Daily Agenda: Macro Risks Test Market Confidence

FOMC minutes due this afternoon; Square IPO will test private tech valuations; Monsanto mulls another bid for besieged Syngenta.


Daniel Acker

Geopolitical turmoil and policy questions dominate market-risk narratives this morning. Treasury Department data released Tuesday confirmed that primary Asian economies are starting to exit from dollar-denominated debt, with China scaling back on its treasury holdings to $1.26 trillion in September while Japan’s share of U.S. indebtedness fell to $1.2 trillion. Despite this confirmation that America’s largest creditors are starting to withdraw in advance of anticipated Federal Reserve tightening, the dollar continues to retain relative strength with only a minor slide versus the euro. A key test of investor confidence in U.S. markets will arrive today in the form of an initial public offering from mobile-payments firm Square, expected to fetch a $4 billion valuation upon its debut — significantly below the valuation achieved in its last round of private financing and a signal that nonpublic tech multiples may not be sustainable in listed markets.

Federal Reserve to release minutes. The minutes from the latest meeting of the Federal Open Market Committee will be released today at 2 P.M. with expectations that they will confirm that the Federal Reserve will begin lifting rates in December.

Monsanto considers another bid for Syngenta. Comments by Monsanto executives Tuesday confirmed that the St. Louis company is considering another attempt to acquire Swiss pesticide producer Syngenta. The comments followed China National Chemical Corp.’s merger proposal for Syngenta. In August, Syngenta’s board rebuffed a nearly $47 billion offer from Monsanto.

Proposed railway merger. On Tuesday Calgary-headquartered Canadian Pacific Railway announced an anticipated, if unsolicited, bid to acquire Norfolk, Virginia-based Norfolk Southern Corp. Based on the current market capitalization, any purchase of the railway would involve more than $25 billion.

Pace of homebuilding in the US falls. US Census Bureau data released today indicated the pace of new home building is slowing sharply at an annualized rate of 1.06 million for the month of october versus a pace of 1.91 million in the prior month. weakness was particularly pronounced in the multi-unit segment. meanwhile, building permit figures rose for the month suggesting the positive trend for construction is not in jeopardy.

Blackrock shutters macro hedge fund. On Wednesday that Blackrock Inc. Is closing a macro hedge fund, BlackRock Global Ascent, due to multiple years of poor performance and investor withdrawals. Blackrock joins a host of other asset managers abandoning the global macro segment as shifting policy currents have caught managers flat footed.

Portfolio Perspective: Perception and Reality out of Sync in Chinese Markets

In China, there is a growing gap between perception and reality on the economy, which often leads to investors’ overreaction in the stock market. With overwhelming news flows and negative headlines, investors can easily get slanted when they try to understand the fundamentals of the economy. People who are in doubt or anxious follow the crowd, leading to a swing of sentiment from one extreme to another. This, however, creates perfect opportunities for value investors.

The market is worried about China’s growth slowdown but many of the concerns are exaggerated. The housing market, one of the most important parts of China’s economy, continued to rebound with residential property sales growth accelerated for five consecutive months since March and home prices in big cities started rising again. Although China might have made some mistakes in handling the equity market turmoil, the government has been adjusting its approaches to ensure stable economic growth in a more market-adaptive manner. With many policy tools still available, we are optimistic that the Chinese government is on track to deliver pro-growth policies to achieve its growth target of around 6.5 percent this year.

In the wake of market sell-offs due to moderating growth and renminbi depreciation, we should pause and ask ourselves: Is the market oversold?

In the second quarter, we predicted a correction was imminent in the Chinese stock markets because market bulls were too gung-ho about the rally. But now the Chinese stock markets — particularly the H-share market which is our favorite sector — were clearly oversold. During September, the 12-month forward price-earnings ratio of the Hang Seng China Enterprises Index, which tracks Hong Kong-listed Chinese companies, dropped to 5.8 times, way below its 10-year average and even lower than its trough during the global financial crisis in 2008.

We are contrarian investors and always want to make market volatility our friend, not our enemy.

We are confident that a long-term investor who follows this philosophy will be able to make strong profits despite short-term losses from market corrections that happen from time to time.

Cheah Cheng Hye and Louis So are co-chief investment officers of Value Partners, an asset management company listed in Hong Kong, specializing in Asia investments.