Mobius Says Buy Commodity Stocks As Rebound's Just Beginning

  • Raw-material prices, stocks `went down too far,' Mobius says
  • Templeton Emerging Markets adding holdings of China producers

Mark Mobius is piling into commodity stocks in China, saying that a rebound in raw-material markets is only getting started after prices sank too far and that gains may be extreme.

Templeton Emerging Markets Group will add more raw-material stocks from Asia’s top economy, according to Mobius, executive chairman of the group, who’s been investing in emerging markets for more than four decades. Many of them will be good holdings for the long term, he said in an e-mail interview, without identifying particular companies.

China’s commodity producers, which were the worst mainland equity investments over almost a decade, have led this year’s rebound as China boosted stimulus and local investors swarmed into the nation’s futures markets, with bets on everything from steel bars to cotton. The Bloomberg Commodity Index rallied for a second month in April, and assessments are stacking up that the worst of the rout is now over, including from industry veteran Tom Albanese, a former head of Rio Tinto Group.

‘Down Too Far’

“We have already seen how both commodity prices and the commodity stock prices went down too far, beyond realistic assessments,” Mobius said. “We can now expect movement on the upside to be extreme in percentage terms. If there is a move down, there is a good chance that we would increase.”

The Bloomberg Commodity Index, a measure of returns from 22 raw materials, surged in April to extend a rebound from the lowest since 1991, and has gained 6.5 percent this year. A measure of materials producers on China’s large-cap CSI 300 Index rallied 27 percent from the January low to a peak in mid-April, before losing about 5 percent.

Not everyone is bullish about the outlook. Commodity prices may ease in the third and fourth quarters, Graham Kerr, head of miner South32 Ltd., said at a conference in Sydney on Wednesday. Goldman Sachs Group Inc. said in a note dated April 22 that while there were signs of a revival, including gains in oil, it was premature to embrace these so-called green shoots.

Property Revival

China’s investors have honed in on raw materials this year amid signs of a pickup in demand after policy makers talked up growth and the property market rebounded, with rebar, coking coal and cotton all surging. Still, the explosion in futures trading alarmed regulators and prompted exchanges in Shanghai, Dalian and Zhengzhou to boost fees and issue warnings. 

“There is no question that derivatives and specifically commodity-futures prices have an impact on real prices,” Mobius said. “There is of course a knock-on impact on stock prices of commodity companies since the market takes its lead from commodity prices even if those prices may not be realistic, and unduly impacted by futures prices.”

Mobius has been consistent in recent weeks in signaling his optimism. In February, he told Bloomberg TV that Templeton Emerging Markets was buying Chinese stocks selectively on speculation assets will rebound toward the year-end, and this month said he expected oil to rally back to about $60 a barrel.

While commodity markets will remain volatile, the long-overdue uptrend will continue, according to Mobius. “Many, not all, of the companies are good investments for the long term and even, in some cases, for this year,” he wrote. “Yes, the rising trend is sustainable but keeping in mind the volatility.”


EPF To Raise Equity-Based Assets

This article first appeared in The Edge Financial Daily, on May 4, 2016.

KUALA LUMPUR: The Employees Provident Fund (EPF) is looking at increasing its equity-based assets as the provident fund aims to deliver real growth for its members and investors, said chief executive officer Datuk Shahril Ridza Ridzuan said.

Shahril said the EPF’s goal is to ensure its rate of return is above Malaysia’s annual inflation rate.

“Apart from the 2008 financial crisis, EPF has always gone above and beyond our promise of delivery of real returns,” Shahril told the media yesterday in conjunction with the launch of the EPF’s 2015 annual report.

EPF deputy chief executive officer (investment) Datuk Mohamad Nasir Ab Latif said in 2015 that equities made up 59% of EPF’s investment income, although only 44% of its investments were equity-based.

Mohamad Nasir noted that equities generate higher returns compared to other assets.

In geographical terms, Shahril said he expects the EPF to focus more on domestic investment due to poorly performing foreign markets, as well as the 26% limit EPF has on its investment globally.

The EPF’s annual report revealed 52% of its investment income had come from foreign investment. This was despite overseas assets constituting 25% of the EPF’s total assets.

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Fosun's Guo Pivots To Emerging Markets After Europe, U.S. Spree

  • Chinese billionaire is self-styled Warren Buffett disciple
  • Shift to developing nations marks new phase for conglomerate

Guo Guangchang, the Chinese billionaire and self-styled disciple of Warren Buffett, is looking to invest in emerging markets for the first time as his conglomerate backs off of its buying spree in developed nations.

“There are fewer and fewer investment opportunities as the overall valuation becomes expensive, especially in Europe and the U.S.,” Guo, the 49-year-old chairman of Fosun Group, said in an interview Thursday. The company will “actively look” for investments to make in countries including Brazil, Russia, India and China, he said.

Moving to developing countries would mark a new phase for Fosun after it spent about $10 billion since 2013 buying insurers, banks and fashion companies in countries from the U.S. to Italy. Emerging-market stocks and currencies have tumbled over the past three years as commodities slumped and growth slowed.

“Our strategic deployment in Europe and the U.S. is relatively complete,” Guo said. “In emerging markets, it has just started. It fits our need as a global company.” Industries the company is considering include commodities, pharmaceuticals and tourism, he said.

Scrapped Deals

Fosun has slowed down its overseas expansion after announcing more than $4 billion of acquisitions in 2015 as it works to reduce debt and consolidate existing businesses. In February, the company abandoned a more than $460 million bid for Israeli insurer Phoenix Holdings Ltd., two months after walking away from a deal to buy Anglo-German banking group BHF Kleinwort Benson Group.

The retreat came before Beijing-based Anbang Insurance Group Co. abruptly withdrew its offer for Starwood Hotels & Resorts Inc., raising concern that the Chinese government may have pressured its companies to slow down following unprecedented overseas purchases earlier this year.

Guo, who went missing for three days late last year to assist in a government probe, said Chinese officials have never influenced his business decisions. The deals are scrapped because their valuations no longer made business sense, he said.

“We invest only when the strategic need, timing and valuation align,” said Guo. “If you think valuation is high, you give it up. That is very normal.”

Shares Slump

He declined to comment on his brief disappearance in December or what officials asked him about, saying business has returned to normal. Over the past 12 months, shares in Fosun International have fallen 50 percent, compared with a decline of 26 percent in the benchmark Hong Kong Hang Seng Index.

Guo co-founded Fosun with four friends and about $6,000 in capital in the 1990s. He later borrowed the investment approach used by Buffett’s Berkshire Hathaway Inc., buying insurance companies to secure long-term funding that can be deployed to expand across a range of businesses.

Over the last two decades, he built an empire sprawling across insurance, real estate, health care and entertainment and acquired global household names such as entertainment company Cirque du Soleil Inc., resort company Club Mediterranee SA and Italian suitmaker Raffaele Caruso SpA.

Junk Rating

Fosun has transformed itself in recent years from a steel and real-estate company to a conglomerate that focuses on consumer businesses, in line with the broad transition of the Chinese economy. By the end of last year, revenue from steel declined to 29 percent of the total from 77 percent in 2008, while its insurance business jumped to 19 percent from zero just three years ago. Overseas business accounted for 34 percent of its $12.5 billion revenue last year, up from just 2 percent in 2013, regulatory filings show.

Guo said the company will keep reducing debt levels in a bid to obtain an investment-grade credit rating. The company is rated BB at S&P Global Ratings, two steps below the investment grade.

While confident that the Chinese economy will grow at the pace of 5 percent to 6 percent over the next decade, Guo said he always has “a sense of crisis” as an entrepreneur.

“The hotter the market is, the stronger sense of crisis one should feel and always prepare ahead,” he said. “It’s like treading on thin ice and you should be cautious.”


Malaysia Names Zeti’s Deputy As New Central Bank Governer

  • Markets pared losses after Najib names Muhammad as new chief
  • Governor Zeti has been seen as stable figure for Malaysia

Malaysia named central bank Deputy Governor Muhammad Ibrahim as successor to Governor Zeti Akhtar Aziz when she steps down at the end of the month after 16 years at the helm. The ringgit gained and stocks pared losses.

Muhammad has been appointed for a five-year term that starts May 1, Prime Minister Najib Razak said in a statement on Wednesday.

Zeti’s term at Bank Negara Malaysia is coming to an end at a time when investors are looking for signs of stability in a nation rocked by a political scandal and alleged financial irregularities at state fund 1Malaysia Development Bhd. She has kept monetary policy steady to aid domestic demand as Najib counts on consumers to support growth amid constraints in boosting government spending.

“This is much-needed good news for Malaysia as concerns over 1MDB had damped confidence," said Trinh Nguyen, an economist at Natixis Asia Ltd. in Hong Kong. "The rallying of the ringgit is an exhaling of relief for investors, Malaysians and watchers.”

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The ringgit reversed a drop after news of the appointment, gaining 0.3 percent to 3.9135 per dollar as of 5 p.m. in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. The FTSE Bursa Malaysia KLCI Index closed little changed, paring losses of as much as 0.6 percent.

Investors and analysts had been concerned Najib may name a governor who was more politically aligned to the government, compromising the independence of the central bank.

Zeti, 68, is one of Asia’s longest-serving central bank heads. She took office in 2000, two years after her stint as acting governor in 1998 amid a then-controversial move to peg the ringgit to deal with capital outflows. With a doctorate in economics from the University of Pennsylvania and known for her no-nonsense manner, Zeti had been among central bankers least likely to surprise markets.

Her successor will have to contend with a slowing economy and volatile capital flows, as well as rebuilding reserves that are about 30 percent below a high seen in 2013. Growth is forecast to reach 4 percent to 4.5 percent this year, down from 5 percent in 2015, while inflation is projected to accelerate from a year ago.

Najib said on Tuesday that the country faces an "uphill battle"over the next five years in its plan to become a developed nation.

Policy Continuity

“I’m confident that under his leadership, Bank Negara Malaysia will continue assisting the government with advice to further strengthen Malaysia’s economy, as well as managing monetary policy, and regulating and developing the financial services industry,” Najib said of Muhammad.

Muhammad, who was born in 1960 and has a master’s degree from Harvard University, joined the central bank in 1984 and had been deputy governor since June 2010. He oversees international reserve management, and money market and foreign exchange operations. He has served in areas from banking supervision and regulation to insurance and offshore banking.

He was managing director at Danamodal Nasional Bhd., a bank recapitalization agency created under the auspices of Bank Negara during the Asian financial crisis in the 1990s.

“Given that it’s an internal appointment, we should expect a continuation of
policy that’s been set by Zeti," said Sim Moh Siong, a foreign-exchange strategist at Bank of Singapore Ltd. "Overall, this is a market-friendly appointment.”

Currency Volatility

The ringgit has rebounded about 10 percent this year to be Asia’s best performer, as a rally in crude prices eased concern about the finances of the oil-exporting nation. Foreigners have been net buyers of Malaysian stocks for 10 straight weeks.

Appointed by former Prime Minister Mahathir Mohamad, who rejected the notion of an independent central bank, Zeti won more powers and autonomy for Bank Negara during Najib’s premiership with a mandate to ensure financial stability. 

That goal was tested last year with the ringgit tumbling 19 percent against the dollar, in part after a multi million-dollar political funding scandal involving Najib came to light and investors grew wary of risks posed by 1MDB.

The reputation of the government took another hit Tuesday when 1MDB defaulted on a $1.75 billion bond amid a dispute with Abu Dhabi’s International Petroleum Investment Co., the co-guarantor of the bonds. The missed payment triggered cross defaults on 7.4 billion ringgit ($1.9 billion) of 1MDB debt, including borrowings that are guaranteed by the Malaysian government.

Zeti had been uncharacteristically blunt in her criticism of 1MDB and the central bank had urged criminal proceedings at least twice against the company. The attorney general’s office dismissed the recommendations as it concluded there was no wrongdoing. Najib chairs the advisory board of 1MDB and has faced calls to resign as premier over alleged mismanagement at the fund.


China's White-Collar Wages Outstrip Southeast Asian Salaries

The labor cost advantage enjoyed by some Southeast Asian economies over China goes beyond factory jobs, according to a new study by Willis Towers Watson.

Average base professional salaries in China are 1.9 to 2.2 times those of Vietnam and the Philippines, the study said.

Entry-level white-collar professionals in China receive an average annual base salary of about $21,000, or 30 percent more than their counterparts in Indonesia, according to WTW's "2015/2016 Global 50 Remuneration Planning Report".

"Wages in China have been rising for a while," Sambhav Rakyan, WTW's data services practice leader for the Asia Pacific, said in a phone interview on Friday. "The lower salaries in Association of Southeast Asian Nations economies are giving them a real competitive edge and we feel this will lead companies to reconsider whether they need to relocate operations that were once based in China. The aging workforce and shrinking workforce in China suggest salaries there will remain higher than in the ASEAN markets minus Singapore."

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The report covers the professional level and middle, senior and top management. It shows that, across the board, China base salaries are about five to 44 percent higher than Indonesia, the most expensive labor market in the emerging ASEAN economies.

"If companies are looking at labor costs they see that China wages are getting higher," said Rakyan. "If they were to move their plant from China to Indonesia or Malaysia, they would be able to save on labor costs. That's just one factor among a lot of other factors that affect moving operations, such as infrastructure and the availability of labor.

"We have certainly seen a trend where companies have been taking a more conscious approach to looking at whether there is now a competitive advantage for them being in China based on the labor cost alone, which is a big cost."

However, China still enjoys some advantages that mean it remains attractive to some employers, he said.

"Though China is much more expensive, its more mature infrastructure and skilled workforce will likely continue to attract companies."

The competitive advantage enjoyed by the low-cost economies may be short-lived. "Wages have gone up in China, it will happen in Vietnam in another 10 years, and then it may be Myanmar after that," said Rakyan.

"In Vietnam and some of the other markets it's not easy to find middle management or senior management talent, and that will command a premium compared with the blue-collar sector and entry-level professionals."


SC Rolls Out Region's First Framework For Peer-To-Peer Financing

KUALA LUMPUR: The Securities Commission Malaysia (SC) yesterday released the region's first comprehensive regulatory framework for peer-to-peer financing (P2P), an online platform which matches local unlisted businesses to both retail or sophisticated investors.

Investors who invest through a P2P platform are buying securities in the form of an investment note or Islamic investment note, which will be issued by the businesses or companies. The issuer is then obliged to pay investors over a time period, with interest or profit.

The new framework comes into force on May 2, 2016.

P2P, which currently runs into hundreds of billions of dollars worldwide, was first introduced more than a decade ago, and is expected to go live here in early 2017.
Markets such as the UK, the US, Hong Kong and Singapore already offer P2P. China has about 3,600 P2P platforms currently.

However, a key difference between the Malaysian version and others is that no individual seeking personal financing will be allowed on such a platform to raise funds.

SC officials, in a technical briefing, said this is in keeping with their focus to grow market-based financing innovation for small and medium enterprises.

The move is also in line with Bank Negara Malaysia's policy in maintaining vigilance on excessive growth of personal loans in the banking system, following double-digit growth in the segment a couple of years ago.

Submissions for applications to be qualified as P2P operators can be handed in to SC from May 2, 2016.

Parties seeking to be P2P operators must be locally incorporated and have a minimum paid-up capital of RM5 million.

There is no investment limit imposed on a sophisticated investor and angel investor, while retail investors are strongly advised to limit their investment exposure in P2P to a maximum of RM50,000 at any point of time.

In 2015, Malaysia became the first country in Asean to introduce a regulatory framework to facilitate equity crowdfunding, with six registered equity crowdfunding platforms expected to be fully operationalised this year.

Malaysia Says $1.5 Billion Sukuk Oversubscribed

KUALA LUMPUR (April 21): Malaysia said on Thursday that it has successfully priced a $1.5 billion dual-tranche benchmark Islamic bond, or sukuk, which was oversubscribed by 4.2 times.

The sukuk is split between a $1 billion 10-year tranche and a $500 million 30-year trache at a rate of 3.179 percent and 4.080 percent respectively, the ministry of finance said in a statement.

The deal was oversubscribed by 4.2 times, attracting an aggregate interest of over $6.3 billion from a combined investor base of over 195 accounts, the statement said.

The deal was priced after a roadshow across global financial centres, including Kuala Lumpur, Hong Kong, Singapore, Abu Dhabi, Dubai, London and New York.

CIMB, HSBC, J.P. Morgan and Maybank acted as the joint bookrunners and joint lead managers for the offering. - Reuters