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The Bamboo Bends with the Wind

It is difficult to form a clear conclusion of the direction about the Chinese economy at the present time, although exports and consumer spending to continue to be strong, the evidence of international commodity prices suggest that China’s demand for iron ore, copper, oil and other raw materials continue to be weak. There is clearly over capacity in steel, shipbuilding, automobiles and even in the supply of apartments and office buildings.

The Chinese Yuan has risen by 30% against the Japanese Yen and the Euro, in the past year, although it has weakened slightly against the US$ in recent weeks. China has become a more expensive location for manufacturers relative to its Asian competitors. Clearly the emphasis of the NPC (National People’s Congress), and the work report of the Premier, Li Keqiang, is on the shift from infrastructure spending to the consumer. We see many investment opportunities in the internet and consumer space, although we continue to be selective about our portfolio choices among Chinese companies, judged by corporate governance and transparency.

In Hong Kong, which benefits from the continuing US$ peg, we see good value in banks, telecoms and utilities with dividend yields of up to 5%. Even HSBC, now yielding 6%, seems to have weathered the storms and the threat of further US fines for past misdemeanors, and offers certainly a value “contrarian” bet. Other core positions that we have been analyzing are the newly reorganized Cheung Kong/Hutchison group where the non-property assets including telecom, water, retail and container ports remain an excellent long term investment. China Mobile, with a 4% yield, also offers good upside, with the rapid expansion of the smartphone market in China with nearly 800 million subscribers today.

I have just returned from a 4-day visit to Indonesia, which shares with India the characteristics of large human and natural resources, a new reforming government, and ambitious infrastructure plans over the next decade. Indonesia, however, is a large exporter of energy and minerals, especially to China, and does not benefit from the oil price cut in the same way. The Indonesian Rupiah has now weakened to over 13,000Rp to the US$ – the lowest since the financial crisis. What is impressive is the growth of the banking sector with groups such as Bank Mandiri, and some smaller Javanese banks, growing at 25% per annum. We also visited Indofood, part of the Salim family group with its large noodles subsidiary, ICBP, which has 75% of the large instant food market. With a population of 250 million people of whom 35% are under 25 years old, Indonesia represents a very exciting growth market. Another group we met was Lippo, which has expanded from its property base to encompass a listed hospital group, Siloam, with 20 private hospitals offering growth of 50% annually and benefitting from medical tourism. Finally, Kalbe Pharma, with 50% of its sales in nutrition of health drinks and good corporate governance, is an attractive play in the pharmaceutical sector. We remain cautious about timing investment in Indonesia given the weak currency and possible political uncertainty, but it remains a medium term target for ASEAN growth like the Philippines.

India held its budget on February 28th, and our colleagues at Val-Q share our optimism about the outlook for GDP at 7.5% this year, and possibly a current account surplus, (with the savings on oil), which will allow the Reserve Bank of India, (which already cut interest rates by 25 basis points in January, and again in March), to make a further 100 basis points interest rate cut in the next 12 months. With strong leadership at the RBI, we expect the Rupee to be stable at round 62 to the US$ with less volatility than other Asian currencies. We are encouraged by the Budget, and intend to overweight the information technology and pharmaceutical sectors, but underweight telecom. We continue to like the Indian banks, especially private and smaller cap banks with strong growth in mortgage lending.

In fact, we have now seen rate cuts in the past 10 days by nearly all Asian Central banks, including Thailand, India, Indonesia, China, Korea and Malaysia. All this is happening while the world waits for the Federal Reserve to begin to lift its interest rates: so the US dollar will remain strong for some time.

As we prepare The Bamboo Fund for launch, and opening to subscribers, between now and 31st March, we are preparing our final model portfolio with the emphasis on Hong Kong and Singapore as well as India. We believe that, in a world where deflation has become visible in Japan, China and Europe, South East Asia will represent the real growth opportunity of the next 5 to 10 years. However we are very conscious of political and currency risk and we are proceeding cautiously with our objective of 3% dividend yield and 12% total annual return to insure carefully against downside risk, and establish good long term positions.

Robert Lloyd George
March 2015

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