Eight years recap

For those who need a recap on what has happened in the investment world for the past 108 years, The Global Investment Returns Yearbook (GIRY), compiled by London Business School experts is definitely an eye opener. The core of the Yearbook is provided by a long-run study since 1900 in all the main asset categories in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States. These markets today make up some 85% of world equity market capitalisation. The first chapter of the book gave us an insight of the global markets from the first eight years of this decade.
The key findings for year 2007:

- Despite the turmoil in the credit markets, stock markets performed reasonably well in most countries. Emerging markets did best.
- Volatility accelerated from a low base at the start of 2007.
- Sector exposures had a larger impact than in recent years, with resource stocks doing particularly well, and financials suffering.
- The tide turned for small-caps, which suffered a reversal after four years of outperformance. Value stocks also disappointed, and they underperformed growth stocks.
- While the US (and world) bond indices did well, most government bond markets gave a negative real return.
- Commodities, notably oil, generally performed well.
- The second half of 2007 witnessed a real estate slowdown in many countries, and a sharp collapse in the US.
- Currency mattered. The US dollar was again weak, and nearly all currencies were performance enhancing. Most countries had satisfactory USD returns, but their Euro returns were markedly lower.
- By end-2007 stock markets had largely eliminated the losses from the savage, start-of-century bear market. This is remarkable since, at the trough in March 2003, US stocks had fallen 45%, UK equity prices had halved, and German stocks had fallen by two-thirds.
- Annualised real equity returns over 2000-07 remain negative in only three of the 17 Yearbook countries, the US (-0.4%), Japan (-0.7%) and The Netherlands (-1.3%). However, returns remain low in several other markets, including the UK (0.5%), Germany (1.4%), France (1.2%), Italy (0.9%) and Sweden (1.4%).
- The annualised USD real return on the GIRY world index over 2000–07 is just 1.3%. Over this period, bonds beat equities (and bills) in 10 out of 17 countries, including all the largest markets. Realised equity risk premium over this period remain low by historical standards.
- Despite 2007 being generally disappointing for small-caps, over 2000–07 they nevertheless beat large-caps in every Yearbook country except Norway (and, marginally, Taiwan). In most countries, those who invested in 2000 in small-caps are more than 50% richer than large-cap investors.
- The poor return in 2007 from value stocks did not eliminate the 2000-07 value premium. Over 2000-07, value stocks beat growth stocks in every Yearbook country except Hong Kong (and, marginally, Switzerland). In most markets, those who invested in 2000 in value stocks are more than 50% richer than growth-stock investors.
- Momentum trading has provided large potential profits in virtually every equity market. A strategy of buying stock market winners, while avoiding (or taking a short position in) stocks that have performed poorly, has provided a large premium since 2000-07.
- A major factor is the investor’s choice of reference currency. Over the eight years since 2000, the US dollar has fallen against all Yearbook currencies except two (the South African Rand and the Yen). Since 2002, the dollar has fallen against every Yearbook currency—by 39% in the case of the Euro.
- A huge gap has now opened up in sector performance since the tech-bubble burst in March 2000. An investment in the top performing UK sector—tobacco—would now be worth 212 times more than an equivalent amount invested in the worst performing sector—technology hardware.

Macau - Glitter no more

Statistics can lie. This cannot be too far away from the truth. In April this year, the Macau Statistics and Census Service reveals that the sleepy, underachieving Portuguese enclave until its return to Chinese rule in 1999 - has become the richest place in Asia. A closer examination of the figures supplied tells a totally different story.

Here is the good news - Macau's booming casino industry boosted per capita gross domestic product to US$36,357 last year, a rise of 26%. That surpasses perennial regional gross domestic product (GDP) superstars such as Japan, Singapore, Hong Kong and Brunei and means the territory now ranks 20th on the list of the world's top-performing economies, ahead of Italy and just behind Germany.

That is where the good news ends. This is neither an economic miracle nor a model that anyone in Asia - or elsewhere - should aspire to follow. All of Macau's new found wealth has been generated by casino revenue, which grew 47% last year, so GDP figures present a false economic picture of the city with a population of 538,000. Consider this: the rise in median monthly salaries has not come close to keeping up with Macau's soaring GDP, increasing only 7.5% from a year earlier and now standing at 7,930 patacas (US$990), well below the earning power of its prominent Asian neighbors.

A look at personal consumption expenditure also clearly puts Macau, which has a land mass of only 16 square kilometers, in a far humbler place than its garish GDP banner suggests. Personal consumption accounted for only 21% of Macau's GDP last year. In Hong Kong, 60 kilometers northeast, personal consumption accounted for 60% of GDP and personal consumption expenditure per capita was $17,800, compared with Macau's $7,500.

Where do you find the rest of Macau's whopping GDP? Most of it has gone into building a gambling mecca that has become the Las Vegas of Asia. Indeed, last year Macau overtook the Las Vegas Strip as the richest gambling market on the planet. Macau has long been known as a haven for gamblers, but that reputation was greatly enhanced in 2002 when the gaming market was liberalized to include foreign players. Before that, Hong Kong-born billionaire Stanley Ho Hung-sun, now 86, had monopolized the industry for four decades. Las Vegas gambling moguls seized the opportunity and poured money into the city, which now boasts 30 casinos. The Venetian Macau, which was built by the Las Vegas Sands Corp and opened last August, is the largest casino in the world.

While Macau's gambling dens have lured millions of visitors to the city - most of them from mainland China, where gambling is illegal - those tourist dollars are going mostly into the pockets of casino moguls, with ordinary citizens left to pick up the scraps that fall from the banquet table. Making matters worse for ordinary folk, inflation - as measured by the composite consumer price index - raced along last month at 9.47%, a 12-year high. Rents rose 15.6%, and the cost of a doctor's consultation shot up 24.2%. Add to that sharp hikes in food prices that have also hit Hong Kong and the mainland and the reported 7.5% jump in median monthly income starts to look like a negative.

Unemployment is a mere 2.9%, but that, again, is due to the casino boom. Alarmingly, Macau's younger generation is increasingly choosing to drop out of school in their teens to take casino jobs that pay as much as $2,200 a month. Gambling revenue has allowed the government to boost spending on education, but at the same time casinos are snatching would-be graduates away with the lure of easy money for work that, most likely, will be a dead-end.

China's agricultural industry

In October 2008, Communist Party of China (CPC) Central Committee issued a landmark policy to further rural reform and development. One of the biggest moves was to allow farmers to "lease their contracted farmland or transfer their land use right" to boost the scale of operation for farm production and provide funds for them to start new businesses.

Farming practices within China range from small scale family owned holdings to large commercial farming operations. The major buyers of market-ready products, such as fruit and vegetables, are large grocery retailers, whereas the major buyers of products requiring processing, such as cereal grain, are wholesale dealers and food processing companies. The costs of machinery and land required to work a large-scale farm are high and provide a significant barrier to entrance. Furthermore, farmers worldwide are facing increasing operational costs due to oil and fertilizers. Although large co-operative farms exits within the Chinese market, the Chinese agricultural market is highly fragmented compared to western markets.

The majority of commercial farmers operate relatively small scale holdings, producing a limited amount of produce for local consumption. However, rapidly increasing food demands are leading to an increase in the extent of large scale farming co-operatives. The customers of such large scale operations are typically food processing companies and supermarket chains. Such large buyers wield their large purchasing power to negotiate minimal prices through bulk purchasing.

The majority of the population of China is still relatively rural in nature and a high proportion of people are still involved in agriculture, either for self-sufficiency or commercial purposes. The majority of farming in China is undertaken within small scale family owned farms, which often act collectively within co-operatives. Given the small scale of most Chinese farming operations combined with the existence of cooperatives, players can enter on a small scale relatively unhindered. However, in order to start a competitive large scale farming operation, the significant cost of machinery and land may pose significant barriers to the entrance of new players. In recent years, some foreign players have started operations within China, attracted by the abundance of low cost highly fertile land and a burgeoning market for food in the country. Furthermore, the increasing demand for food within China is increasingly attracting foreign companies to enter the market through the importation of agricultural produce.

The agricultural products market encompasses a wide variety of products, for which the threat of substitution varies considerably. For example, many fruit and vegetables and cereal products, most notably rice, form staple dietary components for which the threat of substitution is low. Organically certified produce is increasingly being favored in recent years due to the supposed health benefits of avoiding the use of chemical fertilizers and the more environmentally friendly image of organic production. On the negative side, such produce is considerably more expensive for consumers. However, the cost of organic farming in comparison to intensive methods is declining as dramatic increases in fuel and fertilizer prices negatively impact upon non-organic methods.

Players within the Chinese agricultural products market range from individually owned farms to large consolidated farming corporations. It should be appreciated that the latter has a distinct advantage through their scale economies of mass production. With the exception of produce quality, there is typically a lack of differentiation between produce from different producers and producers are typically highly similar, which enhances rivalry.

Stock challenge game

Recently i entered into a stock challenge game organised by the following website:
http://www.nextinsight.com.sg/

The game has started on 3rd Nov 2008 and will run for the next 6 months. Below are some of the stocks i have bought or shorted with my virtual start-up capital of $100K with supporting reasons.

1) Bright World (Long)
How can i not put money where the mouth is after spending time researching on the company?
I am confident that all the pre-conditions of the takeover offer will be fulfilled in the coming months. Even though there is no guarantee, I feel the potential return outweighs the associated risks. Moreover, some sweeteners have been included in the post-acquisition period for current shareholders of China Holdings Acquisition Corp which bodes well for the success of this deal. Those who are not familiar can refer to my earlier postings on bright world.

2) Wilmar (Short)
Shorted Wilmar purely for trading purposes. I feel that the buy-in was overdone as it gained about 20% from Monday to Thursday last week. There was a rebound in CPO prices in the last 10 days or so. But I believe this upsurge in prices will be temporary.

3) UOB (Short)
Shorted UOB as I expect its 3Q earnings report to be weak as compared to the last quarter. I see the UOB share price on a downward decline and took the opportunity to short it when there was a small rally on Thursday 30th Oct. I believe the demand for loans will continue to be soft and thus UOB’s margin will be affected. Further impairment charges will have to be taken as we progress and that will reduce the profits too.

I will post new updates if there is any change in my portfolio.

Cheers!