Outlook on the Markets
Think back over the last 12 months to early September 2008. Lehman Brothers had collapsed, triggering a virtual stop to the flow of credit. The vaunted U.S. financial system had been pushed to the brink. Reality began to overtake disbelief. Any doubt about the market’s interconnectivity also was dispelled. Seven months later, green shoots appeared and with them, the inkling of a market run that continues today – not in a straight line but a zigzag. Meanwhile, pressures still were heavy throughout capital markets. There was a sense the release valve could work again but not in the same way as before. For one thing, new regulations would leave a mark. There was also the debate that continues today. Do these glimmers portend this recession’s true end? Are we are the beginning of a sustainable track that will restore the millions of dollars in lost wealth? Is what we’re experiencing today sustainable – or is skepticism still the order of the day?
Take One: Noriel Roubini, Roubini Global Economics/RGE Monitor, August 2009 says:
- Clearly, this recession is the worst in six decades. About the only good news is that we are experiencing a winding down of the pace of deterioration and may indeed be on the long, right side of the U. That’s the best-case scenario. The worst-case is that we are not looking at a U-shaped recovery but a W and a double-dip recession.
- RGE Monitor forecasts U.S. growth of one percent in 2010. That compares to the two percent growth which the Obama administration suggested in its recently revised forecast.
Take Two: Stephen Jen, BlueGold Capital Management on August 2009 says:
- “While I also think a double-dip recession is a legitimate risk, it is such a distant risk (at least a year away) that investors might miss another 20 percent, i.e., it is too early to start positioning for what might happen a year from now.”
- Jen, a speaker at PPI roundtables in 2008 and 2009, is keeping faith with the policy makers who manage the "tools". If and when they suspect a double-dip risk, they will do more to inoculate the economy against the effects, he says. Important is that they have ample tools at their disposal – and know how to use them.
- Jen agrees with Roubini that we find ourselves on the steep side of the U, but he keeps the shorter-term in focus. He points to improving trend lines for China and a recent cycle-high for crude oil, indicating ongoing demand. Deflation is the bigger risk than inflation, he says.
- At their recent August pow-wow in Jackson Hole, Wyoming, central bankers assured one another that they will act if inflation pokes its head up. The issue is one of timing. Agreed. Precipitous action to tighten could trigger a relapse.
Take Three: Economist Intelligence Unit, September 2009 says:
- The worst is over, but risks that are capable of trying our collective patience remain. No one should count on a return to the trend rates of days gone by.
- Among the most serious of risks is that the various stimulus plans fall short. By 2011, the packages' effects will wane against a backdrop of a still fragile corporate sector and weak consumer demand. Key economies are dependent on stimulus for growth during this stretch including: the United States, parts of Europe, China, Southeast and Northeast Asia.
- Another serious risk is a broad decline in consumer demand undermining producer-pricing power. Poor labor conditions will continue to depress wage growth, and weak inflation will make debt service, previously contracted on assumptions of healthy growth, that much more difficult.
- Emerging markets are separating into two categories: slow, difficult growth – and early recovery and rapid growth. Asia falls in the latter category as does the Middle East. The emerging markets of China and the oil-producing Middle East will be the focus of the 2010 Winter Roundtable, February 24-26, Napa, California.
Final Take, CEO Corner, September 2009 says:
- Outlook for the United States: The Fed will keep interest rates low and inflation at bay through the first part of Ben Bernanke's second term (assuming confirmation) as the Fed chairman pursues an accommodative policy closer in direction to that set by Alan Greenspan, his mentor, than that of Paul Volcker.
- Outlook for Asia-Pacific: In Japan, the new government achieved a decisive victory and with that, a stable majority. But the newly elected Democratic Party of Japan (DPJ) will need all the support it won at the polls and more as it crafts economic policies to address stalled economic reforms, an entrenched bureaucracy, high unemployment, a rapidly aging population, and an evolving (positive) relationship with China and the United States. In China, the government is sending out mixed signals about the world’s fastest growing economy. James Kynge, editor, China Confidential, (a Financial Times publication), reports that authorities are split over promoting a July Politburo mandate favoring all-out growth and slower growth in favor of monetary and fiscal discipline. The “apparent policy dichotomy” pops up between China Banking Regulatory Commission (charged with ensuring banks’ quality and sustainability), and those "less hawkish on the issue of credit expansion", including the People’s Bank of China and Premier Wen Jiabao). In Asia’s emerging markets, the outlook remains strong but highly credible analysts warn that institutional and capital market weaknesses still must be factored in as potential obstacles to sustainable growth. Most emerging economies remain highly dependent on exports, particularly to consumers in the West, now weakened by the financial crisis. Andrew Sheng, a keynote speaker at PPI’s 2007 Asian Roundtable in Singapore and author of a new publication, From Asian to Global Financial Crisis: An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s, questions whether Asian financial institutions have as yet the capacity they need to manage a front-post position in today’s global economy. In the Eurozone, Mohammed el-Erian, CEO and co-CIO, PIMCO, recently answered a CNBC interviewer’s skepticism about growth in France and Germany by asserting that the two countries are positioned to grow faster out of the crisis than the United States because each has greater exposure to Asian markets than their Transatlantic partner.
Outlook on Asia
- Chimerica is the clumsy juxtaposition of the words China and America created to connote the symbiotic relationship that has emerged between China and the United States. As a concept, chimerica had its beginnings with the 1972 historic visit to China by then President Richard Nixon. Right up until the current crisis, the relationship has remained a dynamic force. It has been central to globalization and the broad coupling of markets. But given the expectation in some quarters that de-globalization and protectionism will strain the ties that bind one economy to another, it is reasonable to advocate constant vigilance on both sides of the Pacific on behalf of Chimerica, however clumsy the juxtaposition.
- Enter Jon Huntsman, the former governor of Utah and the recently confirmed U.S. ambassador to the Peoples Republic of China (PRC). Ambassador Huntsman is now in place and in position in Beijing to maintain the relationship’s momentum set by his predecessor, Clark (Sandy) Randt. The latter was the longest serving chief U.S. diplomat in China. He has since been invited to become a member Friend of PPI.
- Ian Johnson, a Pulitzer Prize winning writer for the Wall Street Journal and again working out of the newspaper's Beijing offices, captured the humanity and guiding purpose that Huntsman brings to his new job. The 49-year-old former Republican governor and parent of a ten-year-old, adopted Chinese daughter told the Wall Street Journal thatthe relationship faces a full complement of bilateral issues and that he looks forward to the tasks ahead. Huntsman is a former Mormon missionary in Taiwan. He served briefly as ambassador to Singapore. He worked in the USTR office in 2001, the year that China joined the WTO.
- China's chief diplomat to the United States is Ambassador ZHOU Wenzhong, former Vice Minister of Foreign Affairs, Chinese ambassador to Australia and consul general in Los Angeles. From 1987 to 1990, he was deputy consul general in San Francisco. He too has a daughter.
Market Mover Highlights
Foreign investor interest in RMB-denominated funds is growing like Topsy as China steps up its build-out of a domestic PE market and tries to reduce the business sector’s dependency on bank financing while deepening its capital market and dealing with a massive increase in domestic liquidity. Part and parcel is the intended opening of GEM, the growth enterprise market, as a listing alternative to the A share market for funds seeking exits. While foreign firms that raised their money outside the mainland still dominate China’s private equity market, the trend clearly is toward localization, Reuters reported, May 2009.
Some characterize the trend as protectionist and in line with recent regulatory decisions that were counter to foreign investment interests in China. They hearken back to the March decision to block Coca-Cola’s bid for China Huiyuan Juice, the country’s top juice maker. Another high profile case was the Ministry of Commerce’s rejection of Carlyle Group’s purchase of an 85-percent stake in Xugong Machinery, one of China’s largest machinery firms.
But others describe the proliferation of yuan-denominated funds as responsive both to the maze of requirements in China for offshore funds and to the natural and evolutionary course of deepening China’s capital market. There are multiple reasons explaining the “explosion in popularity” of RMB Funds, according to an August 2009 O’Melveny & Myers Research Report: Topics in Chinese Law: RMB Funds: Update and Trends (click to dowload) which has been cited by the Financial Times and other media. O’Melveny & Myers is a new PPI corporate member.
Recently-announced yuan-denominated funds include:
- In late summer, Macquarie, the Australian banking group, and Everbright, a greater China financial conglomerate, announced a joint venture to launch two infrastructure funds, one of which is an RMB-denominated fund. Macquarie is a PPI member.
- In August, Blackstone Group set up its first yuan-denominated regional private equity fund in connection with an MOU of financial cooperation with the government of Shanghai’s Pudong District. The China development fund totals RMB$5 billion or US$732 million. It is one of the first Shanghai-registered yuan PE funds launched by a foreign investor.
- In September, Singapore-based DBS Bank created the wholly-owned subsidiary DBS Private Equity Enterprise – a US$100 million onshore RMB-backed fund. Enterprise will invest in unlisted firms in China, according to the Shanghai Daily. Investments will be late-stage in growth industries with the intention of listings on the domestic A+ share market.
- In September, Netherlands-based asset manager Robeco announced plans to set up a joint venture fund between the Dutch firm and the Tianjin municipal government called Robeco TEDA Sustainable Private Equity Fund. It will launch in the first quarter next year as China’s first RMB-denominated cross-border PE fund focusing on sustainable investments. It will invest in firms that develop sustainable products and technologies.
- Jerry Borrell, editor of the weekly T&I Asia Watch, opines in the August 30 editionthat says daily newspapers in Asia are just discovering what is now a three-year trend in yuan-denominated funds. Borrell will speak with delegates participating in the November PPI Executive Seminar in Bangkok. This year’s PES precedes the PPI Asian Pension Fund Roundtable, November 5-6, also in Bangkok.
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