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 August 2007 |
August had been an incredible month, with Asian markets plunging 13% in 6 consecutive trading days in the second week and making sharp recovery thereafter. Investors went into panic early due to breakdown of the credit markets in the US and Europe, forcing central banks to inject huge amount of liquidity into the banking system. Sentiment, however, turned around sharply when Fed cut the discount rate and as sub-prime fears eased.
By month-end, the best performing market was H shares traded in HK, up 7.3%. Hong Kong was up 3.5%, but other markets fell. Korea and Taiwan were down 3.1% and 3.3% respectively. Smaller markets in Southeast Asia fared worse than their bigger neighbors. Singapore, Malaysia and Indonesia, for example, were down 4.4%, 7.3% and 6.6%. Overall, the Asian regional benchmark was down 1.4%.
Your account ended the month of August, down 3.02%. A historical comparison of its return against that of the MSCI regional index is shown below:
| |
YTD
|
2006 |
2005
|
2004
|
5-Yr
|
10-Yr |
| Your Account * |
18% |
30% |
16% |
2% |
-% |
114% |
| MSCI |
22% |
28% |
18% |
14% |
-% |
55% |
|
*net of all fees and expenses.
Early on, as stocks began to drop, we took profit on many of the account's positions to raise cash and put on hedges to protect the account's long positions. The market went into a free fall on the 14th and bottomed on the 17th. By then, the account had over 20% of its assets in cash. Including the hedges, the account was hedged to the extent of 25% of its long positions. Following the Fed action, we started buying back some of the shares but left the hedges intact. We didn't expect the market to recover so far and so fast, thinking that it would test the recent low. However, the rally continued without a pause so that the hedges were taken out at losses. Being cautious, we did not chase the market all the way up. Indeed, we took profit on several stocks that realized some outlandish gains.
The account under-performed the benchmark for the following reasons: Firstly, the hedge detracted around 0.45% in performance. Secondly, during the sharp rally in latter part of the month, big caps out-performed the mid and smaller cap stocks. Since your account has a substantial exposure to the latter sectors, the account's pace of recovery did not keep pace with the benchmark. Thirdly, the account ended the month with more cash than when it started.
At the end of August, the account had 11% of its assets in cash. The largest exposure remained in H shares, being 26.5%. This is followed by Korea at 22.9%, Hong Kong at 14.6% and Taiwan at 11%. Singapore, Malaysia, Thailand and Indonesia comprised 14% of the account's assets.
A number of stocks did well, particularly in China. For example, China Mobile and Ping An Insurance were up 16.3% and 19.3% respectively. In Hong Kong Esprit Holdings and Lifestyle were up 7.1% and 7.3% respectively. In the minus column, the portfolio's tech stocks were hit, as concern about possible US recession took its toll. Catcher Technology was down 12.6% and Epistar was down 8% in Taiwan.
In Asia, macro news remained upbeat. Korea reported exports rose 20% YoY in July. Industrial production was up 14.3%. The central bank raised overnight call rate by 0.25% to 5%. Foreign exchange reserves stood at US$255 billion. China reported GDP growth of 11.9% in 2Q'07. Industrial production soared 18% YoY in July and fixed asset investment was up 26.6% in the first seven months. On the 22nd, the central bank increased lending rate by 0.18% to 7.02% and deposit rate by 27bp to 3.6%. This was the fourth increase this year but the amount was rather modest.
Elsewhere, Taiwan reported GDP growth of 5.1% YoY in 2Q. Industrial production grew 13% YoY and export orders were up 23.5% in July. Indonesia reported GDP growth of 6.1% in 2Q. Exports were up 11.4% YoY in June. Singapore's GDP rose 8.6% in 2Q. Industrial production was reported to be up 21% YoY in July.
There were many earning reports last month. I will just cite a few. In Hong Kong, Esprit Holdings reported full-year '07 net profit, up 39%. Lifestyle announced strong 1H'07 net profit, up 40% YoY. In Taiwan, Catcher Technology reported 1H'07 net earnings growth of 9% YoY. Uni-President Enterprises reported 1H'07 results, with recurring profit up 54%. Mediatek reported EPS growth of 54%, YoY in 2Q'07. In Korea, Doosan Heavy reported operating profit gain of 43% in 1H'07. Hanmi Pharm announced flat operating profit in 2Q'07 but sales were up 11%. In Hong Kong, China Mobile reported net profit growth of 26% YoY in 1H'07. PetroChina reported net profit growth of 1.4% YoY in 1H'07. China Construction Bank reported net profit growth of 47% YoY.
The US sub-prime crisis appeared to have subsided, for the moment. The wild ride we had in August was a reminder that our regional markets are still much correlated to that of the US in times of distress, with perhaps the stock market in China being the exception. As I write this note, investor's sentiment remains fragile. Risk aversion seems to be a prudent strategy as the de-leveraging process in the U.S. works itself out in the months ahead.
While there is surely more volatility ahead, it is important to keep in mind that the Asian markets' plunge was not caused by any fundamental factors relative to the region. I would expect that, when the sub-prime issues come to an end, Asian stock performance will again reflect the strength of the region's economies and the companies therein.
We will schedule a quarterly conference call in early October and I plan to visit investors and prospects in January 2008. Meanwhile, if you have any questions, please let me know.
Thank you very much for your continuing support.
Best regards.
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