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May 2012 |
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| Closed-loop bailouts do not work |
In the last Market Truth ‘LTRO and QE to the rescue’ we discussed Ben Bernanke’s tough comments on controlling inflation in his monetary policy report to Congress (and that in our view he could not be trusted on those.) Shortly thereafter, Mr. Bernanke then made headlines again, saying that the US economy needed faster growth, which was seen as an indication that the easing may continue, i.e. that he may have changed his mind. But this was only to be followed by the subsequent release of the Fed meeting minutes suggesting yet again a reversion to the opposite, i.e. that no further stimulus may be forthcoming – who isn’t confused?
We suggest that, rather than chasing such ‘news’ and reading every word off the central bankers’ lips for cues from ‘the gods’, one should place more emphasis on considering the underlying economic realities, and when doing this one comes to realize that, after all, the central banks of the West, be it the Federal Reserve or the European Central bank (ECB), may actually have little choice but to continue easy-money policies, simply because their underlying economies appear too weak to be able to fund and bring back under control an escalating sovereign debt burden – regardless of what they may want to do and what they may say from one day to another.
It has become particularly obvious in Europe of late that shuffling around ‘bailout’ monies from essentially one bankrupt party to another, e.g. Spanish and Italian banks apparently seeking to ‘bail out’ their own respective countries by buying Spanish and Italian government bonds on masse - financed in turn by ECB LTROs -, or the EFSF and the IMF seeking to rescue both Eurozone banks and Eurozone countries, just isn’t working, because at the end of the day all of that bailout money (through whichever fancy tools and institutions it may be raised and channeled) has got to come from somewhere, and that is those same mostly broke Western countries themselves.
Even the IMF seems to have started to realize at last that funding possibilities from most of the West are largely exhausted already, since Germany can’t provide all the money on its own as the country can hardly cope with its own debt burden now, let alone bail out a country like Italy with its essentially hopeless economy and debt size of EUR 2 trillion. So it has recently been asking (supposedly hugely successfully) other countries to chip in. In reality though it seems that many of those financial commitments supposedly made are more ‘talk’ than ‘walk’ as yet, e.g. the large emerging markets said that, between them, they will chip in over $100bn, however before making specific commitments, China, Russia and Brazil want more evidence of “Eurozone governance”, and similarly the UK ‘committed’ Euro 15bn, but it was later revealed that this would be dependent upon conditions that could at earliest be met well into 2013.
Hence further bailouts for Spain and Italy really appear less likely to be forthcoming from any other countries, than from the last resort of the ECB’s ‘printing presses’ (or in other words hugely expanded future quantitative easing programs) – which would translate into massive inflationary risks going forwards.
Accordingly, we would suggest investors not to take central bankers’ by their words, nor to panic on short-term market reactions to their statements, and we would like to reaffirm again as well our positive outlook on gold/commodities generally going forwards as an inflation hedge.
In fact, many commodities as well as some equity markets that sold down substantially during the recent months as a result of constant crisis news headlines, have once again become attractive value now and may offer a good entry or accumulation opportunity – that is, as part of a diversified portfolio. It should not be forgotten in this regard also that equities (and by extension convertible bonds as well) represent companies, and that there are many good companies with notable assets and the ability to put up prices for goods and services sold in line with inflation, and can thus ‘float’ on inflation.
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| Investment Committee, Tyche Group Limited |
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| Global inflation puts pressure on emerging markets |
This year’s headline news is on global markets and their focus on how to fight inflation. Not only is inflation become an issue in emerging markets but also to some developed countries.
Recently, the People’s bank of China raised interest rates during the Lunar New Year holiday, the third times in four months, reflecting the Mainland’s determination to fight inflation. Although China's consumer price index increased in January up to 4.9% from last months 4.6%, it is lower than the market expectation of more than 5%, but whilst the conditions of drought continue in the North of the country, it is expected that inflationary pressures will remain.
Emerging markets in Asian countries have been suffering from the gradual emergence of inflation pressure since last year, mainly due to strong local economic recovery after the financial crisis coupled with global hot money inflow. This year, Thailand and South Korea's Central Bank took the lead in raising interest rates, by 0.25% respectively. In the BRIC countries, India's Central Bank base rate increased from 6.25% to 6.50%, their rates were raised 6 times in the last year. India’s Central Bank's inflation forecast has increased from the previous 5.5% to 7%. Brazil's central bank interest rate has increased by 0.5 % with interest rates rising to 11.25% as they recorded an inflation rate of 5.91% last year, the highest in the past six years.
In order to suppress the inflation problem, most central banks are using more restrictive monetary policy, in addition to increasing interest rates, some countries such as Brazil, Chile and Taiwan have launched capital control measures to prevent hot money inflows, and quell the potential for asset bubbles to surface.
| Country |
Index |
| China |
Jan CPI |
4.9% |
| United Kingdom |
Jan CPI |
4.0% |
| Euro Zone |
Jan CPI |
2.7% |
| US |
Jan CPI |
0.4% |
Recently, the ECB President Jean-Claude Trichet’s comment drew investor’s attention. After an ECB meeting , Trichet claimed the Euro zone is facing a short term inflationary threat. Countries have to be very careful when deal with the threat of commodity prices pushing up inflation and to ensure there are no second-round effects on prices. In fact, the headline inflation in the euro zone jumped to 2.2% in December, and has jumped up to 2.7% recently, that is above the ECB's target. The CPI in United Kingdom in January jumped from 3.7% to 4%, much higher than the target level of the Bank of England’s 2%.
As for the United States, January consumer price index rose by 0.4% and the FED claimed that the inflation is too low and may stay below the Fed's target of 2% through to the end of 2013. However, from the current economic recovery in Europe and America, there should be no room for increasing the interest rates in the short run. In the context of global inflation, tangible assets are highly sought after; investors may wish to pay attention to agricultural products and precious metal investments. In addition, due to the worry of having negative interest rates, and concerns of continuing decline in the purchasing power of money, funds will flow into the stock market seeking for higher returns, stock market will be a good choice at the moment, and especially emerging markets will have a long-term investment return.
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MPF Division,TYCHE Group |
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| How members should do in the MPF Price Cut War
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Last November HSBC announced the launch of a new MPF scheme by the end of 1st quarter, with the charges ranging from 0.79% to 0.99%. Recently, HSBC also announced that effective from March the management fees of the selected constituent funds including all existing MPF schemes of Hang Seng Index Tracking Fund, MPF Conservative Fund, and Global Bond Fund will be revised. The new management fees will be reduced from the original of 1.25% to 1.5% to 0.79% to 0.99 respectively.
At the beginning of the year, AXA announced the renaming of its two existing mandatory provident fund schemes and actively reduced the management fees to attract new customers. While the other trustees such as Bank of Communication, Bank Consortium Trust Company Ltd and Fidelity are preparing to fight back by studying if there is any room for a fee reduction.
Given that the "Member Choice" is deferred, the price war between the trustees should be slowing down, while HSBC is taking the lead in actively reducing management fees, a price war is like an arrow in the bow. To sum up, many of the trustees are only providing fee reduction on certain funds or new schemes or only to new clients and individual provident funds, instead of to the whole scheme as it was in the past.
| Date |
Custodian |
Details |
| Feb 2011 |
HSBC/
Hang Seng |
Effective on March, management fees of all existing schemes including Hang Seng Index Tracking Fund, MPF Conservative Fund, and Global Bond Fund will be reduced to 0.79%-0.99%.I |
| Jan 2011 |
AXA |
Double Easy renamed to “Smart Plan” and Elite renamed to “Simple Plan” while all new clients can enjoy the management fee of as low as 0.99 % |
| Nov 2010 |
HSBC/
Hang Seng |
New scheme will be launched on the 1st quarter of 2011 with management fees of 0.79%-0.99% and contains passive funds in the scheme. |
| Oct 2010 |
Principal |
Hang Seng index fund will be launched in the MPF 600 series and also reduce the management fees of the 500, 600 and 800 series from current 1.25%-1.5% to 1%. |
| Jul 2010 |
BOCI-
Prudential |
The new scheme “My choice” was launched with average management fee of 0.99%. |
However, the cuts have been criticized by the public. For example at HSBC and BOCI-Prudential, their new plan charges are way less than the existing one, and as for AXA, the special fee offer is limited to new customers only and existing customers are not receiving this benefit.
The reason is that Trustees hope to attract new customers through price reductions; on the other hand, full price reduction is too costly. Therefore it only applies to certain schemes or certain funds. According to data from the MPFA, this shows that by the end of 2010, the net asset value of the MPF is HKD 365.4 billion, and using the "Fund expense ratio" (FER) 1.84% as indicator, the estimate charges captured by Trustees is about HKD 6.7 billion.
HSBC and Hang Seng Bank are the most significant players by size in the MPF market as their combined market share is about 32%, if they fully lowered fees from the current 1.85% to 0.99%, they will lose nearly HKD 1 billion in fee income, far higher than the present proposed fee reduction of about HKD 200 million.
Whilst most of the members would benefit from the fee reduction, in choosing a mandatory provident fund scheme, it is important not only to focus on the charges, but also to look at the fund performance. For example, a lot of active funds performed much better than HSBC’s Hang Seng index fund in the Hong Kong equity market. Although these other funds charge a higher fee than Hang Seng’s passive fund they deliver a better return. Therefore, members should compare the schemes comprehensively to fight for better returns.
| Hong Kong Equities |
Features |
Return
In 2010 |
FER |
Invesco Hong Kong
and China Equity |
Cheapest |
12.70% |
1.24% |
AXA RCM
Hong Kong Equity |
Most expensive |
15.04% |
2.43% |
HSBC Hang Seng
Index Tracking |
Typical Hang Seng
Index Fund |
6.42% |
1.65% |
Sun Life First state
Hong Kong Equity |
Best performed
active fund |
24.65% |
1.70% |
| Manulife Hong Kong Equity |
Worst performed
active Fund |
6.21% |
2.42% |
| *Source：Morningstar Hong Kong 2010 |
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Do you have any comments on this issue? Or topics you would like to see covered in future issues? Would you like us to e-mail Market Truth to you every month? Please direct all enquiries to: contact@tyche-group.com |
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This newsletter is intended for information purposes only and should not be regarded as a substitute for professional financial advice. Tyche Group Limited shall not be liable for any pecuniary loss arising from the use of any information provided herein. |
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25 April 2012 (Wednesday), 6:30pm to 8:00pm
Registration : 6:15pm
Podium Floor, Executive Club, Central Plaza,
18 Harbour Road, Wanchai, Hong Kong
Are China stocks attractive now?
In contrast to the local property market, China equities are currently trading near record discounts to long-term P/E ratio averages and P/B ratios, both in nominal terms and when compared against China’s Asian peers, and the mainland Chinese economy overall has remained relatively resilient in face of both the Eurozone crisis and the recent government-induced lending slowdown.
Source: Datastream, Nomura Strategy Research
Even if things should once more take a turn for the worse in terms of the Eurozone or US sovereign debt crisis, then China would still have ample room for easing bank lending and property restrictions again to counter a slowdown, and China’s strong and rising tax revenues of recent years could provide funding for new stimulus programs if needed.
For those reasons we would suggest that the China equity market at this moment does offer a good risk/return profile in terms up upside potential versus downside risk, and that it is relatively under-valued compared to property prices, and investors who may be positioned with an overweight on properties may consider reducing such exposure in favor of equities or convertible bonds at this point.
However, given the still very uncertain global macro-economic background amid the ongoing Western sovereign debt crisis and the uncertain short-term market outlook stemming from this, any equity exposure should only form a part of a diversified portfolio that is spread over different asset classes, and such portfolio should include at least some exposure as well to gold/precious metals for general financial crisis and inflation protection.
Please join us at our April Seminar presented in English by Elvin Wong (General Manager) and Martin Hennecke (Associate Director), for a review of these topics and the outlook going forwards. As always, we aim to make our Seminars as interactive as possible, with questions from the audience most welcome.
As seats are limited, so please register early to avoid disappointment. Please register in any of the following ways:
phone (852) 2525 3639; fax (852) 2525 3679; or e-mail forum@tyche-group.com |
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