China Trade - Burning Investors

The Irresistible China Trade That Keeps Burning Investors

 Cindy Wang, August 6, 2015 — 9:30 PM IST

Updated on August 7, 2015 — 12:17 PM IST

It looked like a no-brainer for buyers of Chinese shares in Hong Kong.

Valuations in April were 25 percent cheaper than in the mainland, monetary stimulus was just getting started and money was pouring in through Hong Kong’s new exchange link with Shanghai. Bulls snapped up funds tracking so-called H shares at a record pace, while analysts at some of the world’s biggest banks predicted big gains to come.

The only problem, though, is that the trade hasn’t worked. Dragged down by weak Chinese economic data, a crash in mainland markets and signs of an imminent lift-off in U.S. interest rates, the MSCI China Index has tumbled 21 percent since the end of April -- the biggest drop among global benchmark indexes tracked by Bloomberg.

It’s the latest setback for a market with a long history of investor disappointment. The MSCI China gauge has returned less than 1 percent annually since 1992, versus about 9 percent for the Standard & Poor’s 500 Index. Strategists at CLSA Ltd. and Chart Partners Group Ltd. who predicted this year’s sell-off say H shares have further to fall.

“You will only get a bull case in H shares when there is stability or positive momentum in the economy,” said Francis Cheung, the head of China strategy at CLSA in Hong Kong, who turned negative in early June. “The bear case would be the economy continues to slow. The bear case is more likely.”

Economic Slowdown

The MSCI China index rose 1.6 percent at 2:46 p.m. in Hong Kong.

China’s latest economic data suggest growth in the world’s second-largest economy is still weak. Profits at industrial companies declined by 0.3 percent in June and a private gauge of manufacturing in July sank to a two-year low. Data due this month will probably show declining imports and exports, according to economist estimates compiled by Bloomberg.

Meanwhile, the flood of money into H shares through the exchange link has slowed to a trickle as China’s government encouraged domestic funds to shore up the local market instead. After an $8 billion influx in April, net buying since then has amounted to just $966 million.

International investors have also been cutting their holdings amid speculation the Fed will raise interest rates as soon as next month, making riskier emerging markets less attractive. The Hang Seng H-Share Index ETF, which lured record inflows in April, has recorded withdrawals for the past two weeks.

Too Cheap

China’s H shares will probably drop about 10 percent over the next two months as slowing economic growth and collapsing commodity prices boost the chance that indexes will fall below key support levels, according to Thomas Schroeder, the founder and managing director at Chart Partners. He advised investors to sell in April as H shares were peaking.

For Roger Xie, a Chinese equity strategist at HSBC Holdings Plc in Hong Kong, valuations are too cheap to ignore after the slump. The MSCI China index trades for 1.4 times net assets, versus 2.1 for the MSCI All-Country World Index, near the widest gap since 2003.

“Value-oriented and long-term focused investors should look at some high-quality H-share companies,” said Xie, who predicts a 26 percent rally in the Hang Seng China index by year-end.

Value Trap

H shares are also attractive relative to their mainland-traded counterparts, according to Bin Shi, a managing director at UBS Global Asset Management in Hong Kong. The valuation discount on dual-listed shares in Hong Kong is still around 25 percent, according to the Hang Seng China AH Premium Index. Aluminum Corp. of China, the largest mainland-listed aluminum smelter, trades at a 67 percent discount.

Hong Kong-listed shares may be cheap for good reasons, said Daniel So, a strategist at CMB International Securities.

Benchmark indexes are dominated by banks and raw-materials companies, which are coming under pressure from bad loans and falling commodity prices. On top of that, foreign investors are concerned about increased government intervention in markets as policy makers seek to prop up mainland equities, according to So.

“H shares are deemed a value trap by some investors,” he said. “There is not much upside or re-rating potential.”

http://www.bloomberg.com/news/articles/2015-08-06/the-irresistible-china-stock-trade-that-keeps-burning-investors

Secrets To Success....!!!

Alex Banayan

Author (Crown/Random House) and Venture Associate (Alsop Louie Partners)

Follow

96 Years Ago, This $310-Billion Man Revealed the Secrets To His Success

Aug 7, 2015

• 110,661 views
• 2,152 Likes
• 418 Comments

• Share on LinkedIn
• Share on Facebook
• Share on Twitter

He’s richer than Bill Gates and Warren Buffett combined. And he started off as a broke Scottish immigrant. I’ve been dreaming of interviewing him for my book. The only problem? He died 96 years ago.

How did Andrew Carnegie, the man with the world’s largest steel empire, rise from no money, no opportunity, and no connections — to the richest man alive?

I’ve spent hundreds of hours researching Carnegie’s success, and here are the 5 best lessons from the man himself.

###

1. Get Out Of The Shade

One afternoon, a young man walked into Carnegie’s office to interview him about his success. Carnegie could have told the young man about his journey from poverty to riches or about his wild dealings with John Rockefeller. But instead, Carnegie talked about something else.

His optimism.

Carnegie said the most important thing in his life was his “ability to shed trouble and to laugh through life.” He said that seeing life through a lens of positivity was worth more to him than millions of dollars.

“Young people should know that it can be cultivated,” Carnegie said. “The mind, like the body, can be moved from the shade into sunshine.”

And it makes good business sense, too. By not getting weighed down by the negative, Carnegie could keep his focus on the positive, bounce back from failures faster, and see opportunities where other people didn’t know they existed.

Ask yourself: do you sometimes slip into pessimistic thoughts and negative self-talk? Are you missing opportunities because you let your mind fall under “the shade”? How much would your business grow if you taped a note above your desk that reads: “move your mind into the sunshine”?

2. Tell Him to Keep the Ten Thousand

Carnegie and J.P. Morgan were once partners in a business. One day Morgan wanted to buy out Carnegie’s stake, so Morgan asked how much he wanted for it.

Carnegie said his shares were worth $50,000, plus he wanted an extra $10,000 on top — so a total of $60,000. Morgan agreed to the terms. But the next morning, Carnegie got a call.

“Mr. Carnegie, you were mistaken,” Morgan said. “You sold out for $10,000 less than the statement showed to your credit.” Morgan had calculated that Carnegie’s stake was actually worth $60,000, and with the additional $10,000, that made $70,000. So Morgan sent Carnegie a check for the full $70,000.

Carnegie responded by telling Morgan to keep the extra $10,000 — which, adjusted for inflation, is over $130,000 today. Morgan replied, “No thank you. I cannot do that.”

When reflecting on this story, Carnegie wrote, “A great business is built on lines of the strictest integrity.” He learned from Morgan that it is better to lose money in the short-term if that means maintaining your reputation for the long-term.

Think hard about this: Is your business doing everything it can to ensure that reputation comes before profits?

3. Follow the Rule of Nine-Tenths

There was a story that changed Carnegie’s life. It’s about an old man who lived a life of many tragic events. People in the town pitied him, but the old man said, "Yes, my friends, all that you say is true. I have had a long life full of troubles. But there is one curious fact about them – nine-tenths of them never happened."

Carnegie learned from that story that most of the problems and “what if’s” we imagine almost never occur. Our brains have a tendency to dream up the worst-case scenarios and act accordingly — yet most of those almost never happen. And even if they do occur, they’re almost never as bad as we imagine.

By reminding himself of the “rule of nine-tenths,” Carnegie freed himself from the fear of the unknown and was able to take the risks he needed to achieve his radical success.

Be honest with yourself: Do you get caught up on the “what if’s”? Would your life be better if you followed the rule of “nine-tenths” and reminded yourself that most of those problems won’t actually happen? Are you willing to make a commitment right now to live by that rule?

4. Jump On 'Flashes of Lightning'

When Carnegie was hired for his first job, the interviewer asked him how soon he could start. Most people would have asked for a couple of weeks to transition. But Carnegie’s answer? “I can start right now.”

“It would have been a great mistake not to seize the opportunity,” Carnegie wrote. “The position was offered to me; something might occur, some other boy might be sent for. Having got myself in I proposed to stay there if I could.”

Carnegie didn’t overthink it. He preferred to act quickly and risk something going wrong than to act slowly and risk losing the opportunity entirely.

And this rule worked in reverse, too. When Carnegie realized he owned shares in a company he didn’t like anymore, he told his partner to sell all the shares right away. When his partner said there’s no rush, Carnegie shot back, “Do it instantly!” And good thing he did… that company soon went bankrupt.

Of course, it’s important to study the facts, but if you’re presented with a real opportunity, don’t risk losing it by taking your time. As Carnegie would say, jump on the “flash of lightning.”

How many opportunities do you think have passed you by because you didn’t jump on them right away? Are you ready to act like Carnegie and make your answer “I can start right now”?

5. Find Your "$2.50" Motivation

Early in his career, Carnegie was given a bonus of $2.50. When he gave the bonus to his parents to help support the family, he said “no subsequent success, or recognition of any kind, ever thrilled me as this did… Here was heaven upon earth.”

And from that point on, Carnegie knew he wanted to be rich. But not for himself. He dreamt of making the money for his parents, so they could live a good life.

As soon as Carnegie identified that external motivation, his drive turned into high gear. The key is that he wasn’t motivated to help himself. He was motivated to help someone else.

So whether you’re doing it for your parents, your children, or to help people who don’t even know your name — you need to have that motivation clearly in your mind to fuel you through the inevitable hardships on your journey to success.

Are you clear on who your “$2.50” motivation is? Who are you doing it all for, other than yourself? If you don’t know, figure it out. And if you do know, how can you remind yourself of that “$2.50” motivation everyday? 

###

Andrew Carnegie is proof that if you work hard, keep your mind “out of the shade,” take risks, act quickly, and build a reputation of the strictest integrity — anything is possible.

And the craziest part? Carnegie is just one example of how it’s possible to work your way from poverty to radical success.

What other inspiring stories like that do you know? Share them in the comments below so we can learn from you, too.

=============================

Named to Forbes' "30 Under 30" list, Alex Banayan is the author of a highly anticipated business book being released by Crown Publishers (Random House, Inc.). The book chronicles his five-year quest to track down Bill Gates, Lady Gaga, Warren Buffett, Steven Spielberg, and a dozen more of the world's most successful people to uncover the secrets to how they launched their careers.

To get exclusive content from the book and the latest from Alex's adventures, click here to join his Inner Circle email community.

https://www.linkedin.com/pulse/96-years-ago-310-billion-man-revealed-secrets-his-success-banayan

P-NOTES THE REAL ISSUE !!

Why Participatory Notes are dangerous

Participatory Notes are a slap on the face of every citizen who is an investor. To invest in shares one has to fill up umpteen forms and provide proof of residence, PAN number, and so on. But for PN investors, the system is totally silent, even on basic information. Why not have confidence in the India story and realise that we can get funds with addresses without offering such anonymity, asks R. VAIDYANATHAN.

The PN system is discriminatory and seems to favour ghost investors.

R. VAIDYANATHAN

Participatory Notes (PN) — a general name used for the investment by Foreign Institutional Investors (FIIs) through Offshore Derivative Instruments (ODIs) such as Participatory Notes, Equity-Linked Notes, Capped Return Notes and Participating Return Notes — have created a storm in the stock market, with SEBI coming out with a draft for discussion to regulate them, the RBI suggesting that they be phased out, and the Finance Minister assuring that the Government is not going to phase them out.

First things first. Let us clearly understand the fundamental issues. The PNs are a slap on the face of every citizen who is an investor. For a person to invest even in one share, several KYC (know your customer) forms have to be filled up, and PAN numbers and proof of address, etc., provided. For the PN investor the system is totally silent on even elementary information. The FIIs issue PNs to funds/companies whose identity is not known to the Indian authorities.

Hence, the PN system is blatantly discriminatory and seems to favour ghost investors. Any self-respecting market, if it discriminates at all, does so against outsiders. But we have done the unthinkable.

We should recognise and internalise the fact that funds are in search of markets, and not the other way. Given the demographic shift in the developed markets (where pension funds have to locate markets to get returns for longer periods) and the lack of huge opportunities in long-term projects, it is natural that global funds are in search of markets.

The PN route, through which a section of investors is participating in our markets, is a mystery wrapped in a puzzle, crammed inside a conundrum and delivered through a riddle. These are address-less funds that could be from dubious sources and the clamour for it is intriguing, if not outright suspicious.

Current Scenario

According to the SEBI Web site, the current position of these instruments is as follows: “Currently, 34 FIIs / Sub-accounts issue ODIs. This number was 14 in March 2004. The notional value of PNs outstanding, which was at Rs. 31, 875 crore (20 per cent of Assets Under Custody of all FIIs/Sub-Accounts) in March 2004, increased to Rs. 3,53,484 crore (51.6 per cent of AUC) by August 2007.

The value of outstanding ODIs, with underlying as derivatives, currently stands at Rs. 1,17,071 crores, which is approximately 30 per cent of total PNs outstanding. The notional value of outstanding PNs, excluding derivatives as underlying as a percentage of AUC is 34.5 per cent at the end of August 2007.” (SEBI – Paper for Discussion on ODIs).

This implies that more than 50 per cent of the funds are flowing through this anonymous route which needs a re-think on this entire issue. This brings us to the question about who are the investors interested in Indian Papers.

Who uses the PN route?

The first category is the regular funds whose twin objectives are returns and more returns on a 21*7*365 basis. They are interested in India since the India story is very good and returns are attractive compared to developed markets. The second category is prodigal money returning. It is not a secret that a large number of politicians/bureaucrats/business-persons have accumulated wealth abroad. This has been accumulated by under-invoicing/over-invoicing, by corruption in contracts and gifts from abroad; and by not bringing in legitimate receipts.

The third category is those foreign governments/entities who would like to acquire/control Indian entities by taking them over.

The fourth category is the terror financiers who could find this route attractive and simple. The first category does not have any reason to use the “anonymous” route since the aim is to earn returns /repatriate and benefit out of interest rate and currency value arbitrage. They enter and exit as per these calculations and are not shy about the greed for maximum returns. They pay the taxes applicable and laugh all the way to the bank with bonus incentives.

The only issue is that currently the stock market is the only route for investing while several other “unlisted” sectors, such as trade, transport, restaurants and other services are starved of funds. Maybe methods should be evolved to get these regular global funds to invest not just in the top ten shares of the stock market but in the needs of the large non-corporate or “ unlisted” segments of the economy, through NBFCs. That would ease the volatility in the market since currently large funds are chasing too few shares of the Sensex or Nifty.

No more ‘safe havens’

The second category will be enthusiastic in bringing the money back into India since the KYC (Know your Customer) norms in many so-called “safe” territories like Switzerland are becoming tougher — particularly after 9/11— and the India story is very interesting and the returns and growth prospects are very good. The Government can always think of an “Amnesty Scheme” for such “prodigal funds” in the form of “no questions asked” about the source. But, once the funds are brought in, then all the KYC norms must be followed, with minimum legal and tax hassles. After all, such amnesty schemes for the domestic black-money holders in the past have met with reasonable success. Otherwise, a Special Purpose Vehicle (SPV) can be created which can be dollar-denominated to hold these funds at attractive rates and which are converted over a period of time to minimise the flow impact.

Harmful for companies

The third category spells danger for domestic companies since the unknown entity may be targeting the local company without its knowledge. With reasonable control they can pressure the current owners to settle with them or even try taking over.

This becomes more ominous in the context of several sovereign funds, like that of China, using the private equity companies to manage their funds which are non-transparent.

These PEs could use other vehicles to acquire on behalf of these sovereign funds and it may be possible that Chinese or West Asian sovereign funds may hold indirectly shares in Indian companies, particularly in software or oil or telecom, which are critical sectors.

The fourth category is the one to be worried about. The terror financier will be happy on two counts, namely the anonymity provided by these instruments and the domestic regulations on gifting the shares.

Also important is the issue of the sale of these PNs to entities that could be inter-connected to the original buyers.

In other words, the original buyer and to whom he sells could belong to inter-connected terror entitities, in which case the global entity could have succeeded in transferring funds to India with ease and anonymity.

It is not without basis that the National Security Advisor (NSA) has cautioned against terror-financing through the banking and stock market channels.

That is a cause for concern. Why are we insisting on the anonymity of the investor and the sources? Why not have confidence in the India story and realise that we can get funds with addresses since we have arrived on the global arena?

We should distinguish between clean global flows and dubious flows as a responsible country with a remarkable growth story.

(The author is Professor of Finance and Control, 

IIM-Bangalore. His views are personal and do not reflect those of his organisation.)

(This article was published in the Business Line print edition dated

October 24, 2007)

http://www.thehindubusinessline.com/todays-paper/why-

participatory-notes-are-dangerous/article1672845.ece