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Jim Chanos says China is starting to look like the next Japan
Hedge Funds
<p>It looks like China is going to be able to avoid the dreaded "hard landing", but according to Jim Chanos, that is not necessarily a good thing. Hedge fund short king Chanos says that China's ongoing economic slowdown is starting to look more and more like the pattern we saw with Japan, a major boom in the 1980s followed by more than a decade of economic stagnation.</p> <p>As part of a panel discussion earlier this week, Chanos said that it seems China may be on a path very much like the one that led to Japan’s lost decade in the 1990s as the debt level grew more twice as fast as its economy.</p> <p>“We have an economy addicted to credit,” Chanos, founder of hedge fund Kynikos Associates, noted while participating in a panel discussion on China in New York Tuesday. While the country doesn’t appear to be facing an “imminent collapse,” it is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids,” he noted.<br /> He went on to point out that Chinese annual loan growth has slowed down to around 15% from over 30% in 2009, but even a 15% loan growth rate is more than double the growth in the gross domestic product. Total household and corporate debt was up to a worrisome 207% of GDP in June of this year, up from 125% at the end of 2008 when China began borrowing.</p> <p>For comparison purposes, Japan’s total debt mushroomed to 176% of GDP in 1990, when it was a mere 127% a decade earlier in 1980. Japan has seen weak economic growth for more than 20 years now despite various efforts by the government to get the economy jumpstarted.</p> <p>China, reported a 6.64% increase in GDP last month, a bit below the government’s target of 7 percent this year. Economists note that the Middle Kingdom has been growing at the slowest pace since 1990. Jim Chanos says that growth in nominal GDP is down to a mere 5% in China today, a huge decline from 15% in 2010, with the economy clearly deflating.</p> <p>“It takes time to sort out” the debt overhang, Chanos commented. The short king hedge fund manager has been saying February 2010 that the China’s real estate market will melt down, and that "China is Dubai times a thousand" and on a “treadmill to hell” because it currently depends almost solely on real estate for economic growth.</p> <p>This article was originally published by ValueWalk. <br /> Photo: Mark Johnson </p>
Aberdeen looks for redemption in China
Asset Management
<p>China and its emerging markets trading partners got roughed up pretty badly this summer. Aberdeen Asset Management is betting that the sector is hitting a trough -- and is essentially asking for investors to buy into their view.</p> <p>Aberdeen itself got hit by the market mayhem. In just the second quarter of this year, it has lost $30.5 billion in assets and its stock has tumbled 23% so far this year.  Total assets under management have fallen 7%. The firm has been bleeding assets for nine straight quarters, and a possible rate rise in the U.S. later this year could just make that worse. Competitors, such as Schroders and Henderson, are seeing outflows, boosted by their exposure to European assets, reports the Financial Times. About 30% of Aberdeen client assets are in emerging markets, and about 5% is in Chinese companies.</p> <p>“We’ve got to sit this out. All we can do is control what we can control, which is [to] look at the costs in the business [and] try and manage money well for our clients,” said Aberdeen CEO Martin Gilbert in late July.  “What we can’t do is manage market sentiment.”</p> <p>Aberdeen has pushed to counter asset outflows with acquisitions, most recently snapping up the London-based Advance Emerging Capital, reports BBC. In August the firm looked to the U.S. and bought U.S. hedge fund investor Arden Asset Management, boosting its hedge fund unit's assets from $2 billion to $11 billion. Aberdeen also purchased U.S. private equity firm Flag Capital Management in May. Late last year, the firm acquired Scottish Widows Investment Partnership (SWIP) in an attempt to diversify its business away from such an emerging market focus. But the firm hasn't seen much benefit from that move yet.</p> <p>At an all-day conference for media, the head of equities Devan Kaloo says there's a light at the end of this long and dark tunnel. "Perspective matters," he says. Yes, GDP in China has been slowing, but it has been for some time. Emerging market investors have a right to be skittish, especially as the U.S. looks to raise interest rates, says Kaloo. Investment outflows for emerging markets year-to-date have already surpassed the outflows for all of 2014. But Kaloo is confident that many of these issues are signalling the bottoming of the economic cycle that can only recover from here.</p> <p>Investors pulled 31.5 billion yuan of shares of Shanghai-listed stocks in July, as the market spiraled. The Shanghai Composite Index fell 40% from its high June 12. But last month investors bough 21.4 billion yuan worth of the market's listed stocks through a trading link with Hong Kong, reports The Wall Street Journal. Some sectors, such as insurance, healthcare, and technology, are thought to be ready to benefit from the transitions in the Chinese economy away from raw materials to boosting middle class needs.</p> <p>Kaloo says the news is unlikely to get much worse: withdrawals from emerging market stocks are nearing their peak, in his view; and China is trying to discipline its markets. And the currency has already gotten crushed by the strengthening dollar. If the Fed raises rates by 25 basis points, he doubts EM will get very hurt. The damage is done.</p> <p>There are some actively good signs. Set aside the SOEs -- the ginormous zombies of the economy -- and there's some good stuff happening in the private sector. Emerging market stocks are attractively valued, he says. And investors could benefi</p>
BlackRock: Market segments to consider while the Fed holds
Asset Management
<p>Investors have spent much of the last couple of months fixated on the Federal Reserve (Fed). In the end, last Thursday, the central bank did exactly what most had come to expect: nothing.</p> <p>After a day to deliberate how to interpret the Fed’s decision to hold off on raising interest rates, investors took the Fed’s hesitancy as a sign of global economic fragility. Stocks reversed course on Friday, giving up their gains for the week, and market volatility (as measured by the VIX index) quickly spiked back to above average levels after dropping below 20 early in the week, according to data accessible via Bloomberg.</p> <p>Amid renewed volatility and the Fed’s continued delay, are there any moves to consider? As I write in my new weekly commentary, “With the Fed Holding, an Opportunity to Make Moves,” after the recent selloff, two areas of the market may now be worth added exposure.<br /> Two Market Segments to Consider<br /> Rate sensitive parts of the market, such as U.S. utilities<br /> Were interest rates rising, one would expect these bond market proxy segments to suffer. However, with long-term rates clearly stuck, utilities look less vulnerable. This is particularly true when you consider that this sector, represented by the S&amp;P 500 Utilities Index, has dramatically underperformed the rest of the broader S&amp;P 500 market this year, according to Bloomberg data. So, it may be time to consider bringing exposure to U.S. utilities back up toward a market weight.<br /> Emerging market (EM) stocks<br /> A more contrarian play could be revisiting EMs. Last week’s soft economic data out of China led to another selloff in China’s equity market. Domestic Chinese stocks were down between 3 percent and 6 percent, although H-Shares, traded in Hong Kong, managed to end the week higher, as market data from Bloomberg show.</p> <p>However, other EMs fared better, according to the data. Markets posted solid gains in India, South Korea, Turkey and even Brazil. The turn in performance was also accompanied by a marginally positive week of flows into broad EM funds, according to market flow data.</p> <p>It’s too early to call a bottom in EM, and there could be more volatility ahead, but valuations now appear attractive. At the recent lows, EM equities were trading at less than 1.3 times book value, and the current price-to-book ratio is the lowest it has been since the end of the financial crisis. It also represents a 35 percent discount to developed markets, the largest discount in 12 years, according to my analysis using Bloomberg data. For investors with little or no exposure to this asset class, now may be a reasonable time to consider slowly establishing or reestablishing positions. The bottom line: With the Fed on hold, there may be an opportunity to make some contrarian moves.</p> <p>Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock.</p> <p>This article was originally published by Advisor Perspectives. <br /> Photo: Kurtis Garbutt</p>
Is this Chinese start-up disrupting the world's oldest profession?
Venture Capital
<p>A Beijing-based start-up called Zubowa - meaning "rent me" -  has raised a $1.5 million angel round for a platform that allows users to sell themselves for a day... or a night.</p> <p>Of course, many uses for this service are purely innocent: perhaps you need someone to teach you piano, another player on your soccer team, or just someone to play bridge with your grandma. But there are other - potentially murkier - services also being offered: dating.</p> <p>According to Tech in Asia, the app is not shy about it either. The description attached to the app even boasts: "there are a ton  of beautiful girls and handsome guys waiting for you."</p> <p>It doesn't take a massive leap of the imagination to see how a platform such as this opens itself for exploitation. It will also be interesting to see how this startup navigates clear regulatory and cultural pitfalls.</p> <p>In any case, online-to-offline services is a fast-growing sector in China right now. Given that China's unemployment rate is the rise - the National Bureau of Economic Research recently put it at 10.9% -  a platform like this could still gain traction.</p> <p>&nbsp;</p> <p>&nbsp;</p>
Aberdeen Asset Management receives ambiguous award
Asset Management
<p>As Chinese securities brokerages and fund managers sweat under the intense scrutiny of the local authorities for alleged stock manipulation, Aberdeen Asset Management must be wondering if it has just been handed a poisoned chalice.</p> <p>The U.K. money manager is the first overseas asset management firm to be granted a wholly foreign-owned enterprise (WFOE) license in China, allowing it to operate as a private domestic securities firm, reports AsianInvestor.</p> <p>The award by the finance ministry followed a meeting between UK chancellor of the exchequer George Osborne and China’s vice-minister Ma Kai on Monday.</p> <p>Previously, WOFEs could only advise and had to attach “Overseas” or “Investment Consulting” designations to their names. Alternatively, they could form joint-ventures with local firms, but a 49% limit on their stakes meant they ceded control of the investment process – a not inconsequential concession when trying to cope with the volatile A-share market.</p> <p>Aberdeen Investment Management (Shanghai) was set up on September 14 in the Shanghai Free Trade Zone. Subject to final approval by the China Securities Regulatory Commission it will be able to create and distribute its own products into the private market of wealthy individuals and also service institutional investors.</p> <p>Hugh Young, Aberdeen Asset Management’s veteran managing director in Asia, is the Shanghai entity’s legal representative. But, bosses at Citic and several other Chinese investment firms have been taken into police custody during the past couple of week, so perhaps it would safer for Young to stay in Singapore.<br /> Photo: Javier Kohen<br /> &nbsp;</p>
Goldman jumps on ETF bandwagon
Asset Management
<p>It's official. Everybody's doing it.</p> <p>Goldman Sachs Asset Management has launched its first exchange traded fund in attempt to grab assets in the growing strategy's space, reports the Financial Times. Retail and institutional investors alike are pouring money into ETFs, as a cheap and easy option for tracking a market. GSAM's first ETF launched with $50 million and tracks the Goldman "ActiveBeta" index, which weighs equities according to value, earnings, and volatility. The firm plans to launch similar products "in the coming months."<br /> “Our clients asked us to apply our investment expertise to exchange traded funds,” Michael Crinieri, GSAM’s global head of ETF strategies, said in a statement.<br /> Moody's has called this "smart beta"-ETF space "the next battleground for asset management dollars." The ratings agency says that it expects the biggest passive asset managers and the most innovative managers to be the winners.</p> <p>Earlier this month OppenheimerFunds acquired VTL Associates to break into the ETF space. Legg Mason bought QS Investors last year, and Franklin Templeton is also eyeing the space. The multi-boutique Legg Mason requested regulator approval for its first four ETFs earlier this month.</p> <p>According to ETFGI, ETFs posted net inflows of $219.7 billion globally during the first eight months of 2015, a 16% increase from the same period in 2014.<br /> Photo: WorldSeriesBoxing</p>
When an easy Fed doesn't help stocks (and when it does)
Asset Management
<p>Last week, the Federal Reserve chose to do nothing to move short-term interest rates away from zero after nearly 6 years of extraordinary policy distortion. As detailed below, the inaction of the Fed, and the failure of the stock market to advance in response, follows the script that I detailed in February. Policy makers at the Fed actually appear to believe – contrary to historical evidence and contrary even to the recent experience of numerous countries around the world – that activist monetary policy has meaningful and reliable effects on subsequent economic activity. It’s lamentable that otherwise thoughtful policy makers, much less journalists who cover these actions, show no interest in how weak these correlations are in actual data, and seem incapable of operating even the most basic scatterplot. Despite the spew of projectile money creation around the world, the global economy is again deteriorating. The main defense of the Fed’s inaction seems to be that years of zero interest rate policy have been hopelessly ineffective, so continued zero interest rate policy is necessary.<br /> As we’ve demonstrated previously, there’s no statistical evidence in the historical record to suggest that activist monetary policy has any relationship to actual subsequent economic activity (see The Beauty of Truth and the Beast of Dogma). Historically, monetary policy variables themselves can be largely predicted by previous changes in output, employment and inflation. That “systematic” component of monetary policy does have a weak correlation with subsequent economic changes. It’s unclear whether that’s purely incidental, or whether those systematic changes in monetary variables (such as short-term interest rates) are actually necessary for the weak effects that follow. I should be careful to note that monetary policy also seems to weakly influence confidence expressed in certain survey-based questionnaires. But that correlation emphatically does not translate into changes in actual output, income, or employment. Put simply, massive activist deviations from systematic monetary policy rules provide no observable economic benefit, but instead create fertile ground for speculative bubbles and crashes.<br /> Despite its wild grandiosity, Fed intervention was not what ended the global financial crisis. Recall that the global financial crisis ended – and in hindsight ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned FAS 157 “mark-to-market” accounting, in response to Congressional pressure from the House Committee on Financial Services on March 12, 2009. That change immediately removed the threat of widespread insolvency by making insolvency opaque. This might not have meant much if regulators had continued to insist on mark-to-market when evaluating bank solvency. But with regulators willing to go along, the global financial crisis ended with the stroke of a pen.<br /> Those who hail the March 2009 replacement of mark-to-market with mark-to-unicorn as a “necessary” response miss the point (though Iceland has actually done quite well relative to the rest of the world, despite initial disruption, by insisting on massive bank restructuring rather than playing extend-and-pretend). The point is that Fed intervention did not end the </p>
Forum Global Opportunities up 107% YTD on big short yuan bet
Hedge Funds
<p>China’s losses have been one hedge fund’s gain – big time.</p> <p>Forum Global Opportunities Fund, the global macro hedge fund run by Ray Bakhramov, jumped 60.21% in the month of August. It is now up 106.71% year-to-date, putting it on track to post its first year in the green since 2011, according to a letter to investors reviewed by ValueWalk.</p> <p>The increase was driven by a 38.2% gain in the fund’s forex investments. The firm has a long-standing bet against China’s yuan, which the country devalued last month. It also won on short bets against the Taiwanese and Singapore dollars as well as the S&amp;P 500, DAX and Nikkei indices.</p> <p>&nbsp;</p> <p>The firm has operated in recent years under the belief that high levels of intervention from central banks has created severe distortions within financial markets, suppressing volatility and posing a flight risk to assets. It has held that at some point, the markets would enter a normalization phase in which distortions would correct – essentially, what happened in August. And Forum doesn’t think the ride is over yet.<br /> Forum Global Opportunities on yuan bet<br /> “Given our high conviction that certain asset prices had become massively inflated as investors piled into risk assets, volatility was suppressed to record lows, and underlying macroeconomic fundamentals continued to deteriorate, we heavily weighted our portfolio with long volatility, highly convex structures that would perform well as we moved into a normalization period that we believed would be characterized by sharp and abrupt adjustments,” the firm wrote in its August note to investors. “While our portfolio has been able to capture these recent market moves as evidenced by our recent performance, we believe the recent spate of volatility is merely the first adjustment in a longer normalization period for global markets. We expect to see continued heightened volatility in the current market cycle, punctuated by discrete waves of adjustment as these distortions correct.”</p> <p>Forum makes the argument that the current normalization process will be “significantly larger and longer” than previous cycles. It points to the acceleration of causal factors behind adjustments – slowing emerging market growth, commodity-led deflationary pressures and diverging global monetary policies – and uses China as an example:<br /> In China, intervention to slow the yuan’s depreciation has tightened financial conditions and accelerated capital outflows requiring further intervention. Cutting policy rates to offset financial tightening only increases fund flows to state-owned enterprises in over-supplied sectors, deepening deflationary pressures and pushing real rates higher. Across commodities, aggressive monetary easing has lowered cost curves via easy credit and local currency depreciation, boosting supply growth and negatively impacting pricing.</p> <p>Forum Global Opportunities on a changing market<br /> The fund also says market structure has transformed, with emerging markets nearly doubling their share of global GDP from 1997 to 2013, and that algorithmic and hedge fund trading “have changed market funding and behavior by linking multiple market segments into single trading strategies and amplifying ‘herding’ effects and liquidity-driven market imbalances during computer stampedes.”</p> <p>Founded in 2001, Forum is one of the leading investmen</p>
Raising money? There's a new entry fund-raising step -- 'pre-seeding'
Venture Capital
<p>After family and friends, hopeful entrepreneurs would go to seed funds to raise money. There's a new step now in the fundraising process. It's called "pre-seed."  Sarah Lacy writes in Pando.com (paywall):<br /> Welcome to the messy, inevitable collision of four trends: The series A crunch, bigger rounds later in a company’s life demanding higher pro-ratas, the rise and success of institutional seed rounds over the last 5+ years, and the increasing prices of building a company in San Francisco.</p> <p>Simply put: “Seed” is no longer seed. Pre-seed is seed. And even that’s not the earliest round: There’s friends and family before that. “Series A is actually the fourth round of funding,” says Manu Kumar, of K9 ventures, the best known pre-seed fund. “Before that there is seed, then before that there is pre-seed and then before that there is friends and family. We are the first institution in, but typically we are the second money.”<br /> Photo: Hartwig HKD</p>
HK billionaire Li Ka-shing's tech fund is Israel’s biggest foreign investor for upstarts
Venture Capital
<p>Hong Kong billionaire Li Ka-shing’s Horizons Ventures Ltd, which invests in technology companies such as Facebook, Slack and Spotify, is the biggest source of foreign investment for a number of tech startups in Israel.</p> <p>Citing data from market tracker IVC Research Center, the WSJ says Horizons has invested in at least 28 tech startups in Israel including Corephonotics, designer of dual-lens system for mobile-phone cameras, and Kaiima, a seed-technology company. In fact, startups from Israel now accounts for more than a third of the tech venture-capital fund’s more than 60 portfolio of startups, it says.</p> <p>The latest information comes as no surprise as Li, ranked the second richest man in Asia according to Bloomberg, has been aggressively expanding his empire all over the world. Just this week, Li’s Hutchison Whampoa sealed a deal with Spain’s Telefonica to acquire its British mobile phone unit O2 for 10.25 billion pounds (US$15.3 billion).</p> <p>Hutchison has been active in Israel way ahead of Horizon. Hutchison has established its presence in the country for more than a decade while Horizon, the first major Asian investor to put up money in Israeli tech companies, only did so in 2011, the WSJ says.</p> <p>Hutchison owns stakes in Partner Communications, Israel’s No.2 mobile-phone company, and in SDL Desalination, a water company, the report says.<br /> Photo: Ron Shoshani</p>