logo-loader

Market Commentary: Himalayan Fund NV - Fullermoney

Last updated: 06:04 01 Oct 2011 EDT, First published: 05:04 01 Oct 2011 EDT

no_picture_pai

Commentary by Eoin Treacy

Market Commentary: Himalayan Fund NV - Thanks to Ian McEvitt for this edition of his fund's report which may be of interest to subscribers. I shared a panel with Ian at an event for members of The Chartered Institute for Securities & Investment last week. He has an expansive knowledge of India and its internal dynamics. I commend his note to subscribers. Here is a section:

The tail of the monsoon continues to wag, with rainfall again above the LPA: the cumulative rainfall for this year is now 4% above the LPA. Reservoir levels are now at 87% of capacity, about 15% above the same time last year. Sugar production is expected to reach 24.6million tones, enough to raise expectations for export restriction to be lifted. Already the ban on non-basmati rice exports is to be eased. Food inflation dropped to 8.8% in the latest weekly figures but some commodity prices are still a bit sticky. The recent sell-offs in global commodity markets are yet to be reflected. WPI inflation is expected to remain in the 9-10% range until December, when base effects and cooler commodity markets should see it decline steadily by the end of FY12.

My view - Inflation has been a headwind for the Indian equity market over the last couple of years. The RBI raised interest rates aggressively, 12 times since March 2010, in an effort to combat these pressures. The spread between the 10yr and 2yr, which we view as a helpful proxy for credit availability, has compressed to zero over the last year, which is a clear depiction of how tight monetary conditions have become. The success of this year's monsoon, following last year's favourable conditions has helped to correct a water shortage and should promote growing conditions.

This section continues in the Subscriber's Area.


Email of the day (1) - on legacy European cross rates:

"I cannot find anywhere on the internet a database showing the FRF/DEM and ITL/DEM evolution from 1970 to 2000.

"What I am trying to do is to plot the trade & services balance between Germany and France on one side and Germany and Italy on the other side (yet France alone would be a good start) together with the evolution of both forex before the EUR.

"From memory, the DEM always appreciated vs. both currencies whilst the trade balance remained positive for Germany. Thanks for your help".

My comment - Thank you for this interesting question. Subscribers may have some additional input. I posted a number of charts for legacy European currencies versus the US Dollar in Comment of the Day on November 23rd 2010. Bloomberg no longer carries data for cross rates for the legacy Eurozone currencies. However, they do still carry spot rates for these currencies versus the US Dollar. Since all currency quotes are ratios and we have access to Italian Lira, French Franc and Deutsche Mark, US Dollar spot rates it is possible to reverse engineer the cross rates that existed prior to the adoption of the Euro.

This section continues in the Subscriber's Area.


EFSF- Ratification: Remaining Agenda and Remaining Risks - Thanks to a subscriber for this short report by Mark Wall for Deutsche Bank containing a calendar of important dates for the ratification of the European Financial Stability Facility. It is posted without further comment but here is a section on Slovakia:

Among EMU countries, the ratification of EFSF reforms by the Slovak parliament is subject to the highest degree of uncertainty. Even though Slovakia's government, led by PM Iveta Radicova, officially supports the reforms, the junior coalition partner Freedom and Solidarity Party (SaS) strongly opposes the endorsement of the euro-zone rescue package. The euroskeptic party holds 22 of 79 seats in the governing four-party coalition which itself has a four seat majority in the 150-member parliament. Richard Sulik, the leader of SaS, required Slovakia to be the last country voting on the EFSF reform. It is now expected to go to parliament on 25 October. Without SaS support, PM Radicova would have to team up with the largest opposition party, the social democratic Smer-SD, to ratify the euro zone rescue package. But Smer-SD leader, former PM Robert Fico, said his party would back the proposal only if the coalition voted for it unanimously.

In the event that the government fails to secure its own majority, a break-up of the coalition seems likely. A first concession by PM Radicova to SaS on Tuesday was an offer that the government authorities would have to vote on all individual EFSF disbursements. SaS dismissed the proposal but also said it would not be opposed to negotiations in general. Sunday evening, for example, a high ranking SaS MP demanded on TV that a holding company should be set up where borrowing countries would deposit assets against loans, a proposal similar to the Finnish request for collateral. Although PM Radicova has so far stopped short of tying the vote on the EFSF to a confidence vote, such a move would become more likely if SaS can be pushed into a more defensive position by facing sufficiently generous offers. With four more weeks before the vote is to be held, the government looks likely to engage in some more haggling and face increasing pressure from European partner countries as well as institutions such as the central bank and the Slovak president which have already raised their voices. The outcome of Finland's attempt to secure some loan collateral should prove interesting, and may serve as a template for a Slovak solution.


EURECAproject Hellenic Recovery Fund -a solution for Greece and Europe - Thanks to a subscriber for this interesting report from Roland Berger Strategy Consultants. It is posted in the Subscriber's Area but here is a section:

1.Bundle Greek state assets worth EUR 125 bn in a central trustee organization (holding company)

2.Sell entire holding company to European Union for EUR 125 bn

3.Allow Greek state to use proceeds to repurchase bonds from ECB and EFSF

4.In so doing, reduce Greek debt from 145% to 88% of GDP

5.Reduce ECB's and taxpayers' exposure to Greek debt to zero

6.Invest EUR 20 bn in restructuring assets to maximize value of privatization (plus EUR 40-60 bn)

7.Add 8% GDP stimulus to Greek economy as side-effect of restructuring program

8.Drive growth swing from -5% to +5%, producing additional tax revenue equivalent to 4% of GDP

9.Cut interest burden by more than 50% thanks to debt reduction and rating improvements

10.Combine (8) and (9) to enable debt repayment worth 1% of GDP p.a., leading to a debt ratio that is clearly within the 60% debt ceiling of the Maastricht criteria.

11.Payout of any surplus to Greece in 2025 to fund additional debt reduction -Any shortfall should be covered by Greece provided the required sum does not exceed 30% of GDP (i.e. no more than EUR 150 bn by 2025/26)

12.Side-effect 1: CDS spreads will collapse, causing speculators to incur losses and preventing attacks on Ireland, Portugal and Spain

13.Side-effect 2: 100% privatization of Greek public sector will stamp out corruption and foster long-term growth and investment

14.Side-effect 3: Greek banks holding Greek bonds will see value gain of EUR 30 bn, restoring solvency of banking system and reducing collateral risk for ECB by 95%, thereby ending Greece's credit supply crisis

15.Safe non-default repurchasing option on Greek bonds could also be implemented as an option

My view - Opinions towards the Eurozone sovereign and financial debt crisis have become polarised over the last few weeks. Increasingly apocalyptic views are being expressed by one cohort while the other appears to be "spitballing" ideas for how this crisis may be resolved. The above is an example of the latter.

This section continues in the Subscriber's Area.


Email of the day (2) -
on shadow banking in China

"I want to pass through some of disturbing new developments in China to the FM community. It seems these have not been picked up by the western media.

"A Financial earth quake just hit Wenzhou, Zhegjinag province. The city is the vanguard of the reforms since 1978. It is now one of the most dynamic and richest cities in China with a large base of export oriented small to midsized private manufacturing enterprises. On 9/24, the owner of the largest spectacle manufacturer disappeared. It turned out he is on the hook for a bank loan and high interests private loans totaling about two billion RMB which he cannot possibly repay. On 9/25, another three factory owners disappeared. On 9/27 the owner of one mid sized shoe manufacturer committed suicide by jumping off a high building. The city is in a panic mode.

"All these happen as the chain of credit collapsed. The victims are either borrower of high interest private loans that cannot repay or lenders that cannot get their money back. The high interest private loans are very popular in certain areas in China. The interest is normally around 30%-40% annualized and some can go as high as 100%. Companies that have difficulty getting loans from banks go to these private pools to get working capital. It's kind of like a shadow bank. There is no collateral for these loans. Usually you need a group of people (companies) to guarantee the loans, so if you don't pay everyone that is guaranteeing your loan is on the hook. In good times the companies can pay these loans as they have decent margin and the turnover is extremely high. Now the margins of these export company's drops below 5% and there is no way they can repay these loans. As the banking saving rate is very low more people are willing to put money into these pools. Even companies with money are putting their money into this game as it is much profitable than their normal business. These is report saying about 20% of the public companies are conducting these private lending.

"At this point it's difficult to know how big the problem is and where the bank run will stop. But given the weak charts of Shanghai Composite and HSI, we really need to be cautious. The issues in Europe are known unknowns. The trouble in China could really trigger another round of panic."

My comment - Thank you for this illuminating email. This article from XinhuaNet.com carries some additional details. Here is a brief sample:

Credit Suisse estimated this week that in China the informal lending market could be worth 4 trillion yuan and is growing by 50 percent annually. Credit Suisse also said the surge in private lending over the past 12 months threatens financial stability.

This section continues in the Subscriber's Area.


Email of the day (3) - on Middle Eastern debts post the "Arab Spring":

"What about the middle east? With all the talk about European banks and exposure to the PIGS. How big a hit is Egypt or Libya? They are not even mentioned as write offs."

My comment - Thank you for this question which may be of interest to other subscribers. Despite civil upheaval, Egypt does not appear to be in any danger of imminently defaulting on its debts. It still has rather favourable foreign currency reserves and according to Wikipedia, Egypt's external debt was $29 billion in 2007. Despite Libya's civil war, its oil wealth makes it unlikely to default. In addition both these countries have recourse to a weaker currency with which to improve competitiveness.


Email of the day (4) - on additions to the Chart Library:

"Could you please include the chart of Chinasoft International [354.HK] in the chart library. Please kindly confirm when done. Many Thanks,"

And

"Would appreciate if we can have this instrument in the chart library:

"Elements Rogers Agric ETN listed in NYSE Euronext, code = RJA

"Thanks in advance."

My comment - Thank you for these suggestions which have been added to the Chart Library.


Speaking engagements - I have agreed to participate in couple of events at this year's World Money Show in London. The times and dates for these are.

Panel discussion "Global investing: Where in the world are the next breakout winners?" 4.30 pm - 5.30pm on Friday November 11th.
I will also host The World Money Show's inaugural Alumni Coffee/Tea Meet & Greet between 8.15 am - 9.15am on Saturday November 12th.

The Chart Seminar 2011 & 2012 - The early booking rate for the London seminar in November expires today.

Following a sell-out tour to Singapore and Sydney earlier this year, The Chart Seminar, now in its 42nd year, will be going on tour again next year. Interest in both our US seminars for 2012 has been brisk so far. The New York seminar is now 37% full and the San Francisco seminar is 38% full. The London seminar in November is more than 50% full.

Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com.

The date and venues for my seminars in 2011 and so far in 2012 are:

London - November 3rd & 4th 2011 at the Radisson Edwardian Hampshire

San Francisco - April 16th &17th 2012 Nikko Hotel

New York - April 23rd & 24th 2012 at The Manhattan Club at 800 7th Avenue

The full rate is £950 + VAT. The early booking rate of £875 for non-subscribers expires on September 30th for the London seminar and January 30th 2012 for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.


Please note - David is away and will return on October 17th.

ARway.ai announces multiple new SaaS developer contracts in both the United...

ARway.ai (CSE:ARWY, OTCQB:ARWYF) Chief Executive Officer Evan Gappelberg joined Steve Darling from Proactive to announce multiple new SaaS developer sign-ups for its augmented reality experience platform, focusing on AR indoor navigation. These partnerships represent significant milestones in...

18 minutes ago