Asia’s economic development continues to attract global investor’s interest. Yet, investing in Asia-focused hedge funds has proved challenging due to illiquidity, shorting constraints, and underdeveloped legal systems. Moreover, Asia consists of many diverse economies and heterogeneous cultures, each presenting unique challenges and at different stages of economic and financial market evolution. In this report we:…
Parts of China’s “shadow banking system”—broadly defined as the non-bank credit and funding markets—have some troubling similarities to US securitization markets circa 2007–08. Specifically, the “guaranteed returns” and off–balance sheet nature of certain products—as well as a “borrow short and lend long” asset-liability mismatch—are worrisome features, particularly considering that the area, which barely existed in…
Given the tremendous growth in debt-financed activity, investors are rightly wondering whether China is near a tipping point where its credit boom becomes a credit bust. China recently made headlines when it allowed its first ever bond default. A second smaller bond default has occurred in the weeks since. Add to that various news stories…
We maintain our neutral positioning on Japanese equities The “arrows” of Abenomics in Japan appear to be misfiring: growth is slowing, the yen has stabilized, and recent increases in inflation may prove temporary. Despite the impressive recovery in Japanese earnings they remain 30% below 2007 levels. Whether the third “arrow” of Abenomics will hit the…
In 2014, we expect a rougher road for Australia, which is currently in a transition phase that has been quite benign so far, but may not remain so.
While access to the Chinese A-share market is improving, investors should not rush in. Given that the market is still evolving, finding a skilled manager to navigate the challenges facing the A-share market is key.
Despite the recent sell-off, Japanese equities are up considerably since last October given the promise of Abenomics; however, we remain tactically neutral given valuations and significant structural headwinds.
For 2013, Australian equities look vulnerable in the near term, but still appear attractive relative to fixed income. While we are more cautious than the consensus, we suggest investors maintain neutral allocations to risk assets and keep the ship “steady as she goes.”
While the dim sum bond market has grown rapidly and there are good reasons to expect it to provide investment opportunities in the future, we do not presently advocate a direct allocation to dim sum bonds given issues such as size, illiquidity, lack of transparency, and governance.
Although valuations are reasonable, macro risks remain substantial. For now, investors should be neutral and seek to build overweight positions on weakness.