Posts Tagged ‘Brazil’

HSBC shareholders juz got lucky/ China blues

In Banks, China on 25/08/2015 at 1:42 pm

Bozo Gulliver earlier this yr decided to pivot towards the Pearl Delta estuary, cutting fat from other places to build muscle here. The collapse in July in the Chinese stock markets had him back-pedalling about becoming big in China.

Now with China in retreat, he’d be a real Bozo to put money into China.

We shareholders had a narrow escape. Thanks to luck rather than good management.

But we will still suffer

FT reports that according to Nomura, less than 10 per cent of HSBC’s came from China proper.

… could be in for a rough ride if the swing in China’s currency is the start of a prolonged devaluation

The most obvious effect of a weaker currency is valuation losses on banks’ loans and trading assets in China, which many have used as a bridgehead in the world’s second-largest economy. A lower currency could also spell trouble for customers in China who have borrowed US dollars or euros but are earning renminbi — the “classic FX mismatch,” in the words of Keith Pogson, senior partner of EY’s Asia-Pacific financial services team.

Western banks also face risks from domestic Chinese counterparts which have borrowed dollars to lend to their own clients. “Asian banks are extremely used to borrowing cheap dollars through interbank markets and then relending it,” said one London-based banker. “In the next couple of years there could be bigger problems if China’s going to carry on devaluing.”

And let’s hope the cash from Brazil will not be squandered by Bozo.


Commentary at

Not HoHoHo’s kind of banks

In Banks on 19/08/2015 at 1:42 pm

BRAZIL BANKS BOOM IN GOOD TIMES AND BAD Although Brazil’s economy has been bumped by the ups and downs of global commodity prices and the manufacturing sector has stagnated, the nation’sbanking industry has been making impressive gains, Dan Horch writes in DealBook. The combined annual profits of Brazil’s four biggest banks have grown more than 850 percent to just more than $20 billion, from $2.1 billion, in the 12 years of Workers’ Party rule.

Brazil’s largest and third-largest banks, Banco do Brasil and Caixa Econômica Federal, do not even have profit as their sole mandate. The government controls both and obliges them to engage in less profitable operations as a public service.

The two giant private sector banks, Itaú and Bradesco, consistently earnreturns on equity – a measure of how much a company can earn out of each dollar invested – of about 20 percent. Big banks in the United States usually manage only about half as much.

The banks face little competition. A banking crisis in the 1990s threatened scores of financial institutions with insolvency and the authorities have encouraged a string of mergers and acquisitions. The four biggest banks have more than 70 percent of the banking system’s total assets. Bradesco’s deal to acquire HSBC’s operations in Brazil for $5.2 billion will bringalmost 75 percent of total assets under the control of the top four banks – near the maximum that the central bank established in 2012.

They have been helped by government policies and economic trends. Interest rates are high: In the free credit market, which excludes government subsidized loans for housing and infrastructure, Brazilian consumers pay on average 58.6 percent interest, and businesses pay 27.5 percent to borrow money.

A history of high inflation, sharp currency fluctuations and large government budget deficits makes it expensive for the government to borrow money. The central bank’s basic rate, which it pays on the local equivalent of Treasury bills, is 14.25 percent.

The average spread – the difference between what banks pay to gain access to capital and what they charge to lend it out – is 30.7 percent in the free credit market.

Not all of that is profit. Taxes and regulatory cost are high and about to get higher – the government just announced a plan to further increase taxes on bank profits. Default is also a serious risk. Nearly 56 million Brazilians, more than a quarter of the country’s population, have missed enough debt payments to be on the blacklist of Serasa Experian, a credit reporting bureau. The spreads are easily wide enough to compensate for that.

When times are bad, the banks can also get support from the government. The Treasury sells bonds that protect investors against inflation, as certain United States Treasury bonds do. It also offers bonds that increase their payouts when interest rates rise or the currency devalues.

When banks sense a deterioration in the economy, they can scale back on loans and move toward these government-backed investments. As a result, the recent inflation of nearly 9 percent, the plunging currency and the rise in interest rates have all helped bolster bottom lines at banks. As Luiz Fernando de Paula, an economics professor at Rio de Janeiro State University, says, “The government pays the price instead.”

NYT Dealbook

Value in China stocks: Indexation guru

In ETFs, Investments on 03/04/2010 at 3:53 am

Princeton University economist Burton Malkiel, the author of  “A Random Walk Down Wall Street”, a book that introduced many to the idea of investing via indexed-linked funds, sees value in Chinese shares, he tells the FT.

The FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares) is different [from the Shanghai “A” shares which he thinks overvalued], he says. This year, while the Shanghai has gained 53.8 per cent, the FTSE Xinhua is up 6.8 per cent – less than the S&P 500.

A “matched pair” study – comparing oil company CNOOC with ExxonMobil, its equivalent in the S&P, and so on – shows that FTSE-Xinhua price/earnings multiples are higher than in the S&P. But their rate of earnings growth is also higher. Crucially, their “PEG ratio” (the earnings multiple divided by the growth rate) is actually lower. So, Malkiel says, Chinese “H” shares are “moderately priced” compared to the S&P.

That is why he is buying China. But Malkiel is not selling his principles. He recommends investing in “H” shares via exchange-traded funds tied to the index – and not backing anyone who says they can beat the market. (Note there is an ETF traded here that tracks  the FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares): DBXT FTChina25.)

Bubble or collapse in China?

He would not be surprised if China took a near-term hit. But long term, he believes it is the place to be … He is concerned about asset bubbles forming in real estate, banking, and in the stock market. “This is bound to occur wherever economies grow fast, and China’s expansion over the past decade has been unprecedented in the history of industrialisation.”

But will the economy collapse if any of these asset bubbles burst? “Absolutely not,” says Mr Malkiel. “They will correct, and restart because of the strength of the underlying story and the country’s extraordinary balance sheet.”

He does not think the country can continue to rely on export-led growth for both geopolitical and economic reasons.

“China potentially has the largest consumer market in the world, but its consumption is less than 40 per cent of GDP, a ratio that has not changed over the past decade. In the US, the ratio is about 70 per cent.”

But key reasons for low consumption remain extant: people need to save because there are virtually no government safety nets; and the one-child policy makes it difficult for children to adequately care for their parents.

The divide between the Haves and the Have Nots is what most worries Mr Malkiel. “There are seismic gaps in China between rich and poor, especially seen in the affluent east versus the impoverished central and western regions.”

This has already led to some unrest. Potential instability is a great danger. “But that’s why the government is developing infrastructure, education and a nascent social safety net,” he says.

He contends that a purchasing power-adjusted gross domestic product weighting, which adjusts for the renminbi’s significant undervaluation by this measure, suggests equity exposure of between 6 and 12 per cent.

So how does he (and his clients) invest in China?

As chief investment officer of China-focused AlphaShares, he is certainly helping investors find their way into the mainland. He has crafted a series of indices, some of which are trading as ETFs, that provide specific sector exposure (infrastructure, consumer, technology and real estate) and market exposure (all cap and small cap).

But his firm has also developed a set of private actively managed funds. These include a China-linked fund, which invests in non-Chinese companies that are directly benefiting from China’s growth, and an enhanced index fund – a broad-market fund with an enhanced weighting of small and value stocks. A buy-write fund aims to exploit Chinese market equity volatility by going long the highly liquid FTSE Xinhua 25 Index and writing options against it to pick up premium income. AlphaShares may take these funds public.

Mr Malkiel squares this active management with his long-term embrace of passive investing by citing the inherent inefficiencies in the way the Chinese market functions and is tracked. He believes unprecedented growth, trifurcated shares [mainland, Hong Kong and foreign classes], and volatility present special opportunities that cannot be captured through traditional indices.

Finally, it should be no surprise, he is a bull on emerging markets, and equities in general.

For a 40-something US investor with a family, he is recommending a portfolio with 80 per cent equity exposure. And he thinks half of that should be foreign stocks. He believes long-term investors will be best served with half of this international exposure being in emerging markets such as Brazil, India, and China.

He remains a believer that passive exchange traded funds are the most efficient means of gaining market exposure around the globe. His recommended 50 per cent US exposure is close to the MSCI All-Country World Index weighting of 44 per cent. However, he deviates significantly in his exposure to so-called EAFE countries, the developed world ex-US and Canada. He recommends 25 per cent EAFE exposure versus the global weighting of almost 41 per cent, in the belief that Europe and Japan will not experience significant growth in the coming years.

He departs from market-cap benchmarking even more materially in recommending 25 per cent equity exposure to emerging markets, twice the All-World Index’s weighting.

Mr Malkiel justifies this by citing a perceived fundamental shift in growth away from developed to emerging markets. “My portfolio strategy remains passive, I’m not picking stocks,” he says. “I’m adjusting for economic realities. And we see the need for such investment modification in China where a low free float [on which most indices are based] undercounts China by at least a factor of four.”

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