As the Chinese government made moves to suppress escalating lending growth driven by excess liquidity, it's worth comparing the similarities with the Japanese experience during it's boom years.
1) At its 2007 peak, the Shanghai A shares traded at more than 7 times book value. Japan's Nikkei index in 1989 peaked at 5 times. Chinese stocks has since halved in value
2) Price to earnings ratio of Chinese stocks using past 10 year average earnings (Graham and Dodds PE ratio) is 50X compared to about 15x in US
3) Residential real estate of Chinese cities is at a multiple of 15-20 times household income versus 12-15 times during Japan's real estate boom
4) Fixed asset investment as a proportion of GDP in China is currently 50% and Japan had similar growth rates then with 30-35% GDP
Finally a thought to hold:
A decrease to 10 year ago investment-to-GDP rates for China would have a disasterous effect on all emerging economies and countries exporting to China.
Eric Tan,
London
Sunday 17 January 2010
Factors affecting soverign default risks. Markets for the week ending 15-Jan-09
Given recent statements made by senior central bankers in Europe with regards to a further deterioration in the Greek bond markets, what are some of the factors that markets should be concerned about in terms of soverign default risks:
1) Debt servicing costs are set to soar as a proportion of GDP in Europe and US as the government debt issuance over the last 18 months to rescue the economy was one of the largest in recorded history
2) Structural deficits from a drop in tax revenue (from certain sectors) over the recessionary period experienced in the last 18 months may become a permanent feature that countries will have to come to face with
3) Weak and unstable economic outlook makes it difficult for governments to time and put in place their plans for fiscal tightening
4) Age related and social services spending are starting to rise and may alter the status quo and result in significant under-budgeting
5) High levels of capital mobility can complicate debt management and credit agencies are becoming very quick to issue concerns and downgrades
The only way out for governments is to come up with creditble details for financial stabilisation and plans for structural reforms to convince the investors that they will be able to address these demographic issues, such as raising pensionable age and look for new growth sectors to replace the sectors affected by the crisis. Strong political leadership is necessary to push through the changes necessary.
Eric Tan,
London
1) Debt servicing costs are set to soar as a proportion of GDP in Europe and US as the government debt issuance over the last 18 months to rescue the economy was one of the largest in recorded history
2) Structural deficits from a drop in tax revenue (from certain sectors) over the recessionary period experienced in the last 18 months may become a permanent feature that countries will have to come to face with
3) Weak and unstable economic outlook makes it difficult for governments to time and put in place their plans for fiscal tightening
4) Age related and social services spending are starting to rise and may alter the status quo and result in significant under-budgeting
5) High levels of capital mobility can complicate debt management and credit agencies are becoming very quick to issue concerns and downgrades
The only way out for governments is to come up with creditble details for financial stabilisation and plans for structural reforms to convince the investors that they will be able to address these demographic issues, such as raising pensionable age and look for new growth sectors to replace the sectors affected by the crisis. Strong political leadership is necessary to push through the changes necessary.
Eric Tan,
London
Sunday 10 January 2010
Hold on tight. Markets for the week ending 8-Jan-10
The financial world was almost at a standstill this week as market observers waited for the December US non-farm payroll numbers to be announced on Friday.
And to the nasty surprise of the markets, the 85,000 drop in non-farm payrolls served as a timely reminder that the US economy is not completely out of the trough yet. As we begin 2010, it is not a bad idea to remind ourselves that despite the stock market recovery experienced in the last 3 quarters of 2009, the new year is likely to bring more volatility. On many metrics, the S&P500 valuation is probably close to +/- 20% fair value, which means, unless there are more positive market data or economic indicators, the market has already priced in the restocking cycle and increase in demand from US consumers as property values stop falling.
On closer inspection of payroll numbers, we should also note that as much as 660k people chose to leave the labour force and stop looking for work, hence the adjusted headline rate of unemployment would should really be 10.4% instead of 10%.
Eric Tan,
London
And to the nasty surprise of the markets, the 85,000 drop in non-farm payrolls served as a timely reminder that the US economy is not completely out of the trough yet. As we begin 2010, it is not a bad idea to remind ourselves that despite the stock market recovery experienced in the last 3 quarters of 2009, the new year is likely to bring more volatility. On many metrics, the S&P500 valuation is probably close to +/- 20% fair value, which means, unless there are more positive market data or economic indicators, the market has already priced in the restocking cycle and increase in demand from US consumers as property values stop falling.
On closer inspection of payroll numbers, we should also note that as much as 660k people chose to leave the labour force and stop looking for work, hence the adjusted headline rate of unemployment would should really be 10.4% instead of 10%.
Eric Tan,
London
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