On Monday, 3 January 2011, 16:56, DannyToe wrote:

Happy New Year ’11 – Say Bye to Low Rates in 2011?

Dear All,

Happy New Year. Once again, thank you all for making 2010 a decent year.

Our view for 2010 has panned out nicely, and the hold till Nov 2010 trades turn out to be a good call.

(For those wondering, we did take profits on some of the stocks we bought in Jul but redeployed them in Dec and in fact added to our overall equity exposure.)

Vincent and team did a wonderful job to expand into Taiwan last year and I hope we can spread our wings and establish a greater presence in HK from 2011 onwards.

Despite the tough going, I am very comfortable holding on to our positions – these are companies that bear the ICH-brand and are quality companies that will perform when market realize they are undervalued and are good candidates for privatization.  You can repeat my confidence when you come across clients asking us about our opinion on these companies.

Over the last 2 months, I think we are seeing greater consensus in the financial market, but we are far from unanimous.  Liquidity is still abundant, and anecdotal evidence tell me there are simply too much cash chasing too few investments at reasonable price.  I think this is positive for equity market but will have lasting negative impact on corporate profits.  Imagine good companies having to compete with new and unproven companies, whose contributions is driving up operating cost and reduce margin through price competition. This cannot be good for the economy.  This is the limiting effect of liquidity.  How long will this show up nobody knows but it will show up for sure, unless the underlying economy is so strong it absorb all kinds of trash. It has not happened before and I won’t bet on ”this time is different”.

Equity is definitely cheaper than property and bonds, and corporate should continue to deliver good results for the next 2-3 quarters.

The public market should be a good place for many investors.  This form a good exit for our private equity investments.

I expect the continuous and slow rise of RMB, and the continuing trend of RMB internationalization.  However, I do have one contrarian call from the market, I believe the rates will start rising earlier than many market participants are currently projecting,  rising rates is definitely very disruptive (not necessarily bad if its orderly and well absorbed) for the equity market and we should position our portfolio accordingly.

For 2011, I would like our funds to make concentrated bets on good companies we are familiar with, and not spread our risks to unfamiliar companies whose performance might be adversely affected by the abovementioned liquidity effect and even more so when liquidity is withdrawn.

I believe the following sectors will be sought after by the market and should be captured in our portfolio (at the right price):

Industrial, China insurance, China travel services, China financial service providers, HK Banks , crude oil, asset managers, capex play, asset inflation play, pharmaceuticals.

I would also encourage investors to allocate funds into Singapore banks, I expect rate rise expectations to pick up and benefit banks margin going into Q2.  It should form a good first level portfolio hedge with limited downside if inflation flare up faster than expected.

Lastly, I would like to remind all fund managers and project managers to be mindful of the wonderful things companies can dress up with when liquidity is abundant, and how they can untangle and collapse when liquidity is withdrawn.  My office is always open if you need advice on how to spot such cosmetics 🙂

I would like to end my message with 2 famous quotes, you have to read them together:

“It takes a huge consensus to form a bubble” – we are not there yet, but definitely we are heading there

“The market can stay irrational longer than the participants can stay solvent” – don’t be afraid of drinking, just don’t get drunk

Happy New Year!

Cheers!

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