| |
|
Tuesday, June 05, 2007
Asia: Hot Market or Frenzy?
Investors Insight Publishing
|
Introduction
The data from the companies which analyze where investors are putting their money tells us there is a lot of money flowing into international funds and especially Asia. This week's Outside the Box we look at a short but thoughtful piece by my good friend and partner Jon Sundt of Altegris Investments. Jon is personally bullish on Asia, but he offers us a graph and some thoughts of which you should be aware before you start putting money into the high flying Asian funds.
I will add a few comments at the end, but let's jump right into Jon's piece.
John Mauldin, Editor
|
Asia: Hot Market or Frenzy?
By Jon Sundt
In the last several years, you'd be hard pressed to find a bigger story in the
investment world than Asia. If you turn on CNBC or read the Wall Street Journal,
the stories are constant. As I write this piece, China is again the focus of the
financial world. The China markets have plunged overnight, with the Shanghai
Composite Index down 6.5% and the smaller Shenzhen Composite Index down 7.2%. Of
course, this pullback follows a huge run up, and I would not be surprised to see
these markets reach even loftier heights in the near future.
Regardless of where the markets go in the months and years to come, the massive
run up and even the significant corrections confirm the reports that right now
Asia is a hot, and maybe overheated, market. The population is growing, with
hundreds of millions coming out of poverty into the capitalist
system...consuming, building, profiting...the Asian countries are literally
swelling with wealth. According to the Economist, five million new Chinese
brokerage accounts were opened in April, two-thirds more than during last year
in total.1 Volumes in Asian stock markets are increasing at an
unprecedented rate, with trading volume on the Chinese markets at $16.4 billion
a day in March of this year, while six months prior it was only $5 billion a
day. Now, for the first time in history, the total number of shares traded on
China's stock market was greater than the combined volume of all other Asia
exchanges. This includes Japan, Hong Kong, Thailand, and Singapore.2
Even standard fundamentals are reaching unheard of levels. The price earnings
ratio on the Shanghai market, the country's principal bourse, is pushing
50!3 Time magazine cites a report by JPMorgan noting that of 37
Chinese companies listed jointly in Shanghai and Hong Kong, eight trade on the
mainland at valuations at least double those quoted in Hong Kong.4
It's a frenzy.
How Can You Position Yourself to Profit in the Midst of a Frenzy?
In the last five years, finding money in Asia has been about as simple as
spotting a tourist in La Jolla - very easy. Since its trough in April of 2003 to
April of 2007, the MSCI Asia Pacific Price Index is up a whopping 148.15%,
annualizing 24.93%. The Hang Seng Index in Hong Kong is up 135.33% over the same
time period, annualizing 23.32%. The Shanghai Stock Exchange is up 154.18%,
annualizing at 25.67%. India is even more impressive, up 317.91% in the Nifty
50, which comes to a 41.94% annualized return figure. Any mutual fund that had
an Asia focus had tons of "beta" to bet on. Just hop on the train and ride it
up.
Source: International Traders Research, Inc.
Why Do We Even Need Active Management?
As the markets have rallied, hedge funds, mutual funds, indexes, ETF's and other
methods of investing in Asia have sprouted exponentially. The big questions
today are this: Will the train continue to roll without more violent corrections
like those we saw at the end of February and the end of May? How should you
participate in Asia as an investor?
The first step to answering these big questions is thinking about the following:
Should you be in an Index Fund, or with an active manager? Before you answer,
have a look at the chart below. If you look at the MSCI AC ASIA Pacific Free
Index from its inception in 1987 through 2006, you can see that these markets
have historically been highly volatile.
Source: International Traders Research, Inc.
Returns over this time period have annualized to a mere 1.98%, with a 20.20%
standard deviation. Let me put it in concrete terms: there are three periods in
the last ten years when a million dollars invested, at the wrong time, would
have been HALVED by a down market. That's some serious volatility.
Does this mean I am bearish on Asia? Not at all. In fact, on the contrary, long
term I am very bullish. So am I saying that Index investing is the wrong choice?
Again, not at all. For many, it may be a good choice.
For me, what this really means is that I am sober-minded in my approach to the
Asian markets. I believe Asia is an IDEAL place for talented active management.
There is tremendous complexity investing in the many exchanges that make up Asia
- Geo-political risk, currency risks, the list goes on. This complexity can lead
to inefficiencies and dislocations that are much different than those in a
mature market like the US. And for the active manager who understands the risks,
the complexity can create opportunity.
Here is the fundamental question I believe you should answer before deciding how
to participate in the Asian markets: Do you think a smart team - on the ground
in Hong Kong and Japan for example, given a broad mandate to hunt for "alpha"
and deploy capital to sectors and countries as the markets change - has the
ability to outperform a passive index over time? If the markets correct, do you
think an active manager may have an advantage by having the ability to short or
get out of the way?
In my opinion, active management is the best approach to the Asian markets for
the right investor. The ability to lever and de-lever, actively select and
deselect country, sectors and individual stocks, and to short when appropriate
makes a lot of sense in these markets. Of course you will have to pay more for
active management, and as a result you'll want to make sure you get what you are
paying for. Just like in the US, a proper and thorough review of the manager and
his team are very important.
My point is that I believe the party is just getting started. We have seen these
markets before, and the Asian market isn't going away. How to participate as an
investor, however, is not as clear-cut. The Asian markets are broad and complex.
I believe the best way to take advantage of this momentum, for the right
investor, centers on quality active management.
1 The Economist: Feeding Frenzy, May 19, 2007
2 FinancialTimes.com: Bourses in China Eclipse all of Asia, May 9, 2007, Jamin Anderlini.
3 Barrons Online: Up and Down Wall Street; Running on Vapors, May 14, 2007, Alan Abelson.
4 Time.com: China Braces for a Bubble, February 1, 2007, Kathleens Kingsbury.
Conclusion
I think Jon makes an excellent point. When you look at fund managers which have
exposure to Asia, you really need to look at their style. Do they tend to track
their corresponding and relevant indexes? If so, you might as well buy an index
fund for lower fees. Investing in international funds is one area where a great
deal of research on management and the underlying strategy will really pay off.
Your loving the emerging markets for the long term analyst,
John Mauldin
johnmauldin@investorsinsight.com
Disclaimer
John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC, Millennium Wave Securities, LLC, and InvestorsInsight Publishing, Inc. (InvestorsInsight) may or may not have investments in any funds, programs or companies cited above.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Communications from InvestorsInsight are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of InvestorsInsight, and should not be construed as an endorsement by InvestorsInsight, either expressed or implied. InvestorsInsight is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.
We encourage readers to review our complete legal and privacy statements.
InvestorsInsight Publishing, Inc. -- 14900 Landmark Blvd #350, Dallas, Texas 75254
© InvestorsInsight Publishing, Inc. -- ALL RIGHTS RESERVED
Email this Article to a Friend 
| |
Printer Friendly Version