Date: 2014-04-07
Macro note
I. By region
0. World
Global economy appear as if it is okay, while in fact it is not. Ever since the global central banks' asset purchase programs have begun, an abnormal asset price movements have been observed. Based on the philosophical approach that radical moves tend to be adjusted back to the historical norm with an exception of paradigm shift, those who prepared themselves well against fat tail scenarios are likely to prevail, eventually. However, as we have observed in the post-Lehman era and many hedge funds that failed while refusing to properly recognize the unique nature of the Japanese economy, it is very challenging to predict which exact fat tail scenario will come true, and it is almost never a good idea to bet against super powers and central banks, so a certain degree of reconciliation with reality must be reflected in the portfolio construction.
1. US
Investors who are positive on the US economy have been increasing, but the economy is still at the very early stage of the expansion, if this is an expansion. Hence, the conviction on the expansion of the US economy cannot be too high at this stage. Yet, energy and commodity prices have been heading lower, and the housing market has been steadily recovering, hence it is fair to assess that the expansionary force is bigger than the other one. Equity valuation tells me that the investors are not yet too optimistic about the future, and the sector rotation also tells me the same story. Therefore, the US equity market is attractive. If there is a major correction in 2014, it would make a good entry point for the investors. It is uncertain whether or not the US consumers are going to spend as much as before, but we should expect the US consumers to become little less important to the global economy, over time. Instead, the US's strong return to the manufacturing is likely. This is not a bad news for the US, but the foreign exporters will not benefit from this structural shift.
2. Japan
Despite the hype of Abenomics, the Japanese economy has been very fragile. Data points that are publicized as positive are mostly due to the weak Yen and inflation. It is hard to find any good volume-based data. Energy has been kept low, hence the yen devaluation did little harm to the country, but the liquidity will flow back into the commodities at some point, so the investors should be cautious. Shale revolution will affect Japan significantly, so this aspect must be observed carefully, and the tax rule change is another factor to watch closely. In addition, domestic political movement that seeks to export domestic instability to abroad needs to be followed.
3. Europe
Euro's structural weakness is never fixed. This is positive for the European exports which are very competitive overseas (German automakers and luxury goods makers). However, there is a good chance of social instability in Europe.
4. China
In 2014, the number of investors who worry about Chinese economy grew substantially, and the sectors (commodities) and countries (Korea, Brazil, Australia), which are closely tied to China, have already been showing a poor performance. The communist party has been trying to meaningfully implement the idea of 'bankruptcy' in China, and this surely is a positive movement in the long run. However, some hidden-insolvent entities may decorate headlines in the process, and the financial market participants may panic, so investors should be wary of this.
5. Korea, Russia, Brazil
Because Japan is so desparate, and Korea has been holding KRW depreciated for such a long time, Korea is not capable of effectively acting against the weakening Yen. Few Korean companies' success story has been misleadingly shadowing the poor domestic economy, and (1) household debt, (2) low savings rate, and (3) lackluster property market despite the policy support make me be pessimistic about Korean economy. But the capital flow from the properties to the financial assets will continue, so we should expect the KOSPI valuation to improve and stay above the historical mean. Because Korean economy is heavily exposed to China, trading KOSPI will require a very careful observation of Chinese economy. If consumers return in the West, Korean exporters should benefit, but the magnitude of the benefit is likely to fall short of the expectation due to the Yen effect.
Russian indices are at an attractive level, but we cannot rule out the possibility of permanently damaged Russian oil and gas industry due to the shale revolution in the US, so I am hesitant to get into Russia. Brazil is also a tough market to play due to weak commodity demand from China and the slump in the commodity market in general.
II. By investment theme
1. Internet/ e-commerce (Google, Ebay, Alibaba, etc)- Korea: Interpark
E-commerce's penetration rate is still low, and the growth in e-commerce is almost certain. However, we should identify some companies (like Amazon) that are already in the bubbled territory. Because companies like Amazon are likely to drop most significantly in sell-off induced by negative macro developments, investors should take caution. Internet advertisements continue to grow at a fast pace, but because Google is a very big company, investors shall check whether this good company translates into good equities or not.
2. Online payments (Visa, Mastercard, American Express, Ebay, Alibaba, etc) - Korea: KG Inicis, KCP
The number of transactions by cash has been steadily going down, and online payment services' worldwide growth is robust. Because cross border transactions increase, margin improvements are expected as well. When companies like Google will enter the payment services market in a meaningful way needs to be thought through.
3. Chinese insurers (Ping An, etc)
Because the communist party will boost its social safety net, and also because the penetration rate is very low, Chinese insurers face a phase of very strong growth. However, the financial statements of these companies may be cooked, so it is more ideal if a significant drop precedes the purchases of these equities.
4. Shale revolution (Chesapeake, etc)
Shale revolution has the US government's key project, and it is technologically perfectly doable, so the impact of shale revolution on the rest of the sector and the world will be very significant. However, the expectations need to be gauged well.
5. Aging (Straumann, Nobel Healthcare, Allergen, etc) - Korea: Osstem Implant, Medy-tox, etc
Sectors benefiting from aging will have a strong performance, as this is a secular trend observed in the developed markets. Demand for Botox and various implants is only going to increase.