On 20 October 2008, Citic Pacific disclosed that it had incurred losses of HK$15.5 billion from using currency accumulators to hedge against a rise in the Australian dollar. Citic Pacific directors and management are being heavily criticized for not disclosing the losses earlier when they had known of the problem at least 6 weeks before the public announcement.
Company shares fell 42 percent between Sept 7, when the board learned of the company's exposure to risk, and Oct 20. Hong Kong's benchmark Hang Seng Index dropped 23 percent over the same period.
The red-chip group purchased equipment and supplies in Australian dollars and euros. To help fund the mining endeavor, group finance director Leslie Chang signed derivative contracts that stood to profit the company, as long as the US dollar grew weaker against the Australian currency.
When the financial crisis exerted a downward pressure on commodities prices last summer the Australian dollar fell sharply against the US dollar. The resulting loss may be the biggest derivatives loss ever reported by a Chinese company.
As a result of the losses, Citic Group had to step in to save the company from going under. Shareholders of Citic Pacific have now approved the issue to the parent Citic Group of US$1.5 billion in convertible bonds which on conversion will give the parent company majority control with 57.6% (up from 29.4%) diluting management shareholder Larry Yung.
According to a statement to the Stock Exchange, Citic Pacific revealed that its entire board of directors was being investigated by the SFC over the incident. Those under the investigation included Citic Pacific Chairman Larry Yung, Citic
Pacific Managing Director Henry Fan and 15 other directors of the
company, while Yung’s daughter, Frances Yung, former group finance
director Leslie Chang and former financial controller Chau Chi-yin were
not on the investigation list, papers reported.
Citic Pacific’s disclosure that all its directors were subject to the SFC’s investigation was made to comply with amendments to the Listing Rules that went into effect on 1 January. The amendments require continuous and timely disclosure by listed companies of information concerning directors who are subject to any investigation, hearing or proceeding by any securities regulatory
authority, or any judicial proceeding in which a violation of any securities
law or regulation is alleged. Many listed companies made similar announcements on Friday to comply with the amended rules since some of their board members were also Citic Pacific directors.
Friday, January 16, 2009
Investor Sentiment and Forecast for 2009
The J.P. Morgan announced that the J.P. Morgan Investor Confidence Index in HK moved up slightly from the previous quarter when sentiment was at its weakest.
The Index is designed to measure the outlook of retail investors in the local market over the next six months. The index rose to 98 in December from 95 in September, when it fell below its neutral level of 100 for the first time since July 2006. The December index shows that overall investor confidence in Hong Kong has stabilized although investors are still wary of the risk of a deeper economic recession in the next six months.
Hong Kong investors anticipate that the employment market may deteriorate further over the next six months, according to the survey. 44% of those surveyed expect an increase in the Hang Seng Index over the next 6 months from the current level. 39% expect the Hang Seng Index to exceed 16,000 at the end of June 2009.
The index covers six areas: Hong Kong stock market performance, the local economic environment, the local investment environment, the global economic environment, personal asset valuations, and amount of investments. Each of those index components registered an increase in the latest survey, with the exception of plans to increase investments.
Both aggressive and conservative investors continue to shift their attention from overseas to the Hong Kong market. Portfolio strategists will tell you that the high concentration of equity investments in the local market may limit the potential scope for returns when the global economy begins to recover, and also increases the risk of portfolio volatility from over-dependence on a single market. However, all portfolio management theories have been thrown out the window this time around. So much for diversification (geographic, industry, asset class, currency). Everything got clobbered.
Of course, retail investors are always the worst predictors of the market.
I don't see any real improvements until after the April final results reporting season. HK has the longest reporting period of any of the developed markets. Final results have to be reported with 3 months.
Institutional investors are sitting on their hands right now and waiting for results announcements. No one wants to buy now and finish with egg on their faces when the results come out and the company announces huge "hedging losses".
So things will be very volatile between now and then. Morgan Stanley just downgraded Hsbc with a target of 52 (was 75 now 66). The market went up 1,200 points on the first 2 days of trading to 15,500 and now has given up more than 2,000 points!
The Index is designed to measure the outlook of retail investors in the local market over the next six months. The index rose to 98 in December from 95 in September, when it fell below its neutral level of 100 for the first time since July 2006. The December index shows that overall investor confidence in Hong Kong has stabilized although investors are still wary of the risk of a deeper economic recession in the next six months.
Hong Kong investors anticipate that the employment market may deteriorate further over the next six months, according to the survey. 44% of those surveyed expect an increase in the Hang Seng Index over the next 6 months from the current level. 39% expect the Hang Seng Index to exceed 16,000 at the end of June 2009.
The index covers six areas: Hong Kong stock market performance, the local economic environment, the local investment environment, the global economic environment, personal asset valuations, and amount of investments. Each of those index components registered an increase in the latest survey, with the exception of plans to increase investments.
Both aggressive and conservative investors continue to shift their attention from overseas to the Hong Kong market. Portfolio strategists will tell you that the high concentration of equity investments in the local market may limit the potential scope for returns when the global economy begins to recover, and also increases the risk of portfolio volatility from over-dependence on a single market. However, all portfolio management theories have been thrown out the window this time around. So much for diversification (geographic, industry, asset class, currency). Everything got clobbered.
Of course, retail investors are always the worst predictors of the market.
I don't see any real improvements until after the April final results reporting season. HK has the longest reporting period of any of the developed markets. Final results have to be reported with 3 months.
Institutional investors are sitting on their hands right now and waiting for results announcements. No one wants to buy now and finish with egg on their faces when the results come out and the company announces huge "hedging losses".
So things will be very volatile between now and then. Morgan Stanley just downgraded Hsbc with a target of 52 (was 75 now 66). The market went up 1,200 points on the first 2 days of trading to 15,500 and now has given up more than 2,000 points!
Saturday, January 10, 2009
"Blackout Period"
Recently front-page advertisements have been taken out in the local papers protesting against a change in HK’s Stock Exchange rules which came into effect on 1 January 2009. Over 200 listed companies have signed a letter protesting this rule change that in their opinion will undermine the viability of Hong Kong’s market making it easier for unwarranted hostile takeovers, corporate exits, reduction in stock market liquidity and exodus of management talent.
Under the old rules directors and managers of listed companies were allowed to trade shares in their companies until a month before results are announced. The problem is that listed companies are allowed three months after the end of the period to report half-year results, and four months for the year-end. This meant that they were able to trade on information that was not publicly available between the end of the reporting period and the start of the “black out period” i.e. for two months before the interim results were reported, and three months for the final results.
In theory, the Listing Rules also require companies to announce meaningful events as soon as practicable, and the SFC does have the power to investigate insider dealing. But such disclosure is still problematic and after the fact. For example, recently Citic Pacific only disclosed news of a $2 billion currency loss six weeks after the fact was known to the directors.
Under the new rules which were originally promulgated in January 2008, directors and managers are not allowed to trade shares in their companies until after the results are announced. Therefore, if the companies continue to make full use of the 3 month interim reporting period and the four months final reporting period, directors and managers are barred from trading for a total of seven months.
In the US, financial results are reported quarterly and must be disclosed within 40 days of a quarter-end and 60 days of a year-end. Thus, if a listed company in HK can announce interim results within 40 days and final results within 60 days (using the US as rule as an example), the total “black out” period is only 100 days and not 7 months.
The problem, of course, is that auditors have to co-operate and the auditors would like to have as much time as possible after the year end before giving the company a clean bill of health because of their own scheduling. Also, companies may sometimes need more time after the year end to work with the auditors on the results.
On December 30th, the Stock Exchange announced that it would delay introduction of the new regime until April 1st. Opponents to the proposals hope the delay will become permanent.
Corporate governance advocates would like to introduce more frequent reporting to increase transparency, and to ban insider trading until important information has been publicly announced to level the playing field.
Under the old rules directors and managers of listed companies were allowed to trade shares in their companies until a month before results are announced. The problem is that listed companies are allowed three months after the end of the period to report half-year results, and four months for the year-end. This meant that they were able to trade on information that was not publicly available between the end of the reporting period and the start of the “black out period” i.e. for two months before the interim results were reported, and three months for the final results.
In theory, the Listing Rules also require companies to announce meaningful events as soon as practicable, and the SFC does have the power to investigate insider dealing. But such disclosure is still problematic and after the fact. For example, recently Citic Pacific only disclosed news of a $2 billion currency loss six weeks after the fact was known to the directors.
Under the new rules which were originally promulgated in January 2008, directors and managers are not allowed to trade shares in their companies until after the results are announced. Therefore, if the companies continue to make full use of the 3 month interim reporting period and the four months final reporting period, directors and managers are barred from trading for a total of seven months.
In the US, financial results are reported quarterly and must be disclosed within 40 days of a quarter-end and 60 days of a year-end. Thus, if a listed company in HK can announce interim results within 40 days and final results within 60 days (using the US as rule as an example), the total “black out” period is only 100 days and not 7 months.
The problem, of course, is that auditors have to co-operate and the auditors would like to have as much time as possible after the year end before giving the company a clean bill of health because of their own scheduling. Also, companies may sometimes need more time after the year end to work with the auditors on the results.
On December 30th, the Stock Exchange announced that it would delay introduction of the new regime until April 1st. Opponents to the proposals hope the delay will become permanent.
Corporate governance advocates would like to introduce more frequent reporting to increase transparency, and to ban insider trading until important information has been publicly announced to level the playing field.
Monday, January 05, 2009
2009 Emerging Markets
The MSCI Emerging Markets Index fell from 54% during 2008. Many have laughed at those who suggested that the emerging markets will perform better than the established markets. Sure, "de-coupling" did not occur. The problems in the US and Europe split over into all other markets. But by the same token, none of the popular investment concepts worked either. Diversification did not work, all markets and all industries got clobbered. The destruction of wealth occured in every market be it equities, commodities, currencies, you name it. If there was a theme for 2008, it was disintegration.
The housing slump in the US will take a couple of years (optimistic) to work itself out. This is not helped by the US governement pumping money into the system to prop up ailing banks. The urgency and market discipline will be lacking and the market will take a while to find the bottom and make the proper adjustments.
Unlike developed developed economies which have multiple drivers, most emerging markets have a central theme. They are energy based, commodities based or like China, simply a huge market that has only started moving. As the world starts to recover, the demand for these products will rise again leading the emerging markets out of the current difficulties.
These markets have fallen more than the developed markets simply because of the lack of liquidity. By the same token, there is more upside.
The MSCI China Index fell 60% in 2008 having risen some 370% from 1 November 2004 through 31 October 2007. Much of this was due to indiscriminate selling by hedge fund (to meet margin calls) and traditional funds (in anticipation of redemptions). Slowing demand for Chinese goods from the US and Europe will slow growth but the Chinese government will be spending over US$586 billion over the next 2 years to stimulate the economy with most going into infrastructure projects which will major consumers of energy and commodity products. Chinese stocks now trade at 12 times earnings compared to 53 times in October 2007.
Yes, China's growth will slow from over 11% in 2007 to an estimated 7.5% in 2009. The Chinese government is targetting growth of 8% which looks achievable given the stimulus package. We like Chinese stocks in the following sectors - energy, construction materials, banks, and retail products with strong franchiese.
The housing slump in the US will take a couple of years (optimistic) to work itself out. This is not helped by the US governement pumping money into the system to prop up ailing banks. The urgency and market discipline will be lacking and the market will take a while to find the bottom and make the proper adjustments.
Unlike developed developed economies which have multiple drivers, most emerging markets have a central theme. They are energy based, commodities based or like China, simply a huge market that has only started moving. As the world starts to recover, the demand for these products will rise again leading the emerging markets out of the current difficulties.
These markets have fallen more than the developed markets simply because of the lack of liquidity. By the same token, there is more upside.
The MSCI China Index fell 60% in 2008 having risen some 370% from 1 November 2004 through 31 October 2007. Much of this was due to indiscriminate selling by hedge fund (to meet margin calls) and traditional funds (in anticipation of redemptions). Slowing demand for Chinese goods from the US and Europe will slow growth but the Chinese government will be spending over US$586 billion over the next 2 years to stimulate the economy with most going into infrastructure projects which will major consumers of energy and commodity products. Chinese stocks now trade at 12 times earnings compared to 53 times in October 2007.
Yes, China's growth will slow from over 11% in 2007 to an estimated 7.5% in 2009. The Chinese government is targetting growth of 8% which looks achievable given the stimulus package. We like Chinese stocks in the following sectors - energy, construction materials, banks, and retail products with strong franchiese.
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