To market, to market to buy a fat pig. On Friday we took a late drubbing, US markets opened better but turned worse and continued to go lower. We are always guided by those that lead, and until it changes, Wall Street will lead equity markets globally. Until the Shanghai composite becomes the biggest market in the world, the US will lead. Obviously the pendulum is moving towards the east in terms of economic prowess, but the move will be slow. Even slower on a per capita basis, for every four Americans, there are 17 Chinese people, roughly. So more than four times the population in China than there is in the USA, bearing in mind that the area of the two is similar. The ratio currently with the US and India is 3.95 Indians to every American.
When you compare the economies of the three, you can quite quickly see the imbalances and how when Warren Buffett suggests it might take 100 years or longer, he may well be right. The Chinese economy is half the size of the US economy, the Indian economy is 12,5 percent the size of the US economy, or one eighth. On a per capita basis it is 47750 US Dollars for the US, 5444 Dollars in China and only 1509 US Dollars in India. Or 4 Dollars and 13 cents per Indian per day. Wow, that does not really sound like a lot, does it? Well, it depends where you are in the world, because four dollars is about what a tall Caramel Ribbon Crunch Frappuccino from Starbucks costs. At the market in India (at 59 Rupees to the US Dollar), you can get roughly 1 litre of milk, 1 kg of Rice, 500 grams of Chicken and 12 eggs for less than that fancy coffee.
So ironically, until things cost a whole lot more in India, and collectively wealth in China is four times that of the US, then the financial capital of the world (to paraphrase the late Mark Haines) is still firmly and squarely in New York. And the flows will continue to be dictated from and around Wall Street and their titans. And conversely emerging markets experience the flows both in and out in a more dramatic fashion.
Example. Picture yourself as a private investor in the US, sitting in retirement in Florida and watching everything that is available to you. Fox business network, CNBC, Bloomberg. And the talking heads come onto the show and suggest that perhaps emerging markets are not going to deliver superior returns and that local is starting to look better again. Quite simply you can switch out of the emerging bouquet of ETF's that you have, sell the units with the great liquidity that exists. The people who manage the ETF will then sell the underlying securities. And the currency flows will be out of emerging markets and into Dollars. Which explains of course why we have seen this -> Emerging markets for sale. That graph, courtesy of Jeff Miller at Sober Look, check it out:
Only the Brazilians have been worse off than ourselves and India, relative to the US Dollar. The saddest part is that Brazil have an infinitely better football team and India has the best one day cricket team, confirming that yesterday. I can't wait for India to tour here in November. For the time being, their supporters and ours are going to have to remain at home to watch the test matches! Too expensive to tour.
But I think that the point I am trying to make is that sometimes people look for an internal reason for selling on the local bourse. This is not 1984. This is 2013. Electronic trading on almost any platform is available from midair in the US, provided that you have a log in. You must have heard of Gogo inflight! Go-go, rather than an endearing term for an elderly lady that is wise in the ways of the world, if not the internet. This Gogo is the other way around, young and all internet -> Gogo Inflight Internet. You could not do that even five years ago. Don't look for a reason internally why the market and the currency has seen little love. The flows are not all local, like they used to be. I remember times when the market traded a couple of billion Rands a day. Heck, I remember speaking to people that thought half a billion Rands a day was cracking volume. Nowadays the average is 17 odd billion Rands! Liquidity certainly will translate through to volatility when the going is tough.
The wheels on the bus are going round and round, but more importantly Naspers through their Indian business Ibibo (which is held by Naspers international - MIH) have acquired a business called RedBus. Price undisclosed! Some people (dance cheek to cheek) suggest the price is 600 crore Rupees. Crore? Ten million. How much is that? Well, at the current exchange rate of 1 Dollar to 59.64 Rupees it is around 10 million Dollars. So it sounds a whole lot smaller than the amount bandied around a week ago, bearing in mind that this is quite possibly a part stake. Don't worry, more will be revealed tomorrow when we have the results from one of the best Internet and Media companies in emerging markets. First thing! We will be on the case, the presentation itself is later in the day, but the results are immediate. Exciting stuff.
Byron beats the streets today around the market and liquidity in China. Pay attention here.
- There are always anxieties that affect the market. In truth some of them turn out to be unwarranted and a small minority have a major affect. Most of them however will have a small affect which as a collective is what moves markets on a daily basis. Over the last few days we have seen some talk about Chinese interest rates, more specifically Shibor which is the rate Chinese banks lend to each other.
Shibor has a big affect on the liquidity of the Chinese economy and if rates are high it means banks are becoming less keen on lending to each other. This level has become extremely volatile after falling into the limelight. It reached a whopping 13.44% on Thursday which resulted in certain people going as far as saying that this will result in China's version of the Lehman collapse because of a massive liquidity crisis.
However before this got out of hand the People's Bank of China injected 50 million Yuan into the system which smashed rates down 495 basis points, back to a more sustainable rate of 8.5%. Business Insider did a piece titled People are Making way too Big a Deal About Surging Chinese Interest Rates. In the piece it quotes a chap named Richrd Xu from Morgan Stanley. He made some interesting observations.
"He pointed out that the total balance of both official interbank lending and over the counter interbank lending, in which rates are directly affected by SHIBOR, represents only around 8% of total bank assets."
You should also read the FT piece written by Kate Mackenzie referred to in the article above. Basically it states that according the current political agendas, although banking stability is very important to the Chinese economy, at present there are other projects which require the countries credit and are deemed more important. This includes small companies, farmers and rural areas.
Our job as asset managers is to look at these issues and try pick out the details and relay them on to our clients. I can comfortably say that after doing the research I am not too concerned about Chinese interest rates. Even if this does turn out to be a slight problem, interest rates in developing markets are always volatile. It is just one of those macro swings that are better to ride out then to try and time. In my world it is just another short term anxiety which creates a long term buying opportunity.
Home again, home again, jiggety-jog. A German IFO number has met expectations, and in the current environment that is not altogether a bad outcome. The global bond story, with yields rising continues to hang around like a bad smell, but beware if you think bonds are "finished". I suspect that if there is a bout of weakness in economic data there might be an abrupt about turn. That is what I am reading in any event. I just saw Mark Mobius on the box talking Chinese banks and loans. Keep calm (clammy hands) and carry on. It is tough to keep the faith, but like that fellow in Sixth Sense (His name is Haley Joel Osment), I see {whisper to Bruce Willis} buying opportunities.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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