Earlier this week I made an across the board swap that is worth talking about. I sold China Mobile (CHL) and then replaced it with Partners Communication (PTNR).
From the top down this does not change the exposure to equities or to the telecom sector but it does mostly eliminate China and increases Israel (we've held Teva (TEVA) for years now). We still have a little China as embedded in some of the ETFs we use.
My history in the position was that I bought it in the low $60s a year and a half ago. I sold out of Sinopec (SNP) in mid 2007 thinking a big decline was very possible. I thought China could cut in half fundamentally and then overshoot another 10%. My sale of SNP was early and my purchase of CHL was early as the China market ended up with a 70% decline before bottoming. CHL seemed to drop almost immediately after I bought it then leveled out for a while, puked down when markets were panicking came back a lot and has been in the high $40s for a long time, with a couple of exceptions.
From the bottom up I can't complain about the stats or the subscriber growth but the stock has not served its purpose as a proxy for China in the manner I had hoped for. From the top down China has become a little riskier in the last few months given the myriad of issues involving over heating and over capacity. I'm not sure from here that investors have to own a company with half a billion customers out of 1.3 billion or so in the total population--the growth seems like it could slow down. As a note the number of subscribers when I first bough the stock was about 100 million lower. I'd call that good growth but the market seemed not to care.
I don't expect to stay out of China very long at all. For all the issues that exist, all the bubble talk and so on that market is down 50% from its high. I think that a resource based or industrial based stock or ETF might serve as a better proxy but I am still mulling.
On a related note a reader asked why I don't talk much about REITs. I sold my last REIT about three years ago. Essentially I have given up on them as being diversifiers. I got lucky with the timing of that sale but as things unfolded they generally seemed to look just like financial stocks.
REITs were long heralded as offering diversification. Well when investors needed that the most REITs failed. You can reasonably argue that all correlations went to one during the meltdown but that is not exactly right. Several of the countries I own peaked months after the US did and gold went up throughout. Obviously broad based inverse funds went up as well.
Looking forward I think real estate is so fouled up in terms of prices and even rents that any recovery can happen without me or our clients. One the reasons I've written so much about farmland stocks has been to explore whether or not they could fill the role the REITs were supposed to. While I think they can be valid holdings I am not so sure that they would zig a whole lot the next time global markets fall in unison.
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14 comments:
My mother in law made a comment that instead of letting in EU Turkey they should have let in Israel.
It would have been positive for EU,and the Euro.
Best,
Jeff from Milan, Italy
Roger,
I have seen that Israeli stock market is doing very well but how do you factor in the possibility of exogenous events (ie...attack by Iran) which could destroy or severely damage markets in that dangerous part of the world?
I have often thought of investing in an ETF like EIS but potential instability in that part of the world has held me back.
so every destination has risks and you cite the big one, imo, for Israel. however there is nothing new about this threat, it has essentially existed forever so i have to believe the price of the market reflects this threat somewhat, not completely obviously. should iran actually do something then ptnr would be in trouble but teva, the largest stock in that market, would be better off based on its geographic diversification.
obviously if iran nuked israel, iran would get nuked--at least i think it is obvious.
Sort of off topic but,
In today's WSJ there is a very revealing article regarding Lehman's accounting practices. This topic was discussed here about a week and a half ago. The key quote of the article for me was,
"In this way, unbeknownst to the investing public, ratings agencies, Govt regulators, and Lehman's Board of Directors, Lehman reverse engineered the firm's net leverage ratio for public consumption."
The topic came up when discussing how transparent financial reports are from emerging market countries. When the biggest of U.S. firms can deceive everyone, it just shows that the potential for fraud is very real across all sectors and countries. I guess it reaffirms my inclination to stay away from individual stocks, especially when an investing decision is made on the basis of information from public reports.
Anyway, I just thought it was an interesting read and thought others might learn something from it.
Also, in my experience, farm land value is not correlated with commercial real estate (REITS). As I have mentioned before, there are a whole host of factors that affect farm land, none of which seem to be discussed here.
"I guess it reaffirms my inclination to stay away from individual stocks, especially when an investing decision is made on the basis of information from public reports."
YES
The fudging by accountants and companies is widespread and all to common IMO.
SEG
The incentives to fudge accounting are too great when executives are compensated based on short-term company performance. Personal and professional ethics aside there is no real downside to cheating when executives get paid so well for an earnings pop.
Not too many Americans would choose the good over the profitable these days so you get what the invisible hand delivers.
i can see the argument about incentives for execs but that must roll down hill as well otherwise why would a regular employee either go along or keep his mouth shut
About China Mobile - I had been looking at this stock a couple months before you bought your position. My interest was from a paid newsletter recommendation. I chose not to get into it after reading about how **Chinese government** had developed it's own transmission standard (a GSM substitute I think). At the time the government was forcing CHL to implement this standard as part of it's 3G or 4G rollout. Technical people thought it to be inferior to competing technologies. Other Chinese telecoms were allowed to use whatever standard they wanted.
I haven't followed the story since and don't know where it stands today. It sounded like trouble to me at the time.
"obviously if iran nuked israel, iran would get nuked--at least i think it is obvious."
I don't think it is obvious at all that Israel or the US or any other developed Western country would nuke Iran back. The leader of the Western country who responded in kind to a nuclear attack from Iran would be at risk of being tried as a war criminal by an international court. The leader of the industrialized Western country has options (smart bombs, etc.) that would cause far less collateral damage than a nuclear response, and the international court would probably hold him/her accountable for not using the less destructive, non-nuclear option.
"I don't think it is obvious at all that Israel or the US or any other developed Western country would nuke Iran back."
Aside from the fact we're talking about a nuclear attack as if there is any chance of it happening (I don't think there is), I would expect the retaliation to come from a 3rd party of unknown origin, probably with a weapon stolen during the break up of the Soviet Union. Either that or an 'accident' on Iranian soil.
But I digress, thank you so much Roger for your answer on REITs. Maybe as a proxy for property I will look at stocks of property management companies or just ETFs in financials - I am looking long-term here and expect there to be headwinds (and cheap prices) for the majority of the twenty teens.
Shame about China Mobile - I really think it'll be a solid performer and have no idea why it wasn't perceived as fair value in the 60s. Could there be some accounting irregularities behind closed doors?
Thanks for sharing your thoughts Roger. Helps me sort through the noise.
Sam
I think China is overvalued and could retrace but have established some new positions in consumer oriented sectors there in the expectation that China will manage to turn the corner into an economy with sufficient internal demand to compensate for export bumps when they are inevitably forced to revalue the renminbi.
My only interest in the Middle East is tactical: It is a cockpit, critically dependent on investments from the great powers (which tend to feature munitions) and exogenous shocks remain highly probable even if further nuclear proliferation is forestalled; more stable profits are available elsewhere.
Somewhat OT but within a broadly "permanent portfolio" framework, my strategic portfolio follows a value-based discipline for rebalancing rather than a strict percentage allocation scheme and, on that basis, my allocations to Japanese equities have been increasing somewhat: When positive future cash flows selling for less than the liquidation value of the companies become available the discipline says acquire, that's all.
Note that Japan's very large debt-load is not necessarily a negative here because further depreciation of the Yen is the greater probability which, to a US dollar investor, offers some security in ROI even if the dollar resumes its downward trajectory too (as I expect it will and frankly should: it's still too expensive from my POV).
RW,
on your japanese investment are you using ETF or individual stocks. I think you are correct on japan. It is now 20 years since the top and it looks promesing.
Best,
Jeff from milan, italy
P.S. where do you get the componets list if the nikkei 225 or 300. - tx
Jeff,
Japan's market is so deep and liquid I usually use individual issues for large cap but when building a broader base I'll use ETF's although I actually prefer CEF's such as JOF and JEQ when their discount is attractive (both had bigger discounts in previous months, JEQ's is still okay).
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