Tag Archives: china

Everyone Is Starting To Get It (Finally)

China is rocking worldwide markets. Some investors are getting caught off guard by the volatility. The volatility could lead to meaningful declines by year-end. On Monday morning, many investors woke up to see Dow futures down 500 points and the S&P (NYSEARCA: SPY ) futures down 3%. CNBC and Bloomberg have finally gotten the memo that the drop in the Chinese equity markets is serious. Forget Greece, forget interest rates, forget oil and forget the dollar. Those issues do not matter at the moment. The Chinese markets are in free fall and it will bring the international markets to their knees for the rest of the year. Wall street needs to come back from the Hamptons and start preparing for a serious correction. Understanding why the correction in China is not just a temporary issue requires an understanding of what pushed the market up over the past year. From June 2014 to June 2015, the Shanghai increased from 2000 to nearly 5200, a 160% increase. A large part of the run-up was funded by retail traders. Source: C alculatedRisk The Chinese markets have been largely bolstered by non-professional investors. These individuals own 85% of equities in that country. China, today, is akin to the US in 2000, when retail investors were pumping up stocks, despite truly understanding those investments. Chinese equities are rife with frauds and over-hyped companies with no tangible models of growth. These are major issues in that country and a large part of the sell-off. As those firms lose the confidence of investors, their stocks will continue to drag down the indices. With the vast majority of those involved being everyday middle-class investors, the dramatic declines will hit their consumption behavior. The Chinese economy, unlike the US, is not entirely reliant on consumer spending. Consumer spending is just ⅓ of the Chinese economy. That represents about $1.8 trillion. A large percentage of that is directed towards American products available to the Chinese people. A market decline may not cause significant GDP contraction, but will cause headaches for foreign companies in China. Source: McKinsey North American consumer discretionary companies, over the past several years, have relied heavily on growth in China to offset sluggish demand for their products in Europe and the America’s. Autos, technology manufacturers, and retailers have grown the top line, in large part, by expanding in China. If middle-class families, which represent 75% of consumer spending in that country, are seeing their wealth decline as the markets wipe out gains, they will reduce buying of American discretionary products, as the wealth effect would suggest. This is what turns this correction into a full-blown downturn for the American markets. US firms can no longer rely on China to bolster the often limited growth worldwide. Yum! Brands (NYSE: YUM ) relies on China for over half of its revenues. General Motors (NYSE: GM ), Wal-Mart (NYSE: WMT ) and just about a quarter of S&P firms are deriving the majority of their expected growth from China. Once spending in that market slows, these firms will be hard pressed in reaching their respective growth targets. The impact of the market meltdown and its effect on consumption should start to materialize in Q3 earnings and become very apparent in Q4. Investors should expect significant revisions to year-end estimates. The lowering of estimates and the eventual decline in EPS should keep the US markets lower for the remainder of 2015 and into early 2016. Markets in North America have traditionally lagged during a correction. The Asian markets began collapsing in June and the US markets are just now (as of last week) starting to fall in a serious manner. The good news, well somewhat good, is that the S&P does not tend to fall as significantly as the Shenzhen or Shanghai. While the downturn here may not be as severe, it will still cause major issues for the rest of 2015. Wall Street has gotten a pass over the past three years as the markets broadly went up. Money managers did not need to do much for returns to materialize. That is not the case going forward. Investors and professional managers need to prepare for a slow growth environment in China. A decline in the indices does not mean investors cannot make money. In July, I suggested three ETFs that trade alongside Chinese volatility. (NYSEARCA: YANG ), (NYSEARCA: YXI ), and (NYSEARCA: FXP ) are all short the Asian equity markets. Each have exploded in the past three months. If the declines persist, as I suspect, these ETFs could still have room to run. Additionally, Shorting American firms which rely heavily on China could be a great move. In June, I suggested a short on NHTC (NASDAQ: NHTC ) because that company obtains 93% of their revenue from China. That has paid off with the stock dropping by 47%. Herbalife (NYSE: HLF ) is another play here. Unlike NHTC, Herbalife has not seen a material decline in its stock, yet the company relies on China as its only growth market. If Herbalife loses growth from China, the company will massively miss the already declining revenue estimates. China is entering a downturn that will continue to wipe out trillions of wealth held by their middle class. This will turn into less consumption of American products and, therefore, lower revenue figures in the coming quarters. While the ETFs that track volatility are spiking, and may seem too risky now, there are still ample ways to make money in this market by looking at firms which disproportionately rely on China for their growth projections. Keep your eyes open and this downturn can be positive for your portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Vietnam’s Transition From A Frontier Market To An Emerging Market

Summary Vietnam is on track to become an emerging country, with rapid economic growth ahead, and the removal of the FOL in some industries beginning next month. VinaCapital’s Vietnam Opportunity Fund and Vietnam Holdings are attractive options for investors due to their low valuation, and access to shares of companies fully held by foreign investors. Investors should avoid the Market Vectors Vietnam ETF, and consider closed-end funds as the most appropriate means to gain exposure to Vietnam. The recent devaluation has created low valuation in listed equity in Vietnam; this has created a buy opportunity. Vietnam is poised to be a dominant player in Asia, as China’s economy begins to slow down, and Vietnam continues to take key steps towards being an emerging country. The further devaluation of the dong this month has negatively affected listed equities in Vietnam, although it can consequently be viewed as a buy opportunity, given that it has created substantially low valuation for a large portion of listed equities in Vietnam. Issues with the Market Vectors Vietnam ETF VNM data by YCharts The Market Vectors Vietnam ETF (NYSEARCA: VNM ) has been substantially declining due to the dong’s devaluation, although the downward trend in stock price and poor performance is not a new phenomenon for this fund. Although the fund invests more than 70% of its assets in listed equities in Vietnam, its portfolio’s performance has been a poor reflection of Vietnam, as a value based/high dividend yield approach has been extremely successful for other investment funds. Moreover, the fund also suffers due to its inability to access shares of companies fully held by foreign investors. The FOL will be removed in some industries next month , serving as a major catalyst for the financial performance of funds in Vietnam that already have a large portfolio of companies fully held by foreign investors; this benefit will not transfer to the Market Vectors Vietnam ETF. Two closed-end funds, the Vinacapital Vietnam Opportunity Fund ( OTCPK:VCVOF ) and Vietnam Holdings ( OTC:VNMHF ), have substantially lower valuation, and also have shares of companies fully held by foreign investors, most notably Vinamilk. Therefore, the best means for U.S. investors to gain access to the growth that is ahead for Vietnam is through either one of these closed-end funds. Now is a very strategic moment to invest in Vietnam due to the recent decline in stock prices, the upcoming removal of the FOL, and Vietnam’s high economic growth and successful steps taken towards becoming an emerging market. Vietnam’s Macroeconomic Outlook Vietnam has an overall substantially positive macroeconomic outlook: Annual GDP growth was most recently 6.44%, and is projected to increase to 7% by the end of this year. High level of exports , due to the relative advantage of cheap labor, although Vietnam has most recently had a trade deficit of $329 million; exports in Vietnam have, however, doubled in the past five years. Consumer spending has nearly doubled since 2010, and is projected to increase by 26.8% YoY during the 2nd quarter of 2016; this growth trend is clearly not over. Retail sales are projected to increase by 19.6% YoY during the second quarter of 2016; retail sales most recently increased by 26.7% The Vietnamese dong has been a relatively stable currency in Asia, and the FX risk is well worth taking, considering the collective low valuation and high dividend yield of listed equity in Vietnam. Removal of FOL I previously interviewed Vietnam Holdings regarding the removal of the FOL in Vietnam in some industries next month. The process is still very unclear, but this decision made for September certainly serves as a crucial step for increased FDI in Vietnam. The removal of the FOL will be company and industry specific, and based on the following factors: Some industries, such as the banking industry, will choose not to remove the FOL, keeping foreign ownership at 10-30%. The decision to increase the FOL also requires approval from the company. Companies with large SCIC stakes will also be less likely to increase the FOL. Despite the lack of clarity and full initiation next month, this serves as a major catalyst for Vietnam’s stock market. Investment funds that have prepositioned themselves by building up a strong portfolio of companies fully held by foreign investors, even at the painful expense of a 20% premium, are sure to be rewarded in the future. Strength over China As China experiences slowed growth in GDP and exports, Vietnam continues to emerge as a superior alternative for manufacturing, due to its relatively lower wages. A report from Standard Chartered Bank recently stated that relocating to Vietnam could reduce operating costs by 19%; wages in China are expected to continue to rise by 8.4% in 2016. Vietnam can also further benefit from the soon to be initiation of the Trans-Pacific Partnership Agreement. Vietnam also has the relative advantage of lower corporate taxes , which should be lowered from 22% to 20% in 2016, representing a 5% reduction to China’s corporate taxes. Vinacapital Vietnam Opportunity Fund Vietnam Opportunity Fund is a closed-end investment company that invests its assets in listed and unlisted equity in Vietnam and surrounding countries in Asia. Some of these factors make it a strategic pick for the growth that is ahead for Vietnam: High discount : Its London listing trades at an 18.35% discount. Low valuation: The fund has a P/E 10.54, and is trading substantially below its book value, with a P/B of 0.68. The fund invests 15.1% of its assets in Vinamilk and DHG Pharmaceutical, two companies fully held by foreign investors. The 52-week change of -16.6% should be seen as a buy opportunity, as it has created substantially lower valuation. The fund has previously had a higher P/E, and its valuation is lower than the average valuation in Vietnam. High upside potential and low valuation of other listed equity, including Hoa Phat Group (8%) and Petrovietnam Drilling and Well Services (3.8%). Acceptable liquidity: The fund has an average 3-month trading volume of 13,650. Vietnam Holdings Vietnam Holdings is a closed-end investment company that invests its assets exclusively in Vietnam, with a value-based investment approach that incorporates social, environmental, and corporate governance standards. The fund is extremely undervalued, although the liquidity risk should be noted, as its average 3-month trading volume has recently increased to 859; its listing on the London Stock Exchange has substantially higher valuation . The following factors make this fund stand out, and an appropriate means to leverage from Vietnam’s future economic growth: Extremely low valuation : The fund has a P/E of 6.03, and is trading below its book value with a P/B of 0.92. The fund invests approximately 20% of its assets in companies fully held by foreign investors, including Vinamilk, DHG Pharmaceutical, FPT Corporation, and Viconship. The fund has had an impressive 52-week change of 16.92%, yet the valuation is still extremely low. In addition to strategically investing in companies fully held by foreign investors, the fund also has a very successful portfolio of companies with low valuation, including Hoa Phat Group, Petrovietnam Drilling and Well Services, and Binh Minh Plastic. Conclusion Now is a strategic time for investors to turn their attention to Vietnam, due to the strong benefits ahead, and the decline in the price of many funds due to the devaluation of the dong. The upcoming removal of the FOL in September will further serve as a catalyst for increased FDI and economic growth in Vietnam; this is also a crucial step towards Vietnam becoming an emerging market. Vietnam has a very favorable economic outlook, with a projected increase in annual GDP growth, consumer spending, and retail sales. Listed equity in Vietnam has the key advantages of having low valuation and high dividend yields, which can prove to be a valuable endeavor for value investors. Unfortunately, gaining access to this growth in not simple for U.S. investors, as the Market Vectors Vietnam ETF has historically been a poor reflection of Vietnam’s potential. Therefore, U.S. investors should turn their attention towards closed-end funds, which include Vietnam Holdings and VinaCapital Vietnam Opportunities Fund. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.