Saturday, January 14, 2006

China makes Soros' mouth water

Soros addressed another packed audience comprising of academics and tertiary students at the Raffles City convention hall on 11 Jan 06. However, his talk was largely focused on his current pet cause of championing for an open society.

Even though Soros kicked off his 20 minute speech by saying that he was thankful for the publicity generated when certain governments attributed the Asian financial crises to him, the speech and the follow up discussion was largely a philosophical one and hence, is of no relevance to this blog. Instead, this blog whips up a mix of the nuggets of financial information he offered during this and Monday's talk.

Soros says today's opportunities in China is, literally, mouth-watering. The current situation reminds him of the under-developed financial markets which he used to do very well in. Generally speaking, he thinks that the current share prices do not reflect values of the Chinese companies. This difference arises because of the issue of corporate governance where the interest of management and shareholders may not be aligned. His point echos that of Charlie Munger who once remarked that the agency problem is an important question which investors in Chinese companies should ask, but often forget to do so.

To which, Soros continued that he is beginning to observe increased alignment of interests. When this agency problem is corrected, he expects big opportunities to present.

Soros considers the intervention of governments necessary because the authorities can prevent financial markets from swinging to extremes. In fact, he thought that the then Hong Kong treasury secretary was correct to use the reserves to shore up falling equity prices during the Asian financial crises and turn in profits subsequently.

When queried if markets were efficient, Soros opined that he was of the view that only 50% of the market is efficient while the other half is not. The answer should not come as a surprise for it is the existence of in-efficiency which allowed him to make his fortune and retire from active fund management at the age of 50.



Anonymous Anonymous said...

interesting post, do you agree with Soros' sentiment?

9:46 PM  
Blogger Mr Market said...

Generally, yes. There is a wall of worry. (1) twin deficits in USA (2) property bubble (3) a depreciatiating USD [after interest rate hikes abate] (4) oil and increases in prices of other commodities and (5) weakening earnings of major corporates.

2005 was somewhat a perculiar year. The general stock market did well despite several concerns such as rising interest rates, spiralling oil prices.

Personally, I have been bearish on the big US picture since mid 05. Whilst my view was way off in the last calendar year, I feel that it is only a matter of time when these factors sink in and take the steam out.

10:56 AM  
Anonymous Anonymous said...

I tend to agree with your five points of "worry". I would add (6) the explosion of executive compensation in America, and (7) the federal budget deficit which leaves the government much less moderate any future economic slump.

My problem with China is that the general lack of transparency in the market and the government leaves me uncomfortable with making any substantial investment.

What is your take on this issue? I would like to hear the perspective of someone with more experience in the asian markets.

12:51 AM  
Blogger Mr Market said...

Anonymous, thanks for your comments on the blog.

Mr Bernanke or Helicopter Ben as some refer to him has taken over the reins at the Fed. Interesting to see how he will run the Fed and whether his policies will take the "health" of the stock market into consideration, in the face of the "points of worry" we raised.

China is emerging and as with all emerging countries, the opportunities are plentiful but other risks are also abound. In particular, corporate goverance which took years to evolve in the USA will take years to take root in China.

There are close to 100 Chinese companies (Chinese operations and Chinese management) listed on the Singapore Exchange. Most trade at low valuations reflecting the risk premium which investors expect from them. Many are also smallish Chinese outfits and investors' confidence has been somewhat rocked after several lowered earnings guidance. This may be suggestive that some companies were primed for a listing.

But it is probably unfair to cast the whole basket away and label all as "bad apples". Several of them have done well. Common traits of these companies are that they have an established track record and for those who do not, they allow an "brand name" investor to take a sizable stake or a seat on the board. For example, Templeton took a stake in a soya bean producer named Celestial (operations in Heilongjiang) after Mark Mobius and associates was allowed to observe the board meetings. The market views these developments positively as it improves corporate governance practices and it is probably an affirmation that a reputable third party has done the recee/leg-work for the small investor. Personally, I subscribe to the scuttlebutt approach. As I cannot see the products or the operations, I tend to be extremely cautious as I am based in Singapore.

An alternative to obtaining direct exposure would be via companies with sizable Chinese operations. This approach would enable one to ride the Chinese uptrend without taking on the Chinese corporate goverance risk. Without addressing my mind too hard at it, I can already quickly think of say, BUD, as a company with a stake in a Chinese number three brewery. In my local market, there are companies with Singapore management team which have their business operations substantially in China too.

Here's another spin. China is also guzzling up natural resources as its economy takes off. Its attempts to purchase American oil refineries (?) is a case in point. So a well placed position in a natural resource company which the Chinese lack/need could well yield good results too.

Welcome your further comments and views here or via email. Cheers.

7:39 PM  
Anonymous Zack said...

New topic, but I cannot get your email link to work so I will introduce the topic here. Have you followed any of the articles (or recent book) by Matthew Simmons about the "oil peak". If not try this link for a good synopsis.

I am curious about whether you have considered this topic in your investment decisions.

Feel free to email at

12:41 PM  
Blogger Mr Market said...

Zack, thanks for commenting. Indeed, oil prices are at the back of my mind when I analyse.

I shall share my thoughts in a more comprehensive post shortly.

6:46 PM  

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