 |
According to many of our viewers, the Weiss Global forum was “fantastic,” “a home run,” “the best ever.”
The video recording is no longer online. But last week, I gave you the transcript to Part 1. (Click here to read it.)
In it, we covered what’s likely to be the most important and sustainable megatrends of our time: A shift of power, capital, wealth — and investment opportunities — from West to East.
Now, here’s Part 2 …
The Weiss Global Forum, Part 2
with Martin D. Weiss, Mike Larson, Claus Vogt,
Larry Edelson, Tony Sagami, and Monty Agarwal
(Edited Transcript)
 |
Martin Weiss: China’s growth is clearly a big part of the West-to-East shift. What major forces are driving it?
Larry Edelson: I count six. The first is credit creation and investment. While credit in the U.S. and Europe was literally drying up, credit in China has been flowing and even accelerating.
Consider this stat for the first half of 2009: New lending by banks grew 201 percent to more than $1 trillion — not just in urban areas but in rural areas as well. To me, this shows that Beijing is following through on its recent promises to channel the urban growth to the country’s 800 million people in rural China. Capital investment in both the urban and rural areas is also soaring, up an average of 33.4 percent.
A key difference with the U.S.: When the Chinese government pumps money into the banks, the banks pump that money straight into the economy.
Tony Sagami: The banks are owned by the government. If bankers don’t loan out the money, they get fired. In the U.S., the banks use the money to buy smaller banks or to try to restore their devastated capital …
Martin: Or to pay big bonuses!
Larry: That’s one reason the stimulus in China, unlike the stimulus in the U.S., is having an impact. It’s going into highway development … railways … oil and gas distribution. It’s going into infrastructure that’s producing and distributing wealth. Right now, there are a record 275,000 construction projects underway in China.
Mike Larson: Imagine that, Martin! In the U.S., despite the stimulus, the equivalent number is not only much smaller, but it’s being undercut dramatically due to the continuing slump in commercial real estate. The lenders aren’t lending, and the developers can’t get the money. So the stimulus package in the U.S. is running into big obstacles, with few shovel-ready projects.
Larry: Not in China! The stimulus in China is $586 billion, equal to 13.9 percent of China’s GDP. For comparison’s sake, that would be like Washington coming out with a $2 trillion stimulus package, or 2.5 times more than the Obama package.
Martin: All paid with cash, not debt.
Larry: Exactly. Unlike the U.S., China does not have to borrow the money. They don’t have to rack up a budget deficit. They have the money in their piggy bank in cold hard cash. Their reserve holdings are still rising and just hit $2.13 trillion — up $178 billion in the second quarter, more evidence that the country is still profitable overall.
And as Mike just said, China does not have to scour the country for shovel-ready projects. Shovel-ready projects are everywhere, especially in rural China.
| External Sponsorship |
|
Get an Exclusive Weiss Capital Management’s All-Weather |
Martin: You said there were six major growth forces. So far you’ve given us two. Could you run through the others please?
Larry: The third is domestic consumption. Beijing has known for quite some time that the country cannot rely on exports forever. So it has been actively promoting domestic consumption for years.
Consider auto sales: Through June of this year, auto sales increased a record 17.7 percent to 6.1 million vehicles, compared to only 4.8 million in the U.S.
Yes, China is now the world’s largest car manufacturer. And this is another megatrend with legs. There are only 10 cars per every 1,000 people in China, compared to 763 in the U.S. So auto industry growth in China is going to be huge for decades.
Martin: 760 cars vs. 10 cars. So you’re saying that, in comparison to the cars per capita in China, the U.S. has 76 times more?!
Larry: Exactly. Tremendous long-term growth potential there!
The fourth growth force is new initiatives with consumer finance and credit. Beijing recently enacted consumer loan reforms that allow credit card companies, including foreign credit card companies, to expand into the financing of durables goods purchases, such as appliances and electronic goods.
Tony: Until recently, Chinese could not buy an A/C unit, a stereo, or a flat screen TV on credit. Now they can.
Larry: And they’re doing so prudently, in my opinion. They’re not allowed to charge more than four times more than the benchmark interest rate, and total credit card balances cannot exceed five times the borrowers’ monthly income.
The fifth growth force, surprisingly, is China’s improving ties with Taiwan. Most people don’t realize how much China and Taiwan are not about to go to war with each other.
They’ve opened up direct commercial flights between the two countries. They’ve agreed to negotiate an economic cooperation agreement. They’re growing closer on all levels — on the verge of becoming important economic allies.
Tony: Many people don’t appreciate that because they think Taiwan is just a small island of little importance. But it’s a major investor in mainland China. Plus, a lot of very large U.S. companies based out of Taiwan are itching to cut deals with China. Taiwan has something China desperately needs: experienced business people!
Larry: You hit the nail right on the head, Tony. To get back to your question Martin, the sixth growth force is China’s currency, the yuan. China knows the dollar’s time as a world reserve currency is running out, and they know the dollar will be supplanted with some type of new reserve currency, perhaps a basket of currencies, including the yuan.
 |
Monty Agarwal: Let me add to that. So far, we’ve been talking about macro-economic trends. What I want to talk about briefly is the capital market developments that have been going on in China as well. Along with promoting the yuan, China has been opening up its markets, step by step over the past five years.
This, in turn, is a precursor to increasing the dominance of the yuan in global trade and thereby reducing China’s overreliance on the U.S. dollar as a trading medium.
They started on July 21, 2005, depegging the Chinese yuan to the U.S. dollar and adopting a measured pace of appreciation.
Then they followed up by granting foreign banks licenses to operate domestically and engage in onshore yuan trading activities.
Martin: In China.
Monty: Yes, most of these foreign banks are based in Shanghai, which, as you know, is the financial capital of China.
Next, they have promoted the development of sophisticated instruments for currency trading.
Meanwhile, the Chinese authorities have been using Hong Kong as a testing ground for opening up their capital markets to offshore trading by allowing Hong Kong residents to hold Chinese yuan accounts. I believe that China is probably a couple of years away from completely liberalizing their currency trading, which will increase global trade in foreign holdings of yuan as well.
Larry: They’re already pushing for the yuan to be part of a basket of reserve currencies.
Martin: Do you think China really wants to supplant the dollar with a basket of currencies?
Larry: They don’t want the entire world dependent on the dollar. So the answer is “yes”! The economic planners in Beijing know the dollar’s days are numbered as a reserve currency. But they also know they can’t dump their dollar holdings on the market all at once. They’d be shooting themselves in the foot if they did that. So instead, they’re taking the steps that Monty mentioned and they’re doing one of the smartest things I’ve ever seen any country do.
Martin: And that is …
Larry: They’re using the global financial crisis and this period of weakness in the dollar to conquer the world on the cheap — via major acquisitions of natural resource production.
That does two things for them: It gives them control over global commodities. And it gives them a built-in hedge against a dollar decline. They know what we’ve been saying all along: That when the dollar falls, the price of tangible assets — oil, copper, gold, iron, nickel — all rise.
Now, I think gold will finally bust through the $1,000 mark. Now, other commodities will follow.
Tony: With its foreign acquisitions, Beijing kills two birds with one stone. It virtually corners critical supplies of natural resources and it hedges against its huge exposure to a dollar decline.
Martin: How big is this?
 |
Larry: Just look at the pace of China’s acquisitions of natural resource companies over the last few years, and it’s obvious: In 2002, it made only one deal; 2003, two deals; 2004, three deals.
Then look what happens: In 2005, 11 deals; 2006, 25 deals; 2007, 33 deals; 2008, 53 deals in natural resource companies.
And not only are there more deals, the average value of each deal is growing by leaps and bounds.
Martin: What about China’s deals in 2009?
Larry: A bit behind in number of deals compared to last year, but the dollar volume should be about double! These deals are being done all over the world — in Brazil, Peru, Venezuela, Australia, Africa. And they’re in virtually all commodities — from oil, soybeans, and copper … to lumber, rubber, wheat, corn, timber, you name it.
Tony: That’s why China’s sovereign fund invested in a 20 percent stake in Blackstone. That investment has taken a bath. But the Chinese don’t mind very much — because they’re getting the knowledge and expertise to make these deals on their own and do it more cheaply.
Martin: Larry, let’s get down to the bottom line here: How do investors profit from this?
Larry: As Tony said before, two birds with one stone — with investments tied to natural resources … and especially to what China needs.
I’m doing it for the same reason as China is buying them — as a hedge against the falling dollar. And because I want to go along for the ride with China as it gobbles up the natural resource supplies. I’m sticking with big-name Chinese companies that are either in natural resources, or making acquisitions, or both.
Martin: Could you name them please, and be specific.
Larry: PetroChina, which just saw a big jump in first-half earnings … CNOOC, which is literally all over the globe looking at oil and gas producers … Chalco, the aluminum company of China, which just had record earnings … BHP … Rio Tinto … and others.
Martin: Tony, you’ve visited China multiple times. Each time, you’ve been among the first to find companies that didn’t show up on Wall Street’s radar screen until months later. Are those the same names Larry is talking about?
Tony: No, they’re different. Don’t get me wrong. I think Larry is right about the opportunities in natural resource stocks. But I come at this from a different angle.
Remember what Claus said about the population curve in China? And remember what Larry said about the boom in domestic consumption?
That’s where I see the biggest and steadiest growth opportunities. I stress the word steady because China isn’t just a story of big opportunities. It’s also a story of big dangers.
Martin: Tell us first about the dangers and then about the opportunities.
 |
Tony: The biggest danger is trying to just throw a dart at the wall and expect to make money in China. Some sectors in China are doing poorly while others are thriving.
I know the U.S. and Western Europe are beginning to recover a bit. But I’d still avoid Chinese companies that depend too heavily on exports.
Over 100,000 factories have closed in China because of the global recession. And it’s too soon to declare that trend is over. So I’d also stay away from the big shipping companies that transport Chinese goods across the Pacific Ocean.
Martin: So you’re recommending companies in the domestic sector?
Tony: Absolutely, and it’s especially true of retail and construction.
Retail because of urbanization, because of the growing affluence of coastal cities, because of the rapidly expanding middle class in China. There are over 100 million Chinese yuppies — Chuppies — and they are spending lots of money.
That’s why retail sales on a tear — up 15 percent so far over last year.
That’s why property prices are rising again and why property sales are jumping, up 53 percent in the first six months of this year.
That’s why you’ve got income on the rise again, up 11 percent in urban areas and 8.1 percent in rural areas.
Martin: You’ve given us a lot of strong statistics, but name some names.
Tony: In the retail sector, I like China Nepstar. That’s the largest drugstore in China. In fact, China Nepstar is the only national drugstore chain in all of China. Think of it as CVS, Walgreens, and Rite Aid combined.
I also like New Oriental Education. Not only does it run the largest and most popular English language schools all over China … but it also has a virtual monopoly on the administration of the Chinese college entrance exams.
And New Oriental is making a mint. It recently reported some spectacular results — sales were up by 48 percent and profits were up by 50 percent. That type of growth is very hard to find and almost nonexistent in the U.S.
That’s why I call it the single best stock I’ve found in the 30 years I’ve been doing this. Peter Lynch of Fidelity Magellan used to talk about “ten baggers” or stocks that rose by 1,000 percent. No guarantees, of course, but I expect New Oriental to be a ten bagger.
Martin: You visited their classrooms a few years ago.
Tony: Yes. And I had to get through snarling dogs in the back streets of Shanghai to do so. I was surprised: They said, “Mr. Sagami, you are the first analyst to actually visit our classrooms.” Some analysts had visited the company’s home office, but not the actual classroom where their students are.
Martin: And now it’s a big stock, traded very actively. But going beyond that company, what do you see in the other sectors?
Tony: I’m also very high on the construction industry. Remember the 275,000 projects Larry mentioned? Also keep in mind that construction is getting the bulk of China’s $586 billion stimulus.
Martin: Specifically …
Tony: The two most direct beneficiaries are China Railway Construction and China Communications Construction, both traded on the Hong Kong Stock Exchange.
China Railway Construction is the largest builder of railroads in China and also does business in the Middle East, Africa, and other parts of Asia.
China Communication Construction is the largest builders of shipping ports and highways in China.
Martin: Traded in Hong Kong, though.
Tony: I know that stops a lot of people. But it shouldn’t. E*Trade, for example, allows real-time trading on the Hong Kong Stock Exchange for a flat $21.95 per trade. It’s easy, simple, and cheap to buy and sell stocks there.
But if you’re the type of investor that wants to stick to U.S. exchanges, take a look at Duoyuan Global Water, a major maker of water filtration and pollution control equipment. It trades on the NYSE.
China’s rapid industrialization and growth have created a horrible water pollution problem. And the Chinese government is throwing billions at solving it.
Duoyuan Water is making a fortune doing just that. Like New Oriental Education, it recently reported its quarterly results and it had a 32 percent year-over-year growth in revenues with a 49 percent increase in profits.
Plus, if you just want to trade on the NYSE, you could look at ABB Ltd., one of the largest utility construction companies in the world. ABB has been doing business in China since 1909!
Martin: That’s China, Tony, but you’ve been all over Asia. What about the rest of Asia?
Tony: Everybody knows that stock prices follow corporate profits. Show me a company that is growing its profits and I’ll show you a stock that is rising in value.
Plus, show me a country with an expanding economy and I’ll show you rising corporate profits.
But that is not necessarily happening all across Asia … yet.
Martin: Where isn’t it happening yet?
Tony: Any country that’s a big exporter and counts the U.S. as one of its biggest customers has been lagging. U.S. consumers simply weren’t buying as many TVs, cars, clothes, and electronic doodads as they used to.
Martin: You’re talking about which countries specifically?
Tony: Japan, South Korea, Singapore …
 |
Claus Vogt: … which is why you can still buy them more cheaply right now. China has had a huge rally already. Japan, South Korea, and Singapore had a short-term correction, which China did not have. So where you see lagging performance, Tony, I see greater value and more potential for catch-up.
Martin: Tony, your response?
Tony: My father was an old-fashioned Japanese farmer struggling to raise a family in the U.S. One of his favorite sayings was, “Buy your straw hats in January when they’re cheap.”
That’s what Claus is talking about, and it’s a very effective investment strategy.
Martin: What about investing in Japan?
Tony: Although I was born in Japan, I’ve been very negative on the Tokyo market until recently. Now I’m beginning to see a lot more green shoots in Japan than in the U.S.
Japanese manufacturers increased production for a fourth month in a row in June, capping the largest quarterly output expansion in more than 50 years.
In the second quarter, the country’s output climbed 8.3 percent compared to the previous quarter, making it the biggest quarter-on-quarter increase since 1953.
Nippon Steel Corporation, Japan’s largest steel producer, is going to restart two mothballed furnaces in southern Japan and will increase output of crude steel by 40 percent in the July-September quarter.
Honda and Mitsubishi, the second- and third-largest car makers in Japan, have delivered better-than-expected profits.
Stock market gains typically precede economic recovery. If that holds true in Japan, the rise of the 225-issue Nikkei Stock Average to a 10-month high is an encouraging sign.
Claus: Ditto for South Korea! Its manufacturer index hit a low of 44 in January. Since then, it has been rising steadily and is now all the way up to 80.
Same for new orders! That index has rallied all the way from 53 in January to 85 right now.
That’s why I have recommended the South Korea ETF for our portfolio and why I think that ETF is going to be one of the best performers, like China’s, which is up 40 percent this year, and Brazil’s, up 65 percent.
Martin: Thank you, gentlemen, for those recommendations. But our goal today is to go beyond investment tactics and lay the groundwork for a broader, longer term investment strategy.
That’s why I’ve invited Monty Agarwal. Monty is the author of what I think will be the blockbuster book on hedge funds of this decade, The Future of Hedge Fund Investing.
For four years, Monty ran BNP Paribas’ Asian Proprietary Trading Operations out of Singapore, the largest bank in the Eurozone by total assets. He ran Barclay Capital’s Asian proprietary trading out of Tokyo for a year and a half, plus currency options trading for Bankers Trust out of Hong Kong for a year.
Total experience in on the ground in Asia, excluding India, was how much, Monty?
Monty: Nearly seven years.
Martin: Plus, in the U.S., you ran your own Asia-focused hedge fund, one of the few that survived and thrived in the big decline. I think you have a unique perspective on this West-to-East shift, and I wanted to give everyone the opportunity to get it directly from you.
 |
Monty: I track hedge funds very closely, and it’s no secret that the money flows to Asia Pacific region began in earnest in 2003.
Prior to that, the hedge fund approach to Asia was almost entirely opportunistic, looking to benefit from the occasional crisis. Since 2003, they have looked to Asia for sustainable long-term growth.
Hedge funds and others that manage money for the rich have started opening Asian offices, based in Hong Kong and Singapore.
Back in 1997, when I moved to Asia, I could identify probably no more than 20 hedge fund managers who were physically based within the region. Now GFIA, Asia’s oldest hedge fund consulting firm, estimates that there are around 500 hedge fund managers based in Asia. So just in 10 year’s time, you are looking at 25 times growth.
Larry: Monty, can you track precisely where they’re putting their money?
Monty: No. Given the secretive nature of hedge funds, it is virtually impossible to get an asset allocation breakdown by country. But overall, you’re talking about at least $150 billion, with the majority of non-Japan Asia hedge fund assets deployed in the Greater China region.
Martin: With so many trillions in sovereign funds, that doesn’t sound like much.
Monty: You’re right. But the hedge funds are the trendsetters, and that money is just the vanguard. On the heels of the hedge fund money, you’re seeing institutional money managers — big pension funds and funds of hedge funds — allocating heavily to Asia as well.
The big pension funds are also trendsetters in the institutional money allocation space. Therefore, it is very important to watch the trends set by some of the top pension funds …
Martin: Such as …
Monty: Such as CalPERS, the California Public Employees’ Retirement System. CalPERS manages $176 billion and has moved into ARA Asia Dragon, sponsored by a member of the Cheung Kong Group, one of the leading real estate companies in Asia.
CalPERS’ CIO believes the ultimate development in Asia is “inescapable and compelling.” So they’re likely to put about $5 billion into emerging markets, with about 20 percent or $1 billion into Asia. And I repeat: Although these numbers may sound small, what counts is that they’re trendsetters.
Also, look at OTPP, Ontario Teacher’s Pension Plan! They manage $88 billion and are regarded as one of the savviest investors. OTPP now invests into Asia via 3rd party money managers, like hedge funds. For example, last year they invested close to $200 million into a new fund, called FountainVest, which focuses on targeting small and mid-sized private enterprises in China.
Martin: How do you know this?
Monty: One way I know is because when I ran my hedge fund, Predator Capital, which, as you mentioned, was Asia focused, OTPP was my largest investor.
Martin: A moment ago, you mentioned “funds of hedge funds.” And I know you know a lot about this topic because that’s the primary focus of your new book. Please explain why they are so important.
Monty: Funds of hedge funds are the equivalent of mutual funds in the hedge fund industry. The reason they are so important is because they’re considered the experts in hedge funds. So most of the people who invest in hedge funds do it via funds of hedge funds.
They control 40 percent of all the capital that is deployed in the entire hedge fund industry. So these are pretty big players.
They started allocating to the Asia bucket in 2004, and they have expanded into other asset classes as well. The important point is that, as more capital has flown into Asia, it has lead to capital market development — more instruments and more liquidity.
This, in turn, has opened the door — not just to sophisticated investors, but also to the average American investor who previously might have shied away from these markets because they were either underdeveloped or less reliable.
Martin: In other words, you have long-term investment capital and liquidity that’s flowing into those markets — another aspect of this monumental shift from West to East.
Monty: That’s right, which means we can now build an educated, reasoned long-term investment strategy.
In a nutshell, use the dips caused by financial crisis in the West to buy investments in the East. That’s what China is doing. That’s what the smarter hedge funds are doing as well.
Given the global connection of all the markets, whenever you see scary news in the U.S. or in Europe, it naturally impacts all markets, including Asia. But instead of running away from the markets, go with the flow: move from West to East.
Claus: The markets are not yet decoupled.
Monty: On a day-to-day, week-to-week, even month-to-month basis, no. When the U.S. rises, Asia rises. When Asia falls, the U.S. usually falls. But on a broader time horizon, you see a very different pattern emerging: You see the Western markets zigzagging downward. And you see the Eastern markets zigzagging upward. The zigs and zags are in sync. But the big trend is very different indeed.
Martin: So the strategy is to …
Monty: To summarize, use intermediate rallies in Western markets primarily as selling opportunities. Use dips in Eastern markets primarily as buying opportunities. Step by step, shift more of your portfolio to Asia.
But like Tony said, you can’t do this by throwing darts at the wall. Like in any investment program, you must do it intelligently, with solid research, with prudence.
Another thing I’d like to add: Don’t restrict yourself to just one country on one continent. Beyond China, look at Japan, South Korea, and India.
Martin: And beyond Asia, look at the other BRIC countries, Brazil and Russia.
Claus: And don’t forget one thing: When this starts looking more like a BUBBLE than like a BRIC, don’t forget to sell! Don’t forget to take your profits off the table and put them away in a safe place, ready for the next major investment opportunities.
Martin: I’m counting on you, Claus, and everyone here in this global forum, to let us know when to sell. Thank you, gentlemen. And thank you, our loyal readers and viewers, for joining us today!
We will follow up with emails. So be sure to check your inbox daily — not only for Money and Markets but also for the emails Larry, Tony, and their colleagues put out every week, Uncommon Wisdom.
Editor’s note: To opt in to Uncommon Wisdom, click here, and we’ll take care of the rest. It’s free and, as always, you can opt out easily any time you wish.
To view the transcript in its entirety click here.
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com.
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
|
© 2009 by Weiss Research, Inc. All rights reserved. |
15430 Endeavour Drive, Jupiter, FL 33478 |
