Comp-Russia-ADRs

In recent months, in addition to the spectacular run up in equity markets, Asian real estate market has also heated up. In most countries this rise is not warranted based on fundamentals. While its true that traditionally most Asians bought residential real estate as a place to live lifelong as opposed to make a killing via flipping in recent years that attitude is changing. Due to the availability of cheap credit, more Asians have become real estate speculators.

1. Singapore
In the tiny city state of Singapore most of the residents live in apartments due to lack of land. While the Singaporean economy has rebounded slightly this year, prices in the property market are back to pre-crisis levels. As the domestic economy is mainly based on global trade and services-based, if the global economy goes into a tailspin like last year, then the economy of Singapore will be negatively impacted.

On Nov 3rd, Asia Times reported on the property bubble in Singapore in a piece titled New heights for Singapore property. The article stated:

“Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month. Over 43% of the transactions that took place in July fell under the middle- to high-end tier, with prices anywhere between S$1,000 (US$715) and S$1,999 per square foot depending on location.”

From the Journal’s Fears of a New Bubble as Cash Pours In:

“Over the summer, a Singapore condominium developer raised prices 5% the day before units went on sale. After dozens of would-be buyers lined up on a steamy night, the developer — a joint venture of Hong Leong Group and Japan’s Mitsui Fudosan — held a lottery for a chance to bid on the units. Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years.”

Despite the promotion of Singapore as a major financial and tourism destination, high property prices may not be sustainable. The usually effective and prudent Singaporean government does very little to curb the growth of bubble in the property market.

2. India
The real estate market in India is a huge bubble and continues to show no sign of slowing down. Property prices in especially the major cities have shot up many fold over the years and are beyond the reach of ordinary middle class folks. The Euphoria of the India Growth story and the availability of cheap credit has propelled property prices to astronomical levels. Working with their highly powerful political friends, developers in India maintain artificially high prices defying the logic of supply and demand. During the last few years when the Indian economy took off, property prices soared and in the credit crunch last year prices barely fell. This home prices in many cities are reaching or exceeding pre-crisis levels.

The supply side of the equation is fairly high now since in addition to local money, foreign investors are pouring money in the market via private equity deals. Astonishing profits in real estate has lured all types of investors into the market leading to speculation in many local markets. The growth in real estate also poses a huge risk to the Indian banking industry since they lent huge loans to developers and buyers alike.Prices in most cities are expensive with an average looking 2 BR apartment costing a $150K or more. In many projects, basic infrastructure such as drinking water, sewage systems, roads, etc. are not developed to match global standards. Despite these issues, home prices have increased in double digit percentages in some cities just in the first half of this year.

3.Hong Kong
Housing demand has always been high in Hong Kong. With the limited availability of land builders usually built huge projects where residential towers reached many floors. However due to the strong performance of the China’s economy, many of the wealthy mainland Chinese are now investing heavily in the property market in Hong Kong creating a bubble. A couple of examples from The Wall Street Journal article:

“In Hong Kong, high-end real-estate prices are soaring. A luxury flat in the tony Midlevels district is expected to sell for US$55.6 million, or $9,200 a square foot, said developer Henderson Land Development Co. Elsewhere, a bidder at a city-run auction to operate food stands at February’s Lunar New Year celebration recently paid a record US$63,225 for the right to occupy a 400-square-foot stall to sell fish balls and other snacks. Prices in the auction of 180 stalls were up 33% from 2008.”

In order to curb this bubble in the high-end property market, Hong Kong’s Monetary Authority has raised the minimum down payment required on luxury homes from 30% to 40% late last month.

From In Hong Kong, a $56.6 Million Apartment in the New York Times:

“Donald Tsang, the city’s chief executive, cautioned in his annual policy address Wednesday that the boom might not last.

“The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home and the possibility of a property bubble,” Mr. Tsang said. ”

4. China
Residential prices in mainland China started increasing again early this year after a lull in 2008. The demand for housing exceeds the supply in most of China. However prices at the current levels cannot be sustained in the future. The rising real estate bubble in China was underscored earlier this year when a house in Shanghai sold for a whopping £25m.

The rising property market is also causing concern among the rating agencies. In China property market a sovereign rating concern - Fitch Reuters wrote:

“Chinese property and stock prices have surged this year, helped by very loose monetary policy and aggressive bank lending.

“The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness.”

Chinese banks extended a total of 8.67 trillion yuan ($1.2 trillion) in new loans in the first nine months, 75 percent more than all of 2008, triggering concern about potential new bad loans ahead.”

Flexible government policies this year is causing the rise in real estate prices. The Chinese government has a strong incentive to keep the party going since the property sector is one of the biggest drivers of China’s domestic consumption, accounting for one-tenth of China’s GDP. China is following the example set by our Uncle Sam that created the largest real estate bubble in this country. The US government’s policies in the decades since WW II considered homeownership to be a right as opposed to a privilege. This misconstrued policy led millions of people to buy homes which they could never afford in the first place.

5. Australia
Residential home prices are rising in Australia. A recent Marketwatch article stated “Defying the global real-estate shakeout, Australian house prices surged to a record in the third quarter, lifted by a strong economy and rising demand from a fast-growing population.”

It added:

“A gauge of prices in the eight regional capitals rose 6.2% in the third quarter from a year earlier, and 4.2% above the previous quarter, the Statistic Bureau said Monday. The Australian government has cited a shortage of available homes among reasons for the rapid price gains. Also commonly cited among economists are population gains as the nation’s resilient economy, which avoided the recession triggered by the global economic maelstrom, attracts a steady flow of immigrants looking for jobs.”

However it must be noted that the Australian government triggered the rise in home sales due to liberal incentives offered to first-time home buyers. For a long time the first-time home-buyer grant was A$7,000. In October 2008, the government increased it to A$14,000 for the purchase of established homes and A$21,000 for the purchase of newly-built homes. Many immigrants and locals took advantage of this great deal giving a boost to home sales.

From the Journal piece: “After a Melbourne property-research firm recently predicted that average home prices will double over the next 12 years, a news report in Australia’s Herald Sun said: “The staggering prediction shows the importance of buying a home as soon as you can afford it because the longer buyers delay, the more chance there is that their dream will slip out of their reach.”"

In summary, the real estate market in many of the Asian countries is indeed a massive bubble now and is being maintained that way by governments. The rise in property property prices in emerging markets such as India, China are do not support the fundamentals and are bound to pop in the future. For international investors caution is warranted before jumping into real estate investments in Asia.

Related ETFs:
SPDR DJ International Real Estate ETF (RWX)
iShares FTSE EPRA/NAREIT Asia (IFAS)
WisdomTree International Real Estate (DRW)
Claymore/AlphaShares China Real Estate (TAO)

When oil prices rose to almost $150 per barrel last year, many of the oil exporting countries such as Saudi Arabia, Iran, Russia, etc. reaped huge profits and built up their foreign exchange reserves.

Each year the oil giant (BP) publishes the “BP Statistical Review of World Energy“.The following are some interesting charts from the this year’s report:

1. Distribution of Proven Oil Reserves over the years

2. Historical Oil Prices from 1861 thru 2008

3. Coal Production and Consumption

4. Distribution of Proven Natural Gas Reserves over the years

The US was the largest consumer of oil in the world in 2008 at 884 million tonnes. The second largest consumer was China at 375M tonnes followed by Japan.

On October 27th, ING (ING) one of the world’s largest insurance companies, was forced to split itself into two in order to comply with the strict rules enforced by the EU on firms that received government financial aid during the credit crisis last year. ING plans to divest its US online baning operation ING Direct, insurance business and about 6% of the retail banking in domestic market. ING ranks 6th in the world based on its insurance revenues and 13th among European banks as of June this year.

ING’s World Headquarters, Amsterdam, The Netherlands

After the restructuring ING’s Tier 1 ratio would stand at 7.6% forcing it to raise further capital form investors. ING plans to raise 7.5 EUR to repay half of the bailout funds it received from the Dutch government.This divestiture plan is a good strategic move for ING. It never made sense to operate in two unrelated fields - banking and insurance as a conglomerate. Globally firms that operate exclusively in insurance have thrived much better than banks that try to get into insurance. Firms generally end to perform better when they operate in one niche area that they can concentrate on with all their resources.

In addition to ING, what are the other Top Global Insurance companies?

The following chart shows the top global insurance firms by 2008 revenue:

Source: The Wall Street Journal

France-based insurance company AXA (AXA) currently pays a 2.16% dividend and has nearly tripled from March lows. Insurance is a big business in France since the French save large amounts for retirement via insurance policies. German insurer Allianz recently delisted its stock form the NYSE. The fifth largest global insurance company Aviva (AV) of UK recently started trading in the NYSE. Zurich Financial Services AG of Switzerland (OTC: ZFSVY) has a 4.34% dividend yield.

1. The Malaysian banks was virtually unaffected by the global credit crisis last year that decimated many banks especially in the western world. The Top Banks such as May Bank, Public Bank, CIMB and Malayan banking (OTC: MLYBY) were not involved heavily in derivatives and weathered the crisis easily.

2. After the Asian crisis, Malaysia enacted many regulations which prevented the reckless flow of capital into and out of the country. These regulations require that capital invested in Malaysia stay invested for some years before they can be taken out.

3. As the world’s largest producer of Palm oil, Malaysia has a leadership position in providing cheap edible oil to many developing countries. Palm oil is a cheaper substitute for vegetable or sunflower oil which are used in cooking. There are many huge palm oil plantations in Malaysia which benefited nicely last year when palm oil prices soared. Kuala Lumpur Kepong which trades in the OTC market with ticker KLKSY is engaged in palm oil and rubber production among other products.

4. In 2008, Foreign Direct Investment (FDI) into Malaysia increased by 38% (RM 46.1 Billion) from the previous year. Australia was the largest investor followed by US, Japan and Germany. However this year, FDI plunged to just $13 B from January thru May. But in the future FDI may increase substantially as the government has announced many liberalization measures and the country holds potential in sectors such as renewable energy, manufacturing, etc.

5. Since Islam is the largest and official religion in Malaysia, the financial sector follows the principles of Islamic finance and take very low risks compared to banks in other countries.

6. Since Independence from the British, the country has been a Parliamentary democracy
with a stable government in most years. Hence political risk is low.

7. Corruption is lower in Malaysia relative other ASEAN countries such as Indonesia, Thailand and others.

8. In addition to palm oil and rubber, Malaysia is blessed with an abundance of forestry, fertile agricultural land minerals like copper, iron-ore,etc.

9. Crude oil and Natural gas were discovered offshore in the 1970s and today Malaysia subsidizes gasoline for domestic consumers and is a net exporter of crude oil. The famous Petronas Tower is owned by the national state-owned oil giant Petronas.

10. While Malaysia has failed to succeed in innovation based industries like IT, biotechnology, semiconductors, etc. it has been able to excel in the agricultural and commodity sector and more recently is heavily encouraging the growth of tourism, healthcare and education sectors. Genting Berhad (OTC:GMALY) is a major entertainment company that operates the famous Genting Highland Resorts outside of Kuala Lumpur, Sentosa Island in Singapore and others.

The following chart shows the 30 Most Valuable brands of Malaysia:
Click to enlarge

Source: Interbrand

A simple and easy way to invest in Malaysian equities is via the iShares MSCI Malaysia ETF (EWM). It has about 50% of the assets in financials and industrials. This ETF has an asset base of $544 M and in 1 year has performed well with a growth of about 24%.

The following is a list of Foreign Bank ADRs that closed at under $10 as of 1/05/2009:

1.Bank: National Bank of Greece (NBG)
Country: Greece
Price: $7.75
Dividend Yield: 1.57%

2.Bank: Grupo Financiero Galicia (GGAL)
Country: Argentina
Price: $6.00
Dividend Yield: No regular Dividends Paid

3.Bank: Allied Irish Banks (AIB)
Country:Ireland
Price: $5.63
Dividend Yield: No regular Dividends Paid

4.Bank: Mitsubishi UFJ Financial (MTU)
Country:Japan
Price: $5.44
Dividend Yield: No regular Dividends Paid

5.Bank: Lloyds Banking Group (LYG)
Country: U.K.
Price: $5.57
Dividend Yield: No regular Dividends Paid

6.Bank: Mizuho Financial (MFG)
Country: Japan
Price: $4.10
Dividend Yield: No regular Dividends Paid

Lloyds Bank of UK is trying hard to free itself from the yoke of the British government which is a major shareholder now. Before the crisis began Lloyds used to be an excellent British bank stock with strong and consistent dividend payments year over year.Even now the bank has a highly valued franchise in the UK. Unlike its competitor Anglo Irish Bank which was nationalized by Ireland, Allied Irish Bank survived and continues to operate as a private financial institution.

The following graphic from The Wall Street Journal shows the European banks with assets in Trillions of Euros in the first half of this year:

Except Unicredit, ING (ING), Credit Suisse (CS) and Commerzbank (OTC: CRZBY) all the other banks hold assets in excess of 1T Euros. BNP Paribas (OTc: BNPQY) of France is the largest in terms of assets held. Its competitor Societe Generale (OTC: SCGLY) is much smaller in size by assets. ING will soon itself into two divisions and spinoff its US online banking unit ING Direct.

In the US, just four superbanks have emerged from this crisis with each having over $1 Trillion in assets. These four banks are:

1. Citibank (C)
2. JPMorgan Chase (JPM)
3. Wells Fargo (WFC)
4. Bank of America (BAC)

But before getting into the list, we must remind ourselves that the easy money in bank stocks may already be gone. For example, in Is the bank stock rally over? Peter Lee of Euromoney said:

“It is possible that the cosy narrative of crisis giving way to healing and recovery in the global banking industry might not progress quite so smoothly. Credit costs are rising and the worst might still be in front of banks, not behind them.

In the six months following their lows in early March, US financial stocks rallied by 135% to early October while the overall stock market rose 51%. In Europe, financial stocks put on 121%, compared with 54% for the overall market, and in the UK they rose 139%, compared with 45% for the market as a whole.

Forward price-earnings ratios in the broad US and European stock markets are now above historical averages, and for financial stocks in particular even above their pre-crisis levels.

Banks aren’t yet saying that the peak of credit woes has passed or is even in sight. Investors, however, don’t seem to care. “

The first set of banks comes from the Journal’s article on November 2nd titled Investing in Banks? Check Loss Buffers.

According to this piece one metric that investors must consider when selecting bank stocks is the bad-loan reserve also called as provisions. “If a bank has a strong reserve against credit losses today, its earnings are likely to recover much more quickly than at less-girded peers.”

The six banks in this article listed are:

Source: The Wall Street Journal

According Bernstein’s research PNC Financial (PNC) has the highest bad-loan buffer at 130%. Citigroup’s(C) buffer of 109% is equal to the charge-off rate over the next 12 months. The bank with lowest buffer is Bank of America(BAC) at 90%.

The following list of regional banks increased their branches last year during the global turmoil. BusinessWeek says that this may give them an advantage as the industry recovers. For example, last year PNC of Pittsburgh gobbled up National City of Cleveland gaining hundreds of branches in Ohio and other states.

Source: BusinessWeek

U.S. Bank (USB) continues to grow by acquisitions and is a strong performer among the regional banks. South-based BB&T (BBT) and Regions Financial (RF) also have strong franchises and offer high dividend yields now.

So what holds for the U.S. banking industry in the future? Will the U.S. banking industry go thru similar phases that the Japanese banks went thru in the past?

The following chart shows the various phases in Japan’s Banking crisis:

Source: Regional Economic Outlook: Asia and Pacific, IMF

In the first phase from 1990 thru 1996, the banking crisis unraveled in Japan and was followed a fragile recovery followed by the withdrawl of fiscal stimulus. If this were to occur in the U.S., we are now only in the second year of the phase one. Another 6 more years may have to go before phase one ends. In the next phase, renewed stress followed due to monetary tightening. Japan also attempted a second recovery in this period. So from 1990 to 2000, Japan had its lost decade during which recovery was attempted twice. Finally after the dot com crash, private demand picked up and many Japanese banks and companies were restructured which led to a sustained recovery from 2001 thru 2007. Since Japan exports heavily to the largest emerging market of China, the trade helped Japanese economy gain a solid footing after a decade of flat to sluggish growth. It is too early to tell how the US banking industry will look like in the next few years.

As more and more small community banks disappear, regional banks such as U.S. Bank (USB), Regions Financial (RF), PNC Bank (PNC), etc. will become larger by acquiring the assets of failed banks on the cheap.

Based on 2008 earnings, Royal Bank of Canada(RY) was one of the two Canadian banks in the 25 most profitable banks of the world.

Royal Bank is the most profitable bank over the long-term as well. Royal Bank(RY) stock has performed consistently over the past years and currently the stock has a 3.79% dividend yield. RY has more than doubled from its March lows.

1-Year Performance of Top Five Canadian Bank stocks:

All the five Canadian banks have run up in a synchronized fashion over the past year.However as expected, the Royal Bank (RY) is the best performer.

According to C&EN, sales for the Top 50 companies rose by 9.6% in 2008 to $892B as the price of oil soared to about $150 per barrel. The industry had strong first three quarters with the fourth quarter among the worst the industry has ever seen. Some of the chemical companies that disappeared last year due to merger include ICI of UK, Lyondell Chemical, Germany’s Hoechst and France-based Rhone-Poulenc.

The Global Top 50 Chemical Companies

Click to Expand

Source: Chemical and Engineering News (C&EN)

Chemical giant BASF (OTC:BASFY) of Germany is the world’s top chemical maker in both the lists. With total sales of $70.5B, BASF topped the ranking for the sixth year in a row. Profits declined by about 40% to $3.9B. Most of the profits came from its Wintershall oil and gas exploration business instead of its chemical business. In the last quarter BASF’s net income fell by 69% to $349M and it warned that sales and earnings are expected to fall for the full year.”After a steep plunge, we are now climbing gradually out of the trough. The recovery will be slow and uneven,” Chairman Jurgen Hambrecht said in a statement.

“In the past three months our business has stabilized at a low level,” Hambrecht said. “Positive impulses are coming from Asia, especially from China, and from parts of South America. Europe and North America remain weak.” (Source: MarketWatch)

Dow Chemical (DOW) of U.S. ranked at number two in C&EN’s list and third in ICIS’s rankings. Total sales was $58B for a 7.5% increase than 2007. But profits plunged a by 44.1% to $2.2B. This shows that despite raising prices by two times last year Dow’s profit was hit pretty hard. In 3rd quarter, 2009 the Midland, MI-based biggest U.S. chemical company reported a profit of $711, a jump of 66% due to asset sales and steep cost-cuts. From its March lows of $5.89 Dow’s stock price has advanced by over 75%.

BASF and DOW continued their acquisition strategy in 2008 with the purchase of Swiss speciality chemical maker Ciba by BASF and Rohm and Haas by Dow Chemical. Due to these purchases both the giant’s earnings must improve next year.

The Global Top 100 Chemical Companies

Click to Download

ICIS-Top-100-Global-Chemical-Companies

Source: ICIS Chemical Business

Some of other German companies included in the lists are Bayer (OTC: BAYRY), Linde (OTC: LNAGF), Evonik and Lanxess. U.S. companies listed include ExxonMobil (XOM), DuPont(DD), PPG Industries (PPG), Chevron Phillips (CVX), Praxair(PX), Huntsman(HUN), Air Products(APD) and Mosiac(MOS).

Among the emerging market chemical companies, the top ranked were PetroChina(PTR) , Sinpoec(SHI) of China, Reliance Industries of India, Braskem(BAK) of Brazil and Sasol (SSL) of South Africa.

Among the fertilizer companies listed in the rankings include Yara(OTC: YARIY) of Norway, PotashCorp(POT) of Saskatchewan(Canada), Mosaic of US and Israel Chemicals of Israel(OTC:ISCHY).

The Top 10 Countries in the Prosperity Index are listed below:

The Legatum Prosperity Index is unique because it “is the world’s only global assessment of wealth and wellbeing; unlike other studies that rank countries by actual levels of wealth, life satisfaction or development, the Prosperity Index produces rankings based upon the very foundations of prosperity – those factors that help drive economic growth and produce happy citizens over the long term.”

Finland took the top spot followed by Switzerland, Sweden, Denmark and Norway.Compared to the U.S., these top 5 countries rank higher in Health, Safety& Security, Governance and Social Capital.

The U.S. was ranked at overall ranking of 1 in 2007 in a three-way tie that included Sweden and Norway. In 2009, the US has fallen behind to ninth rank. Despite the current economic slowdown, USA is the best country in the world for Entrepreneurship and Innovation.

Health is one category that US performs poorly. In the top 10 listing, it has the worst number for health. Globally US ranks 27th. The report notes “Dissatisfaction
with their overall health is dragging down Americans’ sense of well-being, affecting their
determination to get ahead and their faith in their healthcare system.”

Despite the billions of dollars spent on security at the federal and state levels, US ranks 19th in the safety and security. This is not surprising since the current economic problems are leading more Americans to commit crimes. As the gap between the haves and have-nots widens and more gated-communities spring up across the country, security and safety in many communities may get worse. The report also cited the high per capita murder in this country relative to other developed countries. For example, Finland ranks number 1 in this category followed by Norway.

Commenting on the report, Will Inboden wrote in Foreign Policy wrote:

“The distinction between domestic and foreign policy is very thin — America’s education system, health-care system, domestic economy, and even family and community strength, are inseparably linked to its international posture and power. In other words, yes, the prevailing debate about health care is in part a foreign-policy issue.”

This argument completely misses the mark. One country’s education system and health-care system are not related to foreign-policy.The broken education system in this country and the convoluted healthcare system has nothing to do with America’s foreign policy or power.Some might argue that the main problem with our government policies is that we do not have our priorities right. We ignore many of our domestic issues and instead focus our resources, time, money and energy on foreign issues that most Americans could not care. Would you agree?