In the first half of 2008, the shares in Chinese banks have fallen 43% in Shanghai, and 13% in HK wiping out US#300 billion of market value. However, JP Morgan belivese that the current sell-off in the Chinese banks is irrational due to misplaced fears over margins, bad debts, etc. according to a recent report.
If you will recall, I have been saying just that for a number of months. Now it's official. At current levels, they are a BUY and HOLD for medium to long term and a trading opportunity for the short term.
I particularly like the Chinese banks without foreign shareholders. Those with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on sub prime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Chinese banks can "cherry pick" and choose the "best of breed" partner for each new product.
Actually, Chinese companies are a screaming BUY. The current pessimistic view is a result of "transference" i.e. anaylsts are projecting the current problems in the western economies to China. Too often I hear the argument that "If the US economy is down, how can the Chinese economy which depends on exports to the US remain bouyant?" Well we need to look at the portion of US exports to GDP and compare that to internal consumption which is growing soo rapidly that the Chinese government has to hold it down. In the US, the government is worrying about recession. In other words, internal consumption will make up for short fall in the US market. Also, exports to Europe and the rest of Asia are up.
At the end of the day, the best way to participate in a growing economy is through ownership of bank shares. You don't have to pick individual sectors.
Wednesday, July 09, 2008
Tuesday, July 08, 2008
Where is the A share Market Going?
On average chinese companies (A Shares) will be posting +21% earnings growth. This of course falls short of the heady days of 2007 when they were posting multiples growth. However, 21% is nothing to sneeze at.
The average P/E of companies listed on the Shanghai exchange is now down to 21x from over 70x, and the index is down 60.
Time for a rebound.
The average P/E of companies listed on the Shanghai exchange is now down to 21x from over 70x, and the index is down 60.
Time for a rebound.
Monday, July 07, 2008
Play With The Big Boys?
The HKEx reminded brokers that the FTSE Xinhua China 25 Index will be rebalanced on 21 July. The related trading activities may start as early as next Friday as the rebalancing of the FTSE Xinhua China 25 Index will be effective the following Monday. Be prepared to see huge fluctuations during next Friday’s closing auction session.
In a down market, funds will first sell the stocks they don't want to keep or where they need to trim their holdings. Then they will look to buy into those that they want for their portfolios or add to their holdings. This is because they are not worried that the market will run away from them, and in fact would expect the market to retreat on their selling.
In a rising market, they take the opposite tactic by first buying the stocks they want and then selling the ones they don't want to keep.
Since we are in a down market, I would expect that they will sell first and buy in later. Keep this strategy in mind for your own trading.
In a down market, funds will first sell the stocks they don't want to keep or where they need to trim their holdings. Then they will look to buy into those that they want for their portfolios or add to their holdings. This is because they are not worried that the market will run away from them, and in fact would expect the market to retreat on their selling.
In a rising market, they take the opposite tactic by first buying the stocks they want and then selling the ones they don't want to keep.
Since we are in a down market, I would expect that they will sell first and buy in later. Keep this strategy in mind for your own trading.
Friday, July 04, 2008
ICBC Redux
Yesterday, I talked about ICBC (#01398). The bank has just announced that net profits for the first half of 2008 will be up at least 50%! This is in spite of the tightening of credit on the Mainland.
Profits were up over 77% for 2008Q1, and margins have been under some pressure in the second quarter. In 2007 first half profits were up over 60%. Overall, we should see the effects of tightening measures in the second half as investors move to longer term deposits increasing funding costs for banks. However, we expect fees and other non interest income to rise. Banks in China do not have the wide range of financial products that we are used to seeing, and the potential for increased profitability from these products will be substantial. We still maintain a strong BUY recommendation.
Profits were up over 77% for 2008Q1, and margins have been under some pressure in the second quarter. In 2007 first half profits were up over 60%. Overall, we should see the effects of tightening measures in the second half as investors move to longer term deposits increasing funding costs for banks. However, we expect fees and other non interest income to rise. Banks in China do not have the wide range of financial products that we are used to seeing, and the potential for increased profitability from these products will be substantial. We still maintain a strong BUY recommendation.
HK Near Bottom
Yesterday 3 July 2008, the Hang Seng Index (HSI) was down 2.1% to 21,242 with most stocks at 52 week low. At this level, stocks are trading at an average P/E is 13% with dividend yield is 3%, very close to historical lows.
The market has retreatced almost 5,000 points from the mid May high and may be due for a rebound. We have tested the 21,000 support level 3 times and it appears to be holding.
Accumulate China stocks with strong stories and earnings.
The market has retreatced almost 5,000 points from the mid May high and may be due for a rebound. We have tested the 21,000 support level 3 times and it appears to be holding.
Accumulate China stocks with strong stories and earnings.
Buy ICBC on Weakness
At HK$5.36 per share, ICBC is the biggest bank in the world by market capitalisation (US$252 billion). Just how big is that? Well, it's worth almost 2 times JP Morgan.
It also has reserves of US$130 billion which means it can afford to buy out Citigroup.
The sub prime crisis only had a minimal impact (thank god for unsophisticated bankers who don't understand "high finance") and is primed to grow while western banks are scrambling to rebuild their balance sheets after writing off billions in sub prime losses.
It also has reserves of US$130 billion which means it can afford to buy out Citigroup.
The sub prime crisis only had a minimal impact (thank god for unsophisticated bankers who don't understand "high finance") and is primed to grow while western banks are scrambling to rebuild their balance sheets after writing off billions in sub prime losses.
What's Wrong With +20% Profit Growth?
Analysts have bemoaned the slowdown in profits growth at Chinese companies which fell from 42% for the 1st 6 months of 2007 to 20% in 2008. Anywhere else, a 20% profit growth would have been trumpeted as outstanding. When you have been used to exceptional high growth, it is a big comedown to just high growth.
Last years profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
Last years profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
Thursday, July 03, 2008
SJM's (#880) Offer Oversubscribed
Stanley HO's SJM (stock code #880) HKD5.1 billion IPO was oversubscribed although the institutional portion (85% of the issue) was only 2x covered. The pricing is expected to be at the low end of the HKD3.08 to HKD4.08 indicative range. The stock will be traded on Monday, 10 July 2008.
The timing seems to be right for those willing to take a chance on this IPO as the Macau Government just announced that in the month of June 2008, Macau's casino revenues increased 69.7% year-on-year to Patacas 9.7 billion, the 3rd best month ever.
In the first 6 months of 2008, total casino revenues increased 54% to Patacas 58.5 billion. SJM with 27% is the leader, followed by Venetian at 22%, Wynn 17%, Melco 16%, Galaxy 10%, and MGM 8%. Although the headline numbers look good, the casinos have been locked in a price war over commission rebates to junket operators.
The timing seems to be right for those willing to take a chance on this IPO as the Macau Government just announced that in the month of June 2008, Macau's casino revenues increased 69.7% year-on-year to Patacas 9.7 billion, the 3rd best month ever.
In the first 6 months of 2008, total casino revenues increased 54% to Patacas 58.5 billion. SJM with 27% is the leader, followed by Venetian at 22%, Wynn 17%, Melco 16%, Galaxy 10%, and MGM 8%. Although the headline numbers look good, the casinos have been locked in a price war over commission rebates to junket operators.
HK's Exports Performance
How much has negative sentiment in the US and Europe affected HK? Let's take a look at HK's external trade figures. Total exports grew 9.4%, and 9.2% repectively in 2006 and 2007. In the 1st quarter of 2008, total ex[ports grew 10.5%. This is certainly not what was expected from the "sub prime" crisis. However, as the slowdown starts to bite in the US, we do expect growth to moderate in the 2nd quarter with slight improvements in the latter half of the year. Exports to the US which account for 12% was down 1%).
The 1st quarter's performance was enhanced by increased trade intra Asia, with significant increases in exports to the Mainland which accounts for 48% of our exports, was up 11%. Europe at 14% of exports was steady (up 8%) because of the weakness of the USD (HKD is pegged to the USD) vis-a-vis the Euro. The rest of Asia (14% of exports) was up 23%.
Overall, we expect HK exports to grow by a modest 7% in 2008 with China and Asia the main engine of growth.
Tuesday, July 01, 2008
HK Depositary Receipts (HDR)
Come 1 July 2008, companies already listed elsewhere in a jurisdiction acceptable to the HK authorities will be able to have their shares listed in HK by way of HK depositary receipts or "HDR". The sponsor for the HDR will either buy a batch of existing shares of the company in the home market or take a new issue of shares, and package them into a HDR which in turn will be listed in HK. This is very similar to a closed ended fund consisting of shares in a single company.
The idea is that a company that has met the listing requirement's of a regulated exchange will be able to list its shares without going through the whole application process for a new listing. This gets around the requirements of some countries that restrict their companies from listing on overseas markets. For example, many Russian listed companies have listed on the London Stock Exchange by way of "GDR's". A key requirement though is that the home market must be regulated to a similar level as HK.
Members of IOSCO, the international federation of securities regulators, have signed a multi-lateral memorandum of understanding (MOU) which would make it easier to regulate across boundaries. Therefore, companies listed in those markets will find it easier to list HDR's in HK. However, it seems that the demand comes mostly from companies whose home markets are still developing and therefore will not have been able to reach the requirements set out in the multi MOU.
The idea is that a company that has met the listing requirement's of a regulated exchange will be able to list its shares without going through the whole application process for a new listing. This gets around the requirements of some countries that restrict their companies from listing on overseas markets. For example, many Russian listed companies have listed on the London Stock Exchange by way of "GDR's". A key requirement though is that the home market must be regulated to a similar level as HK.
Members of IOSCO, the international federation of securities regulators, have signed a multi-lateral memorandum of understanding (MOU) which would make it easier to regulate across boundaries. Therefore, companies listed in those markets will find it easier to list HDR's in HK. However, it seems that the demand comes mostly from companies whose home markets are still developing and therefore will not have been able to reach the requirements set out in the multi MOU.
GEM (Growth Enterprise Market)
On 1 July 2008, new rules will come into effect in an effort to breath new life into GEM. The GEM Board hit a peak in 2004 with 21 companies raising over HK$2.7 billion when the HKEx closed the door on backdoor listings (pun intended). Since then, fewer companies seeking listings on the GEM Board and so far this year only 2 companies have come to market raising just over HK$200 million.
Why? Because the GEM Board is not as prestigious as Nasdaq on which it was modelled. There are many reasons including rubbish companies, crooked management, etc. The end result is that companies stayed away if they could wait for a listing on the Main Board. It is hoped that the new rules will raise the threshold a bit and keep out the truly undesreving.
Key provisions:
1. Positive cashflow of at least HK$20 million for the 2 years before listing
2. At least 2 years operations under the same management
3. Continuing reporting requirements made more stringent
4. Easier promotion to the Main Board
During the review of the performance of GEM, it had been suggested that rather than tightening the rules, it should go the route of the AIM Board in London where it is "caveat emptor" (let the buyer beware). However, it was decided that the HK investor is not sufficiently sophisticated to make the appropriate judgment on a stock. Let's see if the new rules will make any difference.
Footnote: Since 2004, corporate finance advisers have found ways around the backdoor listing prohibition.
Why? Because the GEM Board is not as prestigious as Nasdaq on which it was modelled. There are many reasons including rubbish companies, crooked management, etc. The end result is that companies stayed away if they could wait for a listing on the Main Board. It is hoped that the new rules will raise the threshold a bit and keep out the truly undesreving.
Key provisions:
1. Positive cashflow of at least HK$20 million for the 2 years before listing
2. At least 2 years operations under the same management
3. Continuing reporting requirements made more stringent
4. Easier promotion to the Main Board
During the review of the performance of GEM, it had been suggested that rather than tightening the rules, it should go the route of the AIM Board in London where it is "caveat emptor" (let the buyer beware). However, it was decided that the HK investor is not sufficiently sophisticated to make the appropriate judgment on a stock. Let's see if the new rules will make any difference.
Footnote: Since 2004, corporate finance advisers have found ways around the backdoor listing prohibition.
Saturday, June 28, 2008
China's Foreign Currency Reserves US$1.8 Trillion
China's foreign currency reserves reached US$1.8 trillion at the end of May 2008. In May the increase was US$40.3 billion but this was slow compared to an increase of US$75 billion in April. In China, the government exchanges RMB for foreign currencies earned by Chinese companies and citizens. This creates enormous inflationary pressures as RMB are created to soak up the foreign currencies.
The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.
The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.
The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.
The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.
Thursday, June 12, 2008
Retesting the 22,000 Support
I think we should look at the macro environment first.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
Friday, May 16, 2008
Is it time to buy China Construction Bank?
The HK stock market rose 0.41% to close at 25,618 ending a week of big swings.
Top story for the day was the placement of 400 million shares of China Construction Bank (CCB #939) at HK$7.05 which is a discount of 2.5% to the market close of HK$7.23 yesterday. CCB closed today at 7.04 bid and 7.05 offer.
The 400 million is only 0.18% of the 224.7 billion shares issued and amount to only 1 day’s turnover in the stock. However, investors are concerned that other strategic investors who were allocated stock in the IPO will start selling. Bank of America which holds 9% will be able to sell in October 2008 at the end of the lock up period. Temasek still has 5.99% which it can sell.
Strategic investors sell their stakes for a variety of reasons which may or may not have anything to do with the company’s performance. Mostly, sales are made to replenish the strategic investors’ own capital and this may be the case in the aftermath of the subprime crisis. Sales by strategic investors do tend to dampen market interests because of the fear of an overhang of stock coming to the market.
As Temasek sold at this level last year, it is reasonable to assume that this would be a good level to use as a base. CCB went as high as HK$9.00 last year and I believe that it would go much higher as Chinese consumers discover banking and financial products, and more deposits find their way into the system.
Accumulate CCB at the current levels.
END
www.goldride.com
Top story for the day was the placement of 400 million shares of China Construction Bank (CCB #939) at HK$7.05 which is a discount of 2.5% to the market close of HK$7.23 yesterday. CCB closed today at 7.04 bid and 7.05 offer.
The 400 million is only 0.18% of the 224.7 billion shares issued and amount to only 1 day’s turnover in the stock. However, investors are concerned that other strategic investors who were allocated stock in the IPO will start selling. Bank of America which holds 9% will be able to sell in October 2008 at the end of the lock up period. Temasek still has 5.99% which it can sell.
Strategic investors sell their stakes for a variety of reasons which may or may not have anything to do with the company’s performance. Mostly, sales are made to replenish the strategic investors’ own capital and this may be the case in the aftermath of the subprime crisis. Sales by strategic investors do tend to dampen market interests because of the fear of an overhang of stock coming to the market.
As Temasek sold at this level last year, it is reasonable to assume that this would be a good level to use as a base. CCB went as high as HK$9.00 last year and I believe that it would go much higher as Chinese consumers discover banking and financial products, and more deposits find their way into the system.
Accumulate CCB at the current levels.
END
www.goldride.com
Thursday, May 08, 2008
Oil reaches USD120 per barrel
The HK stock market fell in line with the mainland market. The Hang Seng Index fell 651 to 25,610 (2.48%) while the Shanghai Index fell 4.13%.
Investors on the mainland are worried that there will be a flood of new shares from the end of the moratorium on majority shareholders, and the proposed share offering by Ping An Insurance of RMB 120 billion A shares and RMB 41 billion of bonds.
The price of oil reaching USD 120 also spooked investors especially since Goldman Sachs is now predicting USD 200 per barrel. Goldman was very prescient last year when they predicted that oil will top USD 100 per barrel by the yearend.
There were also rumours of housecleaning at the CSRC (China Securities Regulatory Commission) which added to market woes.
We do not see the market falling back to the 21,000 level where there had already been substantial consolidation, and has been tested 3 times. The market has fallen 10,000 from the high of 31,000 in October 2007 to the 21,100 level in January 2008. Since then the market has recovered about half the losses. Short term target on the upside is 27,000 to 28,000 with a downside to 24,000. At 24,000 there is good opportunity to accumulate shares for the next leg up.
The fallout from subprime is coming to an end. The bad news on the horizon is oil price.
END
Investors on the mainland are worried that there will be a flood of new shares from the end of the moratorium on majority shareholders, and the proposed share offering by Ping An Insurance of RMB 120 billion A shares and RMB 41 billion of bonds.
The price of oil reaching USD 120 also spooked investors especially since Goldman Sachs is now predicting USD 200 per barrel. Goldman was very prescient last year when they predicted that oil will top USD 100 per barrel by the yearend.
There were also rumours of housecleaning at the CSRC (China Securities Regulatory Commission) which added to market woes.
We do not see the market falling back to the 21,000 level where there had already been substantial consolidation, and has been tested 3 times. The market has fallen 10,000 from the high of 31,000 in October 2007 to the 21,100 level in January 2008. Since then the market has recovered about half the losses. Short term target on the upside is 27,000 to 28,000 with a downside to 24,000. At 24,000 there is good opportunity to accumulate shares for the next leg up.
The fallout from subprime is coming to an end. The bad news on the horizon is oil price.
END
Wednesday, March 26, 2008
"Broker anonymity" or "What do you have to hide?"
I addressed the World Federation of Exchanges Town Hall Meeting in Hong Kong today Wednesday 26 March 2008.
Dominant institutional brokers are demanding that exchanges move towards broker anonymity i.e. not display brokers' ids on the trading screens. What do they have to hide? For a start, many trade on their own book and they want to disguise their trades from clients. If you are advising a listed company, you certainly don't want the company to know that you are selling their shares on the open market.
Many also use their own capital to buy a block of shares which a client wants to sell. They then "slice and dice" the block and re-sell on the market, at a profit of course. How would you feel if you jsut sold a block to your broker and then see him seeing the same shares at a higher price.
Finally, clients like to monitor the execution of their trades, and without broker ids' on the trading screens, this is impossible to do.
The following is the text of my speech.
WFE Hong Kong Town Hall Meeting
26 March 2008
Panel 3: Market Quality – Changing the Competitive Environment
Good morning ladies and gentlemen.
The topic is very timely as exchanges compete for market share with each other and with trading venues such as ECN’s, ATS, etc. It is only natural that exchanges look at the “micro trading mechanisms” of these alternative venues and consider changes to your own market structures to compete effectively.
Recently, we have seen a move towards what is commonly known as “broker anonymity”. The demand appears to come from dominant brokerage houses which find it difficult to complete large client orders and attribute this to “front running” by other market participants. Let’s get this straight. “Front running” is used to describe the illegal behavior of a broker buying or selling ahead of a client order so as to profit from the subsequent movement in the market. There is nothing illegal for a broker to trade ahead of another broker because he thinks that other broker may be acting for a big client with a large order that may move the market.
Let me quote you a passage from a report supporting “broker anonymity” --- “Transparency invites market manipulation, increases volatility, distorts pricing and ultimately reduces liquidity”. Sounds counter intuitive doesn’t it?
“Market transparency” is the ability of market participants to observe information in the trading process. Pre-trading market transparency provides a level playing field for all stakeholders in a market and is a key component of price discovery. “Post trading transparency” is only sufficient as an audit trail to guard against market abuses. It is not a substitute for real time price discovery which tends to stablise prices, increase liquidity and lower transactional costs.
There are a number of stakeholders in a market, each with their own interests and agendas. We have the government representing public interests, the regulators who are there to protect the investing public, the issuers who need a properly functioning market for fund raising, investors (both institutional and retail), and intermediaries. Ultimately, the market is for issuers and investors, and the regulators and intermediaries are there to facilitate trading and to guard against abuses.
For investors and issuers, market quality is measured in terms of a level playing field, price stability, risk management, information flow, liquidity, and trading volumes. “Broker anonymity” tilts the playing field in favour of those in the know i.e. information on trade flows will be concentrated at the trading desks of the dominant brokerages, and available only to their favoured clients.
Investors and fund managers are overwhelmingly in favour of full transparency in trading and disclosure of broker identification on trading screens. This allows them to properly monitor the execution of their orders. Broker anonymity reduces the transparency in a market and makes it difficult for fund manager, who have a fiduciary duty to their clients to ensure that there is best execution, to monitor the execution of their orders.
As a matter of fact, there has been a trend towards more transparency in all aspects of the market. For example, price discovery is facilitated through pre-opening auction sessions. “Broker anonymity”, therefore, appears to be a step back to opaque markets where only the brokers know who is buying and who is selling.
As operators of exchanges, you have a fiduciary duty to your stockholders to maximize returns, and certainly increasing turnover and trade flow must be at the very top of your list of priorities. However, in every financial market, there are a number of stakeholders whose interests must be safeguarded.
Markets and trading venues developed and evolved to fill a need. Their trading structures are very much a product of their history, and development. To a large extent, there is no one market structure that fits all exchanges or even all stocks traded on a single exchange.
In HK, public interest is enshrined in the law that created the HKEx. Public consultations are conducted prior to the introduction of major new initiatives, and new products and trading practices are vetted by the SFC which takes a balanced approach and ensures that the interests of all stakeholders are considered.
In HK, our trading system is automatic order matching and therefore there is no partiality as brokers cannot choose their counterparty. Also, we can negotiate block trades off market, but these are required to be reported to the exchange to ensure transparency.
The market in HK is not as concentrated in the hands of a small number of brokers as in other market. The top 14 brokers account for 55% of the turnover, while the next 50 account for 30%. In the Australian market for example, the top 10 brokers account for 72% of turnover while the top 4 account for 37%.
In contrast to some markets where real time information is only available to brokers, institutional and retail investors in HK have always had access to the same information as brokerages. Moreover, HK does not have trade practices which restrict the flow of information from brokers to investors. We enjoy a very level playing field indeed.
Retail investors in HK account for some 37% of the turnover while institutional investors account for 56%. Proprietary trading only accounts for 7%. In overseas markets, proprietary trading account for a much higher percentage as brokers often take client positions onto their own books and then re-distribute into the market. This is another reason why large brokerage houses would prefer to hide their trading from the prying eyes of clients who may feel aggrieved.
HK does not have competing local exchanges, and that makes life “less interesting” for our exchange operator. However, many HK issues are traded on other exchanges, and we do want to bring that liquidity back onshore.
Overall market quality and integrity is what ultimately drives investors’ interests, and liquidity and turnover will gravitate towards quality markets. “Broker anonymity” is a short–term fix at the expense of market transparency and will detract from the attractiveness of a market to investors.
For exchanges with broker anonymity, I encourage you to provide more trading information to your ultimate clients, the investors, instead of less. The HKEx has made a business out of this and derives 8% of revenues from information services, and most of this drop directly to the bottom line.
We have the best practice in HK and there is no need to regress to a less transparent model.
Dominant institutional brokers are demanding that exchanges move towards broker anonymity i.e. not display brokers' ids on the trading screens. What do they have to hide? For a start, many trade on their own book and they want to disguise their trades from clients. If you are advising a listed company, you certainly don't want the company to know that you are selling their shares on the open market.
Many also use their own capital to buy a block of shares which a client wants to sell. They then "slice and dice" the block and re-sell on the market, at a profit of course. How would you feel if you jsut sold a block to your broker and then see him seeing the same shares at a higher price.
Finally, clients like to monitor the execution of their trades, and without broker ids' on the trading screens, this is impossible to do.
The following is the text of my speech.
WFE Hong Kong Town Hall Meeting
26 March 2008
Panel 3: Market Quality – Changing the Competitive Environment
Good morning ladies and gentlemen.
The topic is very timely as exchanges compete for market share with each other and with trading venues such as ECN’s, ATS, etc. It is only natural that exchanges look at the “micro trading mechanisms” of these alternative venues and consider changes to your own market structures to compete effectively.
Recently, we have seen a move towards what is commonly known as “broker anonymity”. The demand appears to come from dominant brokerage houses which find it difficult to complete large client orders and attribute this to “front running” by other market participants. Let’s get this straight. “Front running” is used to describe the illegal behavior of a broker buying or selling ahead of a client order so as to profit from the subsequent movement in the market. There is nothing illegal for a broker to trade ahead of another broker because he thinks that other broker may be acting for a big client with a large order that may move the market.
Let me quote you a passage from a report supporting “broker anonymity” --- “Transparency invites market manipulation, increases volatility, distorts pricing and ultimately reduces liquidity”. Sounds counter intuitive doesn’t it?
“Market transparency” is the ability of market participants to observe information in the trading process. Pre-trading market transparency provides a level playing field for all stakeholders in a market and is a key component of price discovery. “Post trading transparency” is only sufficient as an audit trail to guard against market abuses. It is not a substitute for real time price discovery which tends to stablise prices, increase liquidity and lower transactional costs.
There are a number of stakeholders in a market, each with their own interests and agendas. We have the government representing public interests, the regulators who are there to protect the investing public, the issuers who need a properly functioning market for fund raising, investors (both institutional and retail), and intermediaries. Ultimately, the market is for issuers and investors, and the regulators and intermediaries are there to facilitate trading and to guard against abuses.
For investors and issuers, market quality is measured in terms of a level playing field, price stability, risk management, information flow, liquidity, and trading volumes. “Broker anonymity” tilts the playing field in favour of those in the know i.e. information on trade flows will be concentrated at the trading desks of the dominant brokerages, and available only to their favoured clients.
Investors and fund managers are overwhelmingly in favour of full transparency in trading and disclosure of broker identification on trading screens. This allows them to properly monitor the execution of their orders. Broker anonymity reduces the transparency in a market and makes it difficult for fund manager, who have a fiduciary duty to their clients to ensure that there is best execution, to monitor the execution of their orders.
As a matter of fact, there has been a trend towards more transparency in all aspects of the market. For example, price discovery is facilitated through pre-opening auction sessions. “Broker anonymity”, therefore, appears to be a step back to opaque markets where only the brokers know who is buying and who is selling.
As operators of exchanges, you have a fiduciary duty to your stockholders to maximize returns, and certainly increasing turnover and trade flow must be at the very top of your list of priorities. However, in every financial market, there are a number of stakeholders whose interests must be safeguarded.
Markets and trading venues developed and evolved to fill a need. Their trading structures are very much a product of their history, and development. To a large extent, there is no one market structure that fits all exchanges or even all stocks traded on a single exchange.
In HK, public interest is enshrined in the law that created the HKEx. Public consultations are conducted prior to the introduction of major new initiatives, and new products and trading practices are vetted by the SFC which takes a balanced approach and ensures that the interests of all stakeholders are considered.
In HK, our trading system is automatic order matching and therefore there is no partiality as brokers cannot choose their counterparty. Also, we can negotiate block trades off market, but these are required to be reported to the exchange to ensure transparency.
The market in HK is not as concentrated in the hands of a small number of brokers as in other market. The top 14 brokers account for 55% of the turnover, while the next 50 account for 30%. In the Australian market for example, the top 10 brokers account for 72% of turnover while the top 4 account for 37%.
In contrast to some markets where real time information is only available to brokers, institutional and retail investors in HK have always had access to the same information as brokerages. Moreover, HK does not have trade practices which restrict the flow of information from brokers to investors. We enjoy a very level playing field indeed.
Retail investors in HK account for some 37% of the turnover while institutional investors account for 56%. Proprietary trading only accounts for 7%. In overseas markets, proprietary trading account for a much higher percentage as brokers often take client positions onto their own books and then re-distribute into the market. This is another reason why large brokerage houses would prefer to hide their trading from the prying eyes of clients who may feel aggrieved.
HK does not have competing local exchanges, and that makes life “less interesting” for our exchange operator. However, many HK issues are traded on other exchanges, and we do want to bring that liquidity back onshore.
Overall market quality and integrity is what ultimately drives investors’ interests, and liquidity and turnover will gravitate towards quality markets. “Broker anonymity” is a short–term fix at the expense of market transparency and will detract from the attractiveness of a market to investors.
For exchanges with broker anonymity, I encourage you to provide more trading information to your ultimate clients, the investors, instead of less. The HKEx has made a business out of this and derives 8% of revenues from information services, and most of this drop directly to the bottom line.
We have the best practice in HK and there is no need to regress to a less transparent model.
Friday, March 21, 2008
Fed intervenes in the US Market!
There is market intervention, and there is market intervention. But when it's done by the Fed, it's called saving the economy.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
The Asia Era: Challenges and Opportunities After The Subprime Mess
The year 2007 marked a major turning point in the financial world order. The market capitalization of the Americas (USD22.5 trillion), Europe Middle East (USD20.3 trillion) and Asia Pacific (USD19.7 trillion) were roughly equal. Over the next decade, the Asian markets are expected to continue their phenomenal growth with the expansion of the economies of China and the Indian sub continent as the new engines of growth.
Of the top 5 growth markets in 2007, the top 4 were in the 2 most populous countries China and India. Shanghai and Shenzhen grew at 303% and 244%, and Bombay and NSE grew at 122% and 115%. Except for Japan, all Asian markets enjoyed double digit growth.
During 2007, the NYSE and LSE each grew at a paltry rate of 1.5%. The US and European markets will be pre-occupied with dealing with the aftermath of the subprime debacle. New regulations expected to be put in place to prevent similar problems will handcuff the principal US and European markets in the same way that Sarbanes-Oxley inhibited US market growth in the wake of WorldCom and Enron.
The ASF is the annual gathering of the representatives of the securities industries in the Asia Pacific region. The objective of the ASF is to allow delegates to share experience and to explore opportunities in co-operation. Currently, markets represented on the ASF include Japan, Korea, China, Chinese Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Australia, India, and Vietnam. The ASF 2008 in Hong Kong will be the 13th in the series of annual meetings.
The ASF will consist of market reports by representatives of each market, followed by panel discussions lead by well known market professionals. This year, the panels will focus on Risk Management and what we can learn from the subprime crisis, and How to Take Advantage of Opportunities in Asia.
Tuesday, February 05, 2008
What If The Fed Gave A Party And Nobody Came?
The thought on the minds of investors since the Fed cut interest rates last week was "Why there isn't a stronger reaction?" The answer of course was that the cut was too late. The Fed waited until it could see the statistics reflect a slow down. By definition, that means that we have already started moving downhill by the time the numbers show up on their radar screen.
Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.
Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.
So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.
Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.
Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.
So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.
Wednesday, January 23, 2008
Better Late Than Never!
Hong Kong's Hang Seng Index rose 2,332 points (10.7%) to close at 24,090. The HSI had declined more than 10,000 points from the peak in October 2007 and was in danger of breaching the 21,400 support level, closing 21,757 on 22 January 2008. Since October 2007, the HSI had given up almost all the gains in 2007 which began the year at just over 20,000.
The catalyst was the Fed cutting Fed Funds rate by 0.75% from 4.25% to 3.50%. The Fed Discount rate was cut by the same percentage from 4.75% to 4.00%. The last time the Fed made such a large cut was in August 1982.
The expectation is that the Fed will continue to cut rates aggressively at the meeting next week, perhaps by as much as 0.50%. The Fed is expected to cut rates down to 2.75% by April, and 2.0% by September. How low can it go? The lwest was 1.0% on 25 June 2003.
Will cutting interest rates help? Almost certainly. The problems with providing liquidity to banks through the discount facility is that the banks do not want to borrow. They have sufficient cash. The problem is that they need capital injection because of the book losses they have taken from revaluing the "sub prime loans". By cutting interest rates, the Fed makes it easier for borrowers to keep up their payments. Taken together with the US Government's efforts to negotiate a moratorium on interest vrates re-setting, this will reduce the expected default rate, and allow the banks to start valuing the sub prime based securities at closer to their real value rather than the current "fire sale" levels.
Why didn't the Fed cut by 0.50% in December 2007 instead of the miserly 0.25%? The reason given was that there were still inflation worries, and the Fed wanted to try injecting liquidity directly to banks through the discount facility. That did not really address the problem of pending defaults on sub prime mortgage loans. Only a moratorium on restting interest rates, and a reduction of the rates will achieve the aim of stabilising the market.
The HK market reacted positively to the rate cut. However, we still expect the market to be volatile over the next 6 weeks until the rate cuts take effect. In the short term, we are looking for 27,000 for the near term and up to 34,000 sometime during 2008.
The catalyst was the Fed cutting Fed Funds rate by 0.75% from 4.25% to 3.50%. The Fed Discount rate was cut by the same percentage from 4.75% to 4.00%. The last time the Fed made such a large cut was in August 1982.
The expectation is that the Fed will continue to cut rates aggressively at the meeting next week, perhaps by as much as 0.50%. The Fed is expected to cut rates down to 2.75% by April, and 2.0% by September. How low can it go? The lwest was 1.0% on 25 June 2003.
Will cutting interest rates help? Almost certainly. The problems with providing liquidity to banks through the discount facility is that the banks do not want to borrow. They have sufficient cash. The problem is that they need capital injection because of the book losses they have taken from revaluing the "sub prime loans". By cutting interest rates, the Fed makes it easier for borrowers to keep up their payments. Taken together with the US Government's efforts to negotiate a moratorium on interest vrates re-setting, this will reduce the expected default rate, and allow the banks to start valuing the sub prime based securities at closer to their real value rather than the current "fire sale" levels.
Why didn't the Fed cut by 0.50% in December 2007 instead of the miserly 0.25%? The reason given was that there were still inflation worries, and the Fed wanted to try injecting liquidity directly to banks through the discount facility. That did not really address the problem of pending defaults on sub prime mortgage loans. Only a moratorium on restting interest rates, and a reduction of the rates will achieve the aim of stabilising the market.
The HK market reacted positively to the rate cut. However, we still expect the market to be volatile over the next 6 weeks until the rate cuts take effect. In the short term, we are looking for 27,000 for the near term and up to 34,000 sometime during 2008.
Subscribe to:
Posts (Atom)
