down by more
than 20 per cent, some as much as 40 per cent. If investors sell out now,
they will be selling at market lows.
Furthermore, psychologically, it would be
very difficult to re-enter the market any time soon if investors sell out
now. Such investors who choose to quit now are likely to stay in cash until
markets are well into their recovery phase - when most of the best buying
opportunities would have already passed them by.
While it may seem difficult, investors
need to be prepared to withstand market volatility, and it is during
uncertain times that volatility is highest. But for the patient and
disciplined investor, such trying times represent excellent opportunities to
pick up bargains.
When everyone is so worried or panicky
over something - in this case, the Fannie Mae and Freddie Mac saga and the
ongoing US financial crisis - fear overrides reason. It no longer matters
that stocks are undervalued or markets cheap, because the overriding desire
is to unload everything you own.
As such, the buyer has all the power and
the seller is powerless. In times like these, stocks and equity unit trusts
are all available at bargain prices. But investors are no longer considering
whether companies (and indeed the stock market) will recover and how they
will fare one or two years later. They are simply concerned about the huge
drop in the value of their investments - which they cannot avoid in any case
because it has already happened. Panic selling crystalises any losses that
you have already incurred. Three months later, or even one year down the
road, if stock markets have stabilised, investors may still be fearful and
put off re-entering the markets, though by then, markets may have fully
recovered all previous losses.
Seize the buying opportunities
The US is the largest economy in the
world and its financial markets are the biggest. As such, any time the US
sneezes, all other markets are affected. But the impact of the fallout may
not be uniform across global markets. The ongoing US financial meltdown and
economic decline are a good example. Most Asian financial institutions are
not holding massive, potentially bad loans on their books, nor are they
facing the kind of credit crunch that some of the US financial institutions
currently face. In fact, investors who have experienced such crashes before
will know the current situation may throw up good buying opportunities.
Most Asian markets have been beaten down
severely and are trading at very attractive valuations. For example, at the
start of 2008, Asian markets, as represented by the MSCI Asia ex-Japan
index, were trading at almost 17X forward PE ratio for 2008. As at July 18,
that forward 2008 PE ratio had dropped to 12.7X.
On a historical basis, this is at the
lower end of the forward PE valuations for Asian markets, and investors who
choose to buy into Asian markets (via Asian equity funds) during times of
low valuation have historically made very good returns when recovery comes
about..
It is easy to forget in the midst of all
the negative sentiment that in reality, Asian economies are fundamentally
sound and that many economies are expected to post healthy growth rates this
year, even with a possible US recession. For example, the Singapore economy
is still expected to grow 4 to 6 per cent this year and at a similar, if not
higher, rate over the next five to 10 years.
Even in the US, investors can pick out
selective bargains, despite the doom and gloom surrounding the economy and
the market. The average price-to-book value (PB/V) of US financials has
fallen from a PB ratio of more than 2.0X to around 1.0X. The situation we
are seeing now is similar to what happened during the peak of the Asian
financial crisis, where many Asian financials fell to similar PB levels. But
when economic recovery took place, the surviving financials delivered
substantial gains to those who dared to pick them up during the 'bad' times.
While it may be too risky to select individual financial stocks currently, a
global financial fund that holds dozens of financial stocks would be
well-positioned to benefit when the current US financial crisis blows over -
which it eventually will.
Investors can expect plenty of near-term
volatility in the coming days. There will likely be more bankruptcies,
bailouts, and write-offs ahead as the US financial crisis unfolds. However,
the entire US financial system is too large and too important to simply
collapse completely. Eventually, the market recovery will occur. And when it
does, the US financials and banks that survive the current crisis will post
significant gains.
In conclusion, hold on to your hats and
don't panic. Be disciplined and remain diversified in your investments.
Making an investment decision in a moment of panic or haste will probably
lead to regrets later on.
History shows that stock markets have
always experienced big crashes due to various crises - and have always
bounced back again. Despite all the recent volatility, or perhaps even
because of all the worries and fears the stock market is currently
experiencing, now is not the time to quit from the market. It is the time to
stay in it. - 2008
July 23 BUSINESS TIMES
Risk & Return : The sub-prime debacle and Asia
Ernst & Young's (EY) country managing
partner Steven Phan encapsulates recent developments as such: 'The current
global economic fallout was sparked off by the sub-prime mortgage crisis in
the US. The credit crunch that followed caused the market to become more
cautious and lending became more stringent.'
'The weakening US dollar, coupled with
housing issues, rising commodity prices and market volatility, dampened
general consumer confidence and sense of job security and, as a result,
curtailed consumer spending. This has had a wide impact on the global
economy, given that the US is undoubtedly a major consumer market,' he adds.
Despite the crippling effect of the
sub-prime crisis, experts are divided as to whether the US is headed for a
recession.
A US recession?
'Some have argued that the US is already
in a mild recession. Nonetheless, clearly, consumer confidence has been
declining amidst the global slowdown and rising oil and food prices,' says
Mr Phan.
Tham Sai Choy, head of audit at KPMG in
Singapore, says: 'Whether technically a recession or not, there is clearly a
marked slowdown in many of the economic indicators in the US.'
Peter Baldock, chief operating officer at
Deloitte Global Corporate Finance, based in Singapore, believes that 'the
reality is that the US is moving into a period of stagflation where the
economy moves sideways, probably not steeply downwards but at best zero to
very modest growth'.
Goh Mui Hong, president and CEO of ST
Asset Management, says: 'Our view is that the US economy is still expected
to experience a period of protracted weakness and possibly a recession under
the weight of falling home prices, tight credit, rising unemployment and
growing inflationary pressures.'
UOB economist Jimmy Koh believes the
world's largest economy could avoid slipping into a recession. 'Our take is
that while growth will remain weak, it should be able to avoid a recession.
The question is the recovery process. Given that banks are still repairing
their balance sheets, and the sub-prime effect is still working through the
real economy, the recovery path is likely to be a fairly long U-shape.'
CIMB-GK Research head Song Seng Wun
agrees that the US is unlikely to slip into a recession this year but warns
it could happen next year. 'The US economy this year is still being
supported by contributions from net exports and private consumption. But it
could slip into a recession next year, once the lift from the tax rebates
have worked through. Consumer spending may fall, if oil and food prices stay
high against a backdrop of a weak labour market. US exports may fall off
more meaningfully going into 2009, if global demand is hit by high
inflation.'
The impact on Asia
Asia, however, is likely to be shielded -
to a certain extent - even if the the world's largest economy does slip into
a recession.
'One reason is that Asian banks have very
reasonable exposures to such assets,' says UOB's Mr Koh. 'Thus, the effect
is likely to be via the real sectors of the economy. Also, we have seen
emerging new economies - the likes of China and India. The ample global
liquidity has also helped to mitigate extended downside.'
Deloitte's Mr Baldock says: 'Asia,
particularly China, is not wholly dislocated from the state of the US
economy but to the extent that the Asian domestic economies now have greater
relative importance than in the past, they are not so dependent on their
exports to the United States and Europe.'
CIMB-GK's Mr Song says: 'Asia is not
protected if global demand were to slow sharply. But Asian governments and
companies are generally in a stronger position now to ride through any
slowdown because most companies' and countries' balance sheets are quite
decent - for example, they have high forex reserves, low debt gearings,
etc.'
ST Asset Management's Mrs Goh says:
'Another possible reason Asia could survive is that the bulk of borrowing
needs could be supported by Asian banks. While global banks have been
cutting down on investments and lending, the region has been fortunate that
the Asian banks could continue to finance and support the local companies.'
KPMG's Mr Tham believes the slowdown in
the US could even present opportunities for this region. 'Asia's developing
economies are seeing a strong momentum of growth,' he says. 'Compared to the
last time the US was in recession, they also have stronger reserves to
buffer themselves against external shocks and are seeing improvements in
governments, infrastructure, markets, education and security.'
'In addition, slower growth in US markets
may push along the development of new trade flows within the Asian region,
and increase the economic opportunities for countries in Asia,' Mr Tham
adds.
This doesn't mean, however, that Asia is
out of the woods. The full extent of the sub-prime crisis has yet to play
itself out, and new challenges are threatening the stability of global
markets.
Mak Yuen Teen, director of the
Asia-Pacific Research and Innovation Centre of Watson Wyatt, believes the
still-unravelling sub-prime debacle poses significant risks: 'A key
challenge is that the sub-prime crisis is very different and the full
effects are still anybody's guess. Its impact may be more severe, systemic
and global than many other crises. And we now have issues of high inflation,
high oil prices and high food prices. So, it may require a lot of stamina
and resources to get through this one.'
New threats
EY's Mr Phan notes: 'Inflation has
increased, reaching an all-time high and, in some parts of Asia, these
escalating costs have caused certain levels of socio-political tension.'
He also points out that foreign exchange
rates, market volatility and rising costs of raw materials will create
additional burden and threats to businesses.
Deloitte's Mr Baldock believes the
greatest challenges for most Asian economies will come from inflation and
access to basic resources - ie oil and gas, minerals and food. 'To contain
inflation and rocketing real estate prices, interest rates will rise and
that will impact on their relative exchange rates to the US dollar. Hence,
there will be a loss of cost competitive advantage with regard to the US.'
CIMB-GK's Mr Song warns that Asia is also
facing increasing competition, as trade barriers are being lowered.
UOB's Mr Koh believes the new threats
will pose significant challenges for the region's economies. 'Some are
worried Asia could be walking into stagflation. So far, most economies are
running negative real interest rate. And, many are assuming inflation, oil
and commodities prices, should eventually ease. The worry is, what if prices
do not correct? Asian central banks could be forced to hike rates
significantly, which would be detrimental to asset prices.'
The new threats will not only affect
economies as a whole, but individual businesses as well.
Need to be vigilant
KPMG's Mr Tham cautions: 'Businesses will
need to be more careful in analysing the risks that they are exposed to, and
be better prepared for them. They may have to be prepared that banks might
fail, high-quality rated investments might lose their value overnight, and
historical patterns might not even apply any more.'
'Moving forward, organisations should be
more vigilant in their risk management procedures, paying attention to risk
identification, and embark on a strategy to diversify and manage these
risks,' Mr Tham adds.
Deloitte's Mr Baldock says: 'At the
corporate level, the key risks are the volatility of supplies of inputs,
both in terms of quantities available and prices paid, including forex
volatility exposure. This uncertainty makes business planning and investment
very difficult. Corporates will therefore attempt to take control of their
supply chains.'
ST Asset Management's Mrs Goh warns that
the slowdown in US consumer spending will affect companies that cater to the
consumer sector. She also cautions: 'US and European property markets have
been negatively impacted by debt re-pricing. This will affect real estate
developers and agents.'
'Businesses will also have to find
cost-efficient ways to move from obsolete technologies to new technologies
that are more energy efficient or use alternative sources of energy. And
employers will have to handle wage expectations given current food and
property price pressures,' she adds.
EY's Mr Phan believes new threats will
also throw up new opportunities for businesses which are well-equipped to
seize them. 'Companies who continue to focus on empowering their people and
attract and retain the right talent will be the ones who are able to execute
and perform better during trying times.'
- 2008 July 23 BUSINESS
TIMES
Real-Estate Woes of Banks Mount - No End in Sight
Lenders Dumping Bad Loans at Discount;
Regulators See Losses Continuing
THE WALL STREET JOURNAL
June 6, 2008; Page A1
Federal regulators warned Thursday that banking-industry
turmoil would continue as financial institutions come to terms with piles of
bad loans they made to finance the construction of homes and condominiums.
Until now, most of the damage to banks from the housing
crisis has come from homeowners defaulting on their mortgages. But amid a
dismal spring sales season for new homes, loans to home and condo builders
are looking increasingly shaky. Banks have begun to dump them at what will
likely be steep discounts, setting the stage for billions of dollars in
fresh losses.
"As long as the housing market is on a downward path,
as long as those prices continue to fall, I think there's a risk that the
losses could continue to mount on a variety of loans," Federal Reserve
Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.
At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said
banks that aren't diversified, or those with high exposures to residential
construction and development, are of particular concern. "That's where
we are really seeing the delinquencies spike," she said.
The surprisingly gloomy outlook is at odds with the
sentiment of investors, who appear to have moved on from worrying about the
health of the financial system to obsessing about gasoline prices and
consumer spending. The Dow Jones Industrial Average rose 213.97 points, or
1.7%, on Thursday on the back of surprisingly strong retail-sales data.
The health of the economy is heavily dependent on the
willingness of banks and other financial institutions to lend to consumers
and businesses. Many banks have already taken substantial losses, and either
will have to pare their lending or raise new capital to rebuild their safety
nets. The Federal Reserve and Treasury Department have been pressing banks
to raise capital so as not to further reduce lending.
Banks with swelling portfolios of troubled loans tied to
land and housing are struggling to unload some of their real-estate debt.
IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540
million in loans made to finance land purchases and housing construction
projects. Winning bids on many of the loans were, on average, about 60 cents
on the dollar, according to people familiar with the matter. But some
winning bids were only about 20 cents on the dollar.
Cleveland-based KeyBank, a unit of KeyCorp., is trying to
unload $935 million in loans tied to land and residential developments,
while Wachovia Corp. is shopping a $350 million loan portfolio, according to
two people who have seen the offerings. Representatives of the banks
declined to comment.
The sales are a response to a growing problem: Home
builders are falling behind on loan payments, and the value of the land and
housing developments that serve as loan collateral is plummeting. Over the
next five years, U.S. banks could "charge off" as bad debt between
10% and 26% of their loans tied to residential construction and land assets,
which would amount to about $65 billion to $165 billion, according to a
report sent to clients Thursday by housing research firm Zelman &
Associates. That compares with charge-offs of about 10% of
construction-related bank assets, totaling $31.6 billion, when adjusted for
inflation, during the last housing downturn in the late 1980s and early
1990s. In 2007 and the first quarter of this year, banks wrote down just
0.7% of such assets, according to Zelman. - 2008
June 6 WALL ST JOURNAL
Will
learning these three R's
prevent another panic of '08?
Before we replace angst about housing,
mortgages and credit markets with anxiety about rising oil prices, consider
what we've learned in the past several months. The U.S. had a housing
bubble; that's now obvious. But how did it happen? Why was its bursting so
painful? Without answers, we can't hope to reduce chances of a repeat.
Boil it down to the three R's: rocket
scientists, regulators, and ratings agencies.
The rocket scientists are the
wizards of Wall Street who invented securities that supposedly dispersed
risk widely but actually created much more leverage than proved wise. There
is a good case that the savings-and-loan mess of the 1980s was made in
Washington, the inevitable result of government deposit insurance that led
to tails-you-lose, heads-I-win banking. The current mess was made on Wall
Street.
A bubble so large also required
aggressive mortgage originators, imprudent home buyers and myopic investors.
But it wouldn't have been as bad if not for the paper factories that sliced
up individual subprime mortgages and assembled the pieces into securities,
each with its own acronym, that were deemed safer than the underlying loans.
They behaved as if they were taking a little poison and diluting it in a big
reservoir; instead, they poisoned the whole water supply.
A lot of risk wasn't dispersed, as we now know. It
ended up in banks like Citigroup and UBS. To the extent it was dispersed,
that posed a different problem.
"The idea of risk dispersion is nice in
theory but in practice it depends on who it gets dispersed to," says
Peter Fisher, a former Federal Reserve Bank of New York official now at
money manager BlackRock Inc. "It turned out we weren't dispersing it to
strong hands who could hold it through the volatility. Rather, we were
dispersing it to weak hands who couldn't hold it, and ended up adding to the
volatility."
The cost of delinquency, default and falling house
prices often was passed to entities (some linked to brand-name banks) that
lacked the financial strength to weather a storm. As the entities couldn't
bear the burden for long, they had to sell mortgage-linked securities into a
hostile, illiquid market, pushing down already depressed prices.
In a a modern capitalist system, regulators
provide guardrails to keep markets from driving the economy off a cliff. The
regulators failed. Whether regulators should or could have restrained
innovation on Wall Street or prohibited business deals between consenting
sophisticated adults is a tough question.
But the regulators failed to protect
unsophisticated consumers from mortgage loans that they simply couldn't
afford or didn't understand; they're now fixing that. And regulators
misunderstood the risks that banks were taking and failed to stop lenders
from lowering standards too far in their frenzy to attract business; fixing
that will be tougher.
Among their many failings, the regulators allowed
lenders to make a fundamental mistake: To lend not against the borrower's
cash flow and income, but instead to lend against the seemingly inexorable
increase in the value of the collateral. Mortgages were made to people who
couldn't afford the payments because the lender (or investor) figured that
if the borrower defaulted, the house would always be worth more than the
loan.
"It is the hallmark of a credit bubble when
lenders think that because collateral is going up in price they can ignore
the borrower's ability to pay," says BlackRock's Mr. Fisher.
"Collateral should only be a backstop." When lenders forget that,
regulators must step in. "Lenders need someone to prevent them from
competing their way to the bottom," he says. Let's put those words on a
laminated card and hand it to every banking supervisor."
THEN THERE is the rating agencies, mainly
Moody's and Standard & Poor's. "Credit-rating agencies assigned
high ratings to complex structured subprime debt based on inadequate
historical data and, in some cases, flawed models," the Financial
Stability Forum, a collection of regulators and central bankers, said in an
April report. "As investors realized this, they lost confidence in
ratings of securitized products more generally."
The flaws of rating agencies are a melange of
conflicts of interest, misleading grading systems that classified complex
securities as if they were much like simple corporate bonds and a
backward-looking approach that proved particularly useless. They were the
enablers. They are atoning and changing their ways, as they should. Their
business model will change; government oversight will be strengthened.
But investors who relied on the rating agencies --
particularly supposedly sophisticated pension funds and other institutions
-- are at fault, too. Rating firms became a crutch for investors who simply
didn't want to spend the time and money required to be prudent investors at
a time when low interest rates had everyone reaching for higher returns
without contemplating the higher risks.
A little "back to basics" in banking and
investing would go a substantial way toward avoiding a repeat of the Panic
of '08. - 2008 May 29
WALL ST. JOURNAL David Wessell
US mortgage market staring at
US$112.5b loss: study
US homeowners, lenders and investors may
lose as much as US$112.5 billion through 2014 as mortgage payments go up on
adjustable-rate loans, triggering defaults and foreclosures, according to a
study.
The study by mortgage-risk data provider
First American CoreLogic said that an estimated US$2.3 trillion of
adjustable first mortgages were originated from 2004 to 2006 and many of
which will begin to reset in two to three years. As they reset
at higher rates, about 1.1 million loans amounting to US$326 billion may go
into foreclosure, the study said.
'The big years for reset are 2007 and
2008,' said Christopher Cagan, director of research and analytics for First
American CoreLogic. 'Until recently, the investment community wasn't giving
a sufficient risk discount' for the potential losses, he said.
US sub-prime borrowers fell behind on
their mortgage payments at the highest rate
in four years in the fourth quarter and foreclosures on all types of home
loans rose to a record, according to the Mortgage Bankers Association. New
Century Financial Corp, the second-biggest US sub-prime mortgage lender, has
said that it may not be able to stay in business unless it can find new
capital. Some adjustable loans reset in two or three steps, said Mr Cagan.
'At full reset, it's going to be about US$40 billion a year' of additional
interest payments, or an average of US$1,500 a month per loan, he
said. To avoid reset, borrowers often
try to refinance before the higher rate kicks in.
Mr Cagan estimated that sub-prime
borrowers would face an average increase of US$400 a month, 'but these
people are credit-impaired and already having difficulty' paying. Sub-prime
loans were the largest portion of the 8.37 million mortgages that Mr Cagan
analysed, accounting for 3.8 million loans representing US$1.1 trillion.
Sub-prime and so-called teaser loans, which offer the lowest initial
interest rates, face resets sooner than market-rate loans, he said. -
2007 March 20 Bloomberg
Act fast or face deep recession: Tony
Tan
World could see worst recession in 30
years unless policymakers intervene urgently
(SINGAPORE)
The global economy will run into even more turbulence if policy makers don't
act quickly and decisively to ease the credit crunch spilling over from the
United States, says the Government of Singapore Investment Corp (GIC).
But
the sovereign wealth fund is standing by its substantial investments in UBS
and Citigroup after the sub-prime crisis ravaged the two mega banks.
Speaking
to some 1,000 employees at the inaugural GIC Staff Conference yesterday, GIC
deputy chairman and executive director Tony Tan warned that the world
may
face a recession 'longer, deeper and wider than any we have encountered in
the past 30 years'.
'We
are entering a period of extreme uncertainty in the world economy and global
financial markets. As banks continue to de-leverage, cutting their lending
activities and causing a contraction in credit supply, the prospects for the
US economy - and possibly the world economy - are fraught with downside
risks.'
But
Dr Tan believes the economic downturn can be mitigated if the authorities in
the US and elsewhere take decisive and timely action. 'If policymakers
respond strongly and appropriately, investment markets and sentiments can
turn around sharply.
'However,
if such actions by the authorities are not taken within the next 3-4 months,
it will be left to the market forces of supply and demand to stabilise the
US housing market before we can see the light at the end of the tunnel. This
will be a considerably more painful and long-drawn process.'
Despite
the uncertainty, GIC is standing by its decision to invest billions of
dollars in troubled banks UBS and Citigroup.
(they have lost $1.2 bln so far on these investments)
'We
regard our investments in UBS and Citicorp as long-term investments that
will give us good returns when markets stabilise and economic conditions
return to more normal levels,' Dr Tan said.
GIC
pumped 11 billion Swiss francs (S$14.7 billion) into UBS last December via a
convertible bond issue that would eventually give it a stake in the bank. It
has also not ruled out injecting more cash into UBS, which is looking to
raise 15 billion Swiss francs through a rights issue, after reporting a
second straight quarterly loss this month. GIC has said that it would
examine the terms of the rights issue before deciding.
GIC
also invested US$6.88 billion in Citigroup in January this year through a
private offering of convertible preferred securities.
Dr
Tan yesterday reiterated that GIC was able to make such investments because
it was well prepared for the current credit crisis.
'We
had moved to a more conservative posture in our portfolio by liquidating a
portion of our equity holdings in the third quarter of 2007 and moving into
cash - a measure we had not taken for quite some time. This provided us the
liquidity to make substantial investments in UBS and Citicorp when these
opportunities arose.'
He
added, however, that financial and investment markets would be nervous and
volatile over the next 1-2 years.
'Instead
of the rising tide that broadly benefited financial and investment markets
for the past 10-20 years, we are now facing choppy seas that could engulf
the broader economy globally. Policymakers, business managers and investors
will require fortitude and nimbleness to navigate safely through the
turbulence.'
Still,
he expressed optimism for GIC's future. 'Working together as a team and with
the right policies, we will successfully navigate the treacherous currents
that lie ahead with sufficient ballast to be able to take advantage of
opportunities as they arise. When this turbulent period is over, I am
confident that GIC will emerge stronger and more resilient and take its
place as one of the most competent and respected investment organisations in
the world.'
Dr
Tan's speech yesterday to staff and the media, at Swissotel The Stamford, is
seen as part of GIC's efforts to be more open about its investments. Set up
in 1981 to manage Singapore's foreign reserves, the company is not required
to give the same level of detail about its activities as a publicly listed
company. But it has made overtures in recent months to be more transparent,
without compromising its competitiveness.
GIC
is the world's third- largest sovereign wealth fund, with US$330 billion in
assets under management, according to Morgan Stanley in February. It ranks
behind the Abu Dhabi Investment Authority with US$875 billion and Norway's
Government Pension Fund with US$380 billion.
- 2008 April 22 SINGAPORE BUISNESS TIMES
Sub-prime woes won't hit Asia-Pac
growth: World Bank
Developing
countries robust enough to pull advanced economies along
East Asia and Pacific economies will
be hardly deflected from their growth path this year by fallout from the
US sub-prime mortgage crisis, the World Bank says in its latest Global
Economic Prospects report published today.
It also maintains an upbeat tone about
prospects for the global economy, arguing that developing country growth in
Asia and elsewhere is robust enough to pull advanced economies along. This
optimism echoes that expressed by the Organisation for Economic Cooperation
and Development (OECD) last month in its latest Economic Outlook, and in the
World Bank's East Asia and Pacific Update last November.
But the bank does acknowledge growing
risks, such as that of a sudden collapse of the dollar or even the failure
of a 'key' financial system. So far, the sub-prime crisis and related
financial market distress have taken only a slight toll on the world
economy, the latest report says.
Global growth slowed 'modestly' last year
to 3.6 per cent from 3.9 per cent in 2006 and should decline gently again
this year, to 3.3 per cent, it argues. 'World output should pick up in 2009,
expanding by 3.6 per cent as the US economy regains momentum.'
GDP in East Asia and the Pacific is
expected to grow about 10 per cent in 2007, with China set to grow by more
than 11 per cent. Growth for the region should ease to 9.7 per cent in 2008
and 9.6 per cent by 2009.
'Effects from turmoil in world financial
centres may be small in most economies in the region. Except in China,
direct exposure of financial institutions in the region to mortgage-based
securities or the sub-prime crisis is limited,' says the report.
Growth in South Asia edged down slightly
in 2007 to 8.4 per cent, with industrial production and GDP growth driven by
strong domestic demand. 'An expansion of credit, rising incomes, and strong
worker remittances are buoying private consumption.'
Meanwhile, 'improvements in business
sentiment along with rising corporate profits are providing a further
boost', the World Bank says. Growth in Latin America should also ease only
slightly this year while output is predicted to expand in 2008 in the Middle
East and much of Africa, owing to high oil prices and to strong domestic
demand.
'Overall, we expect developing country
growth to moderate only somewhat over the next two years,' commented Uri
Dadush, director of the World Bank's development prospects group.
'Strong import demand across the
developing countries is helping to sustain global growth,' said Hans Timmer,
manager of the global trends team in the development prospects group. 'As a
result, and given a cheaper US dollar, American exports are expanding
rapidly. This is helping to shrink the US current account deficit and
contributing to a decline in global imbalances.'
The World Bank admits, however, that 'a
much sharper US slowdown is a real risk that could weaken mid-term prospects
in developing countries'. A US recession, or an excessive easing of US
monetary policy could contribute to further sharp declines in the dollar, it
notes.
'A weaker dollar would benefit developing
countries with dollar debt but impose losses on those holding
dollar-denominated assets. It would hurt the competitiveness of firms
exporting to the US.
However, 'the main impact of a
precipitous decline in the dollar would likely stem from the increased
uncertainty and financial market volatility it would provoke'. Recent
financial turbulence has shown how 'sudden and pervasive adjustments in
financial markets can be', the report says.
'Because the dynamics of financial
behaviour are inherently difficult to control, and new securitised
instruments have made identifying the location or magnitude of underlying
risk difficult, the possibility of a breakdown in a key financial
institution or system cannot be fully discounted.'
To date, the report adds, 'strong
fundamentals in developing countries have helped mitigate the slowdown in
the US but in the case of a major disruption, adverse effects in emerging
markets are unlikely to be avoided, which at some point would exacerbate the
US slowdown'.
- 2008 January 9 SINGAPORE
BUSINESS TIMES
Brace for the perfect storm
If there
ever was a time in recent history when the US consumer's spending stamina
would be sorely tested, it must be now. And given that US consumption
spending accounts for something like 70 per cent of America's GDP, it is
little wonder that the debate about a possible recession has already
started.
Even if we leave that aside for a moment, it's hard to envisage a tougher
quartet of challenges for the usually indefatigable US consumer than the
falling US dollar, sliding US house prices, a shakier-looking Wall Street
and the threat of an imminent credit crunch.
As if that wasn't bad enough, external considerations threaten to make an
already bad situation worse. Oil prices, for example, look like they are
finally going to power their way above US$100 per barrel this week
Should that feed through into higher cost-push inflationary pressures in
the US economy, then the danger is that the Fed would be that much more
constrained in its ability to trim US interest rates as growth falters.
And of all the potential spanners in the works, falling US house prices
sit worst with the threats of an imminent credit crunch.
This week, the Economist warns that the 'sweetheart' interest rates
offered to entice some two million sub-prime US borrowers will have to be
refixed at higher levels over the course of the next 18 months. US banks
could certainly do with better margins. From initial estimates of about
US$150 billion, estimates of the total write-offs associated with their
sub-prime loan assets have now risen to some US$400 billion.
Just last Friday, a downgrade of Citigroup shares based on such higher
estimates saw Wall Street's bluechip stock plunge to three-month lows. And
given that these same indices had recorded fresh all-time highs just a month
ago, there's a very real danger that any extended sell-off would remove yet
another critical feel-good factor for the US consumer.
If that, in turn, instigates yet more talk of a US recession, then we may
have to worry about the potential damage which could be caused by a sharp
turnaround in all the US asset classes that have happily enjoyed a boom
together with Wall Street and the US housing market over the past couple of
years.
For example, UK-based research house IDEAglobal fretted aloud this week
about a US recession which causes US sub-prime loan sector woes to extend to
other areas of the 'dubious' credit quality universe like 'Alt-A' mortgages
and the junk bond credit sector. The only consolation in this 'perfect
storm' scenario for the US economy is that, today, Asian countries like
Singapore are in a much stronger economic position to weather that storm if
and when it hits than they were a decade ago.
That said, there's little doubt that asset prices - those in Asia
included - will take a beating should the dark clouds now gathering turn
into a full-fledged storm. But when you stop to think about it, perhaps that
won't be so bad for the red-hot local economy.
- 2007 November 23 Editorial from SINGAPORE
BUSINESS TIMES
A property crunch
has emerged in the West:
Some pockets like Vancouver
BC and San
Francisco could emerge unscathed though because essentially they are recreation
homes for many of the world's elite and the capital values low compared to
world-class cities so repatriating through liquidation of single family
homes would do little to contribute to net-worth. However
in Canada we anticipate that Ontario will be hard hit because of that
province's trade dependency on the United States which appears to be sliding
into recession.
Having said that though, Asia seems to be an area
of opportunity demonstrating investor's responsiveness and mobility of
capital in the global world. In particular Hong Kong in the past week has been able to
buck the trend of declining money markets due to the Chinese government's
recent decision to allow PRC to invest in Hong Kong equities.
Nonetheless it is important to follow global
trends closely as markets are frothy. We archive a few articles here - Global
Investment Strategist ANDREA
ENG
Condo Fees Defaults Surge in Manhattan
A precipitous rise in the number of condominium
owners who are defaulting on their common payments, an important indicator
of future foreclosures, is being reported.
Much has been said about Manhattan's
perceived real estate invincibility in the aftermath of the subprime meltdown, but lawyers
representing dozens of condominium boards in some of the city's wealthiest neighborhoods say they are seeing these default
cases increase as much as 25% this year.
"There has been a very substantial
increase of cases involving condominiums," a lawyer who is the
president of the Council of New York Cooperatives and Condominiums, Marc
Luxemburg, said.
Monthly common charges, which include
general upkeep costs for the common area of a building and often reach into
the thousands of dollars, can be the first indicator of foreclosures because
homeowners stop paying them if they are having trouble with their mortgages.
During the last housing downturn in the
early 1990s, there was a similar increase in defaults preceding numerous
foreclosures, Mr. Luxemburg said.
"This could be an indication that
something larger is going on," a partner at Breier Deutschmeister Urban
& Fromme, Lisa Urban, said. Last year at this time, she had one such
case of a default on common charges; now, she has seven.
A partner at the firm Belkin Burden Wenig
& Goldman, Aaron Shmulewitz, said he has seen a 25% increase since the
beginning of the year.
Buildings where condo liens are being
processed include a nine-story apartment building at 2 South End Ave. in
Battery Park City; a 12-story building at 114 E. 13th St. in Greenwich
Village; a 27-story building at 420 E. 58th St. on Sutton Place; a 32-story
building at 40 E. 94th St. on the Upper East Side, and a seven-story
building at 205 E. 22nd St. near Gramercy Park. Calls to many of the
managing agents that represent these buildings were not returned.
When a condo owner stops paying the
building's common charges, the condo board files a lien to begin foreclosure
proceedings. Liens are rare, as condo boards often end up negotiating with
the owner out of court. Recently, however, condo boards are having a tougher
time resolving such issues.
Mr. Luxemburg said that defaults on
common charges have become so numerous that he is planning to discuss the
problem at length at his organization's Annual Housing Conference next
Sunday.
A senior management executive at Lawrence
Properties, which represents 420 E. 58th St., Fred Balic, said that
negligent tenants tend to let common charges accrue for months and sometimes
years unless a lien is filed.
While most foreclosures are now in
marginal neighborhoods, it may be just a matter of time before wealthier
neighborhoods get hit.
In the third quarter, foreclosures in
Queens rose 69% over last year to 2,702, according to real estate firm
RealtyTrac. The Bronx saw filings surge by 43%, to 1,011, while in Brooklyn
they were up 31%, to 2,498. In Manhattan, there was a 14% increase in
foreclosures, to 402.
"Sometimes these things trickle down
to people you don't think would be affected," the president of a
foreclosures publication, Profiles Publications Inc., Jessica Davis, said.
"Increases in defaults on common charges would be an early indicator of
worse things to come. We haven't seen the end of this yet."
- 2007 November 8 NEW YORK SUN
Here is the graphic sequence of events
leading up to the current Subprime crises:
World's wealthy still eyeing
property
They are undeterred by the market
turmoil triggered by the US sub-prime crisis
(GENEVA) The
wealthy have lost none of their appetite for property despite the market
turmoil triggered by the sale of risky sub-prime mortgages in the US,
according to some of the world's top private bankers.
Clients of wealth managers are, however,
on the lookout for the next big areas of growth and want products that will
enable them to reduce their exposure to any one property or market.
'We're seeing heavy levels of investment
in property in Hong Kong (and) throughout Asia,' said Peter Flavel, global
head of private banking at Standard Chartered. 'You can't get office space
in Singapore, you can't get it in Dubai.'
Speaking at the Reuters Wealth Management
Summit, Mr Flavel said there was a 'group of Asians that love real estate'
and that their ardour showed no sign of fading. 'They'd see the situation in
America as specific to America and the situation in the UK as specific to
the UK,' he added.
Samir Raslan, head of Citibank's wealth
management operations in central and eastern Europe, Middle East and Africa,
said his clients also remained alive to potential opportunities in world
real estate markets.
'We haven't seen any change in our
clients,' he told the summit held at Reuters offices here.
Nicolas Cagi Nicolau, global head of
structured product solutions at SG Private Banking, said demand so far in
2007 had been particularly strong.
In Ireland, where fortunes have been made
on the back of the country's decade-long property boom, a fast-cooling
domestic market and recent global market turmoil may have had a short-term
impact, but investors' love of property is intact.
'All that we may be seeing is that people
are just waiting to see what may well happen either domestically or
internationally, but the appetite for further investment is undoubtedly
there,' said Mark Cunningham, managing director of Bank of Ireland Private
Banking.
He said his main problem was persuading
Ireland's growing ranks of self-made millionaires to diversify into assets
other than real estate. 'The first love has always been property and will
continue to be property for a lot of these people.' In Spain, which like
Ireland is experiencing a rapid cooling in its property market, the wealthy
remain committed to real estate, although not necessarily in their own
country.
Daniel de Fernando, head of asset
management and private banking at Spain's BBVA , said a new product offering
clients a chance to invest in the Mexican property market had proved
particularly popular. 'People are asking us for more ideas on that front,'
he said of a fund bought into by 60 people within two weeks of its launch at
a minimum investment of 2.5 million euros (S$5.2 million) each.
In the Netherlands, property also
continues to be popular, according to Bernard Coucke, deputy chief of
private banking at ING Groep. 'On the contrary, more and more programmes are
being set up, not only in residential but also commercial. Why? Because, for
instance in the Netherlands, demand is high . . . and I think it will
continue to go up.'
For some rich investors, however, there
is a growing belief that other assets can offer better returns.
'I think that the appetite for real
estate is decreasing a lot,' Paolo Molesini, head of private banking at
Italy's Intesa Sanpaolo said of a country where up until now the wealthy
have held about 70 per cent of their assets in property. 'Property costs a
lot and gives you a very, very low revenue . . . There is no equilibrium
from the price of the asset and the earnings that you can get out of it.' Mr
Molesini said his clients were looking to invest in foreign property,
particularly in Germany, eastern Europe and Paris. -
2007 October 11 REUTERS
Deal activity seen to resume as the Hang Seng hits a
new high
Confidence is
starting to return as the recovery is supported by expectations of a
significant inflow of Chinese household savings
Six days. That was all it took for the Hong Kong
stock market to rid itself from the bearish mood that had pulled it down
more than 3,000 points in just over three weeks and return to its pre-subprime
crisis levels.
There is no question that there are still concerns about additional
fall-outs from the widespread exposure among banks to the US subprime loans,
but yesterday’s 655-point gain by the Hang Seng Index to a new record
close of 23,777 points was a clear indication that this is no longer an
issue that will be allowed to have a market-wide impact without a specific
reason.
“The China individual investment story has taken over as the lead story
and some people clearly think this could be a re-rating opportunity for the
H-shares,” says one syndicate banker, referring to the news last week that
Chinese individuals will be allowed to invest in Hong Kong equities –
albeit initially only through a pilot programme in Tianjin.
Since the announcement of the pilot scheme at around lunch time last Monday,
the Hang Seng China Enterprise Index (or H-share index) has rallied 27%,
which shows the kind of significance that investors attach to this
development. By comparison, the Hang Seng Index is up 16% in the same
period. The H-share index tracks state-owned Mainland companies listed in
Hong Kong, which are expected to be the first to benefit since Chinese
investors are already familiar with them.
The astonishing recovery in the secondary market has prompted renewed
activity in the equity capital markets, where bankers are working hard to
get the deals at the front of the queue ready to tap into some of this
buying frenzy. At least one investment bank was working on a placement for a
Hong Kong-listed company yesterday, but in the end it wasn’t launched –
potentially because of the public holiday in the UK that would have reduced
the number of available buyers.
The pipeline of initial public offerings that may start marketing over the
next couple of weeks is also growing. Companies that have already been
through the Hong Kong stock exchange listing hearing are tipped to start at
least the pre-marketing process towards the end of this week or early next
to coincide with asset managers returning to work after the summer break.
Among those companies, sources say, are Guangzhou-based property developer
Aoyuan Corp, which is hoping to raise between $200 million and $300 million
with the help of Credit Suisse and Morgan Stanley; China Dong Xiang Group, a
sports goods manufacturer which also has the exclusive distributor rights
for Kappa sportswear in China and which is looking to raise up to $700
million through an IPO led by Deutsche Bank and Merrill Lynch; and Global
Sweeteners, a spin-off from Hong Kong-listed Global Bio-chem Technology
which is seeking up to $100 million from a listing arranged by Goldbond
Securities.
Queuing for a listing hearing within the next couple of weeks are the likes
of China National Heavy Duty Truck, which is expected to raise between $500
million and $600 million with the help of CICC and JPMorgan; Sino-Ocean Real
Estate, the property arm of shipping firm Cosco which is targeting as much
as $1 billion and has mandated BOCI, Goldman Sachs and Morgan Stanley to
handle the listing; and online gaming company Kingsoft, which will be
brought to market by Deutsche Bank and Lehman Brothers and hopes to raise
around $150 million in the process.
Bankers are also looking at launching a few US IPOs for Chinese companies in
the coming weeks, even though the recovery of the US secondary market has
been a lot less convincing.
And even in Hong Kong, primary market investors may still need some
convincing even if the secondary market is now back where it was a month
ago. The August correction has resulted in a pickup in volatility and sharp
intraday swings which are clear signs that market players are still worried
that another set of bad news could trigger more selling.
“The deals will get done, but compared with before the correction there is
likely to have been a shift in pricing power which means the terms will have
to be more buyer friendly,” one banker says.
In the short term though, the Hong Kong equity market is likely to continue
to be underpinned by the individual investment pilot scheme as part of
China’s huge savings deposits is likely to be diverted to the Hong Kong
equity market, according to Credit Suisse analyst Vincent Chan.
Even assuming that just 5% of household deposits leave the Chinese banking
system to buy Hong Kong stocks, it would mean an infusion of $112 billion of
new liquidity into the market, which is equivalent to 12% of the estimated
Hong Kong market freefloat and 19% of the freefloat of Hong Kong-listed
Chinese stocks, he says in a research report published yesterday.
The result, according to Chan, will be a re-rating of the H-shares similar
to what happened in 2001 when Chinese individuals were allowed to start
investing in B-shares. Following that regulatory change, the price/earnings
multiple of the B-share market soared to 44 times in June from just 20 times
in February.
Given that the current historical price-earning ratio for H-shares is about
24 times, while the A-share market trades at 60 times “it is difficult to
see why Chinese investors would not want to invest in the Hong Kong market
to arbitrage the difference,” Chan says.
However, he does note that this could easily lead to a situation where
H-shares get overvalued. He also doesn’t consider the macro fundamentals
(particularly inflation and asset price bubble in China) to be that positive
in the long-term.
“The net result of this move (allowing Chinese individuals to invest in
Hong Kong) is preventing a near-term correction of the H-share market, but
it might plant the seed for a much bigger correction afterwards, once the
H-share market has been pushed higher,” he says.
- 2007 August 28 FINANCE
ASIA
The European Central Bank, Bank of Japan and Bank
of Canada all said market turmoil could affect their monetary decisions,
leaving a Friday speech by US Federal Reserve chairman Ben Bernanke in the
spotlight.
Reports that more financial institutions faced
problems, evidence that German confidence had taken a knock and data showing
US consumer confidence was at its lowest in two years while US house prices
slid 3.2 per cent in the second quarter from a year earlier quashed any
hopes that the home loan crisis was easing.
The S&P/Case-Shiller US National Home Price
Index showed the sharpest decline since 1987.
German business sentiment fell in August as firms
took a dimmer view about the next six months following recent market
turmoil, the Munich-based Ifo economic research institute's closely-watched
survey showed.
'The expectations are still positive but not as in
previous months. The situation of financial markets has certainly played a
role in this,' Ifo chief economist Gernot Nerb said.
Germany has borne the brunt of the European
fallout from problems stemming from sub-prime US home loans as two of its
banks have almost collapsed, requiring major bailouts.
Britain's Times newspaper said institutional money
manager State Street faced US$22 billion exposure to asset-backed commercial
paper conduits - packages of retail and commercial loans financed by
short-term debt raised in the commercial paper market - that have caused
problems for rivals in recent weeks.
The Boston-based bank has credit lines to at least
six conduits, which account for 17 per cent of its total assets, the
newspaper said, citing regulatory filings.
Uncertainty about banks' exposure to the US
sub-prime market was matched by doubt about the path of monetary policy.
ECB president Jean-Claude Trichet cast fresh doubt
on the chances of a euro-zone rate rise next week. His last comments on
monetary policy, made on Aug 2 when he used the 'strong vigilance' phrase
signalling tightening was likely, had been made before the current market
volatility, he noted on Monday. -- REUTERS
2007 August 29
'The Panic of 1907' versus the
sub-prime crisis
The unfolding of the sub-prime crisis that has
jarred financial markets in the last two months 'has a long way to run',
said Robert Bruner, dean of the University of Virginia's Darden School of
Business and co-author of the book The Panic of 1907.
In a close parallel to recent events, the book
chronicles and analyses a liquidity crunch that hit Wall Street almost
exactly 100 years ago, which led to the formation of the Federal Reserve
System.
Speaking in an interview with BT yesterday, Dr
Bruner compared the situation then to contemporary affairs. He said today's
crisis is 'still early in the process', though the next couple months is
likely to provide information and other signals that could bring matters to
a head.
One reason is that hedge funds - the influential
wild cards of hot money in today's financial system - must report on a
monthly or quarterly basis, and they are due to do so in August or
September.
If funds with major loans from established
financial institutions reveal huge losses, it would cause widespread fears
about the institutions' soundness, and institutional depositors, the 'hot
money' in the system, would shift their capital into US Treasury bonds, said
Dr Bruner. 'We could see a prominent institution perhaps not collapse but
sold under involuntary conditions.'
Although the sub-prime mortgage sector is only a
fraction of the credit market, 'what's important is not the total supply of
credit but the behaviour at the margin', he said. This refers to corners of
the world's financial systems that contain risks investors are not aware of
- such as with Thailand's banks in 1997 or Russia's sovereign debt in 1998.
Today, it refers to to hedge funds that are 'by
and large well-run but from whom we see periodic collapses', like with Long
Term Capital Management in 1998 and Amaranth last year.
'We don't have any transparency about the global
hedge fund industry and have no way of knowing what difficulties may lurk,'
he said.
The Fed's meeting on Sept 18 to discuss the
benchmark interest rate will provide another important signal. 'If they
raise rates, they are saying the crisis has passed. If they lower, its
clearly a signal that things are a lot worse than we imagine,' said Dr
Bruner.
So far, the Fed has played a cautious game and
save its most potent weapon, though it has lowered the discount rate - at
which it makes short-term loans to banks - and signalled it is willing to
throw liquidity into the market. The Fed is the 'best informed player in the
US capital markets right now' but 'may not have many more options', Dr
Bruner said. He expects Asian markets to remain robust, especially in
sectors with sufficient liquidity. But economies like China and Japan also
depend on the willingness of the US consumer to keep spending, he said.
'We are at the very beginning of what is the heavy
consumer spending season of the entire year, from now till end of the
calendar year. We will know probably in the next 30 days how buoyant the US
consumer feels.'
A few recent statistics, such as lower demand for
boxcar shipments from the West Coast to the Midwest, and lower shipments
from Asia, suggest that importers are stocking at a lower rate, he said.
- SINGAPORE
BUSINESS TIMES 2007 August 29
Li Ka-shing advises caution
HONG KONG -- Hong Kong tycoon Li Ka-shing Thursday
warned investors of the high risks involved in the volatile markets
sparked by the U.S. subprime mortgage loan problems, which sent stocks
plummeting last week. He cautioned investors to stay alert while dealing
in shares although any negative economic development in the United States
would not only affect Hong Kong but also the whole world. If the loan
problems in the U.S. escalate, he expects the U.S. government will cut
interest rates further -- two to three times. When this happens, Hong Kong
banks will follow suit, he added. - 2007 August
24 CANWEST
Will
market jitters slow down spending in Asia?
Major
risk comes from prospect of US downturn, says Credit Suisse
(SINGAPORE)
Amidst the brouhaha about the economic boom, one puzzle has
been why consumer spending in Singapore has not quite kept pace with the
buoyant economyAnd now, there is the risk that private consumption across
Asia - as well as overall GDP growth - could well be hit if the recent
financial market turmoil intensifies, and especially if the US economy
takes a sharp downturn.
While the Singapore economy grew a strong 7.9 per cent last year,
growth in private consumption expenditure averaged a weak 2.5 per cent in
the five quarters through Q1 2007. Things started looking up in Q2, as
growth in private consumer spending more than doubled to 5.8 per cent,
although there was no pick-up in spending on household goods and
furnishings, communications products, and even food and beverages.
Then came the recent bout of global financial market volatility, which
saw a rout on the stock markets.
Investment bank Credit Suisse's economists reckon the wealth effects of
the recent sell-off are, for now, 'too modest' to have a big impact on
consumption.
'To the extent the equity market sell-off intensifies in the months
ahead, the wealth effects on consumer spending and growth would presumably
be felt most where large numbers of retail investors participate in the
equity market, including in Korea, Hong Kong, Singapore and Taiwan,' the
bank says in an Emerging Markets Economics Research report this week.
But, pockets of banking and financial market risk notwithstanding,
Asia's biggest risk exposure is to a sharp slowdown in the US economy, it
says.
Emerging Asia's growth outlook is exposed to the recent market
volatility mainly through US growth, it maintains.
While the region is gradually 'decoupling' from the United States and
intra-regional trade is expanding, Asia remains linked and exposed to the
US economy, still the biggest market for its exports.
The US share of Asia's exports has fallen since 2000, but this has been
offset by commensurate increases in Asian exports of intermediate goods to
China, which in turn are exported to the US as final goods, the Credit
Suisse report notes.
Hence Asia's exports still closely track US manufacturing new orders
and its GDP growth has remained correlated with US growth.
'A sharp slowdown in the US is thus bound to affect Asia's growth
outlook negatively, although governments in the region generally have the
flexibility to pursue counter-cyclical policies to cushion the impact,'
the bank says.
Credit Suisse's economists have pared their forecasts of US economic
growth for Q4 (to 1.7 per cent from 2.8 per cent) and for 2008 (to 2.6 per
cent from 3 per cent) and 'the balance of risks is on the downside'.
- 2007 August 24
Why Asia was spared in this credit crisis
While it was the steep slide in global equities which
hogged headlines over the past week, Asia appears to have been more
insulated from something else afflicting Western money markets.
True, stocks in this region did suffer their share
of the bleeding, with some key Asian indices sliding as much as 20 per cent
from the year's July peaks. But in private, there must have been Asian
central banks who were pleased that some of the unhealthy froth had at last
been removed from their bourses and - with that - some of the persistent
upside pressures on their currencies as well.
And it's worth pointing out that the ongoing
credit crunch in international financial markets has had far more
consequences for Western central banks than Asian ones. Compared to the
massive liquidity injections we've witnessed from Europe to the United
States and Canada over the past week, Asian central banks (except for
Japan's) appear to have been relatively insulated.
In the West, injections of hundreds of billions
proved less than effective in calming lending fears in their domestic money
market systems - until those short-term infusions were augmented by the
Fed's decision to reduce its discount rate for banks' borrowings by half a
percentage point to 5.75 per cent last Friday.
Over and above that, the big discussion among Fed
watchers these days is not if, but when, the US central bank will follow
that move with reductions in its key Fed funds money market rate as well -
which, so far at least, has been left unchanged at 5.25 per cent.
At one point earlier this week, we were told that
the TED spread - or the difference between government Treasury bill yields
and straight deposits for the three month tenor - in the domestic money
markets of the eurozone, the UK and the US had widened more than it did
during the US stock market crash of 1987 or the Long Term Capital Management
debacle of 1998.
In the US, the paranoia over hedge fund losses,
doubtful credits and the failure of one prominent money market fund caused
the TED spread to widen at one point on Monday to more than 3 per cent -
compared to a more 'normal' gap of something like 0.7 per cent.
Safe refuge appeal caused the one-month US T-bill
rate to fall even more sharply, to a low of 1.34 per cent - almost four
percentage points lower than the US central bank's Fed funds rate of 5.25
per cent.
In Asia, by contrast, strong growth and price
pressures at home obliged the People's Bank of China to announce its fourth
hike in benchmark one-year deposit and lending rates for the Chinese economy
on Tuesday this week.
It's almost as if less developed Asian financial
markets were spared this time around precisely because they had not yet
developed the complicated financial structures, investment funds or
derivative instruments which are causing so much stress in the more
sophisticated financial centres of the West. - 2007
August 24 SINGAPORE
BUSINESS TIMES
Drop Foreseen in Median Price of U.S.
Homes
The median price of American homes is expected to
fall this year for the first time since federal housing agencies began
keeping statistics in 1950. - NEW
YORK TIMES 2007 August 26
A limited financial liquidity crunch
The newspaper headlines are bleak:
Sub-prime mortgage crisis - credit crunch - equity markets in freefall -
bond markets quake.
Can things really be this bad? Stop
listening to the noise, tune in to the fundamentals, and a more reassuring
picture emerges.
First of all, this is not an economic
liquidity crisis, but a far less severe and more limited financial liquidity
crunch. What does this mean? Simply put, liquidity concerns are confined to
specific sectors of the financial markets. They will affect companies and
institutions that have excess leverage and are highly dependent on debt. Yet
global economic fundamentals remain sound and strong growth should continue,
(barring a major geo-political upset).
So, high-quality companies without excess
leverage should continue to perform.
To understand this, let’s take a
closer look at the two main factors that have triggered the recent
volatility in the markets: sub-prime mortgage defaults and a credit crunch
in the corporate debt market.
What exactly is the sub-prime crisis? Due
to low creditworthiness, some people do not qualify for a mortgage from
mainstream lenders. But other institutions are willing to lend to them at
higher interest rates; these are known as 'sub-prime' lenders.
Because of these higher interest rates, compounded
with the borrowers’ poor credit history and murky financial
situations, the risk of default on the sub-prime loan is higher. So
sub-prime loans are naturally more risky and have higher default rates. But
since these risks are clear, why the current problem?
During the recent years of low interest rates and
plenty of liquidity and booming US property prices, the US sub-prime
mortgage market ballooned. Both lenders and borrowers welcomed the easy
credit. Then, steadily rising US interest rates pushed up further the price
of already-expensive sub-prime mortgages. This made it even more difficult
for sub-prime borrowers to make repayments.
So an increasing number of borrowers defaulted,
which means lenders lost money on the loans. A few non-mainstream financial
institutions failed as a result of over-extended lending in this area. This
triggered fears that many financial institutions would suffer similarly,
causing a sell-off of financial companies shares.
This sell-off has in turn rippled over global
stock markets.
Is the sell-off justified? The sub-prime mortgage
market comprises less than 5 per cent of US home mortgage lending. While
these loans are made to people with poor credit histories, the loans are
backed up by real assets - their houses. This means that when borrowers
default, the lender still has the asset as security - the loan value isn't
completely lost.
In a worst-case scenario, if all sub-prime
mortgages defaulted and the lenders recovered just 50 per cent of their
loans, the negative impact on US residential asset values would be about 2.5
per cent. That’s significant, but hardly the crisis it is being made
out to be.
What is a credit crunch and what's to be feared
from it? When a private equity firm buys a company, it tries to do so with
as little of its own money as possible - borrowing as much as it can - or
'leveraging' the buy-out as much as possible.
Banks advising the private equity firms on these
deals underwrite the loans and then either sell these loans on to bond
investors directly or repackage loans from several borrowers through a
process called securitisation.
These repackaged loans are known as collateralised
loan or debt obligations (CLOs and CDOs). These have a number of tranches,
and the interest rate on the different tranches varies according to the risk
of default. This is quantified as the 'spread' over a benchmark (usually US
Treasury bonds). For example, one tranche might pay 3 per cent over
Treasuries, another might pay 2 per cent over.
Over the past few years private equity firms have
been involved in an accelerating number of leveraged buy-outs. This
situation worked well for private equity firms and banks, as long as
investors continued to buy the CLOs/CDOs. These deals were good for stock
markets too: as the number of deals accelerated, the number of potential
buy-out targets increased, lifting share prices of these companies, and of
stock markets in general.
But recently a number of high profile private
equity deals experienced difficulties in completing; some banks advising on
some large PE deals found it difficult to sell on the loans needed to
finance the buy-outs. The underwriting banks were left holding this debt on
their balance sheets instead of placing it with their bond investor clients.
This tightening has impacted equity markets,
resulting in slumping stock prices. Why?
Less liquid CLOs and CDOs are less attractive, so
investors in these instruments began to sell. This caused spreads on these
instruments to widen significantly. The result? Higher interest rates on
companies’ loans decrease future profits - so bring down share prices
of these companies. And potential takeover targets that had enjoyed
resultant inflated stock prices have seen this 'PE premium' evaporate - and
their prices consequently fall - as the number of PE deals has stalled.
Yet not all companies are excessively leveraged.
Globally, overall corporate balance sheets have never been healthier. For
those companies that are not over-leveraged, spreads will correct over time.
Additionally, firms that were not targets for takeover (and did not have
this PE premium in their valuations) are likely to see renewed growth in
their values.
The bottom line: What does it mean for me? The
volatility in the equity and bond markets globally underlines the importance
of asset allocation and the diversification of portfolios across multiple
uncorrelated asset classes.
While the speed at which money flows through the
financial system may slow down, the amount of money in the financial system
has not changed. So we are not witnessing an economic liquidity crisis, but
a far less severe and more limited financial liquidity crunch.
The current environment offers committed long-term
investors an excellent opportunity to slide additional capital into global
markets to capture current low prices - from which to profit later. We
remind investors that:
This period of softness provides canny investors
with a welcome opportunity to phase additional capital into portfolios to
build strong positions on the back of cheaper prices.
- A properly formulated multiple asset class
diversification will continue to provide stability to overall portfolio
returns, while allowing investors to accumulate into temporarily weaker
markets.
- The current climate is especially conducive to
ongoing regular investing in order to reap the very significant
long-term benefits of a dollar-cost averaging strategy.
- by Hanif Kanji
SINGAPORE
BUSINESS TIMES 2007 August 29
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