Wednesday, July 1, 2015

Share valuations of world's top medical glove makers surge - but not on MERS


Share valuations of the four biggest medical glove makers in Malaysia - in the world, in fact - have soared to historic highs, but not because of the MERS outbreak.
The median forward 12-month price-to-earnings ratio of Top Glove (TPGC.KL), Supermax (SUPM.KL), Kossan Rubber Industries (KRIB.KL) and Hartalega (HTHB.KL) has risen to 18, the highest ever, according to Thomson Reuters data. The figures also show their combined revenue is expected to grow 20 percent in 2015, the most in five years.
(For a graphic on sales growth, click: link.reuters.com/pym94w)
The chief driver of sales is the ringgit's slump to nine-year lows against the dollar, making exports more competitive. Low raw material prices will also help widen profit margins. Analysts advocate a selective stock-picking strategy. Among the four, they see Top Glove as their top pick. Shares of the world's biggest glove maker, which commands a 25 percent share of the market, have jumped some 11 percent in Kuala Lumpur since the company released earnings on June 17 that beat expectations.
"I think given the strong rally in Kossan prices, value has emerged more in players such as Top Glove and Supermax," said Chris Eng, head of research at Etiqa Insurance & Takaful, which manages more than 23 billion ringgit ($6.12 billion) of assets. "Probably Top Glove presents the most value as we expect oil prices to gradually rise in coming months putting upward pressure on nitrile as well, which will disadvantage Hartalega and Kossan."
The recent outbreak of Middle East Respiratory Syndrome (MERS) in South Korea has also helped spark investor interest in the stocks, though analysts do not expect MERS to translate into a jump in glove demand with a material impact on earnings. Malaysia-based RHB Research attributed this to the success of South Korea in containing MERS. South Korea has reported a total of 180 MERS infections as of Thursday morning, with 29 deaths. In contrast, Severe Acute Respiratory Syndrome (SARS) in 2003 infected 8,096 people and killed 774, and driving up demand for medical gloves. As for Ebola, which has killed more than 11,000 people in West Africa in the past year, cases have declined sharply in recent months.




http://www.reuters.com/article/2015/06/25/us-malaysia-stocks-pharmaceuticals-glove-idUSKBN0P501Q20150625

Tuesday, June 30, 2015

The Little Book that Beats the Market by Joel Greenblatt

The Little Book That Beats The Market opens with a simple story about a boy selling bubble gum on the playground. The author and his son attempt to place a value on the business. In the end, it’s made clear that putting a value on a business is the key to investing in individual companies. 











The Magic Formula In A Nutshell
The book concludes with a multi-page appendix that lays out how to apply the magic formula. Here’s that explanation in a nutshell:
Go to a website that lets you filter stocks by certain criteria (like this one at Yahoo!). Filter for stocks that have a ROA (return on assets) of at least 25%, then rank them according to their P/E ratios, with the lowest at the top. Toss out all stocks with a P/E lower than 5 (something’s fishy there), all utility and financial stocks, and all foreign stocks. Buy five or seven of these stocks a month for five months (or so). When you near a year of owning one of these stocks, if it’s at a loss, sell it when you’ve owned it one day less than a year and if it’s a gain sell it when you’ve owned it one day morethan a year (playing games with the capital gains tax, basically). Then reinvest what’s left. Keep doing this for at least five years. That’s it!

Read more here:

The Little Book of Common Sense Investing by John Bogle

This small book is divided into eighteen chapters, each ten to twenty pages long, that spells out piece by piece the ideas behind the philosophy that one should do their investing in low-cost index funds.



















Read more here:
http://www.thesimpledollar.com/review-the-little-book-of-common-sense-investing/

Monday, June 29, 2015

Greece explainer: What the financial crisis means

Greece announces bank holiday

As Greece inches closer to a financial default, the government closes banks and initiates capital controls.
While the world recoiled in horror at the terrorist attacks in Tunisia and elsewhere, another crisis was unfolding in Europe.
This week begins with Greece about to default on its debts, its banks closed indefinitely as citizens panic and rush to withdraw their euros.
Greece is facing soaring unemployment while wages have sunk and pensions have been slashed.
Greece is facing soaring unemployment while wages have sunk and pensions have been slashed. Photo: Bloomberg
Next Sunday the people vote on whether to accept the terms of a rescue package offered by Europe, which outlines more cuts to pay and pensions and imposes some steep tax rises.
The result could determine Greece's future in the euro zone and even in the European Union. It will send financial and political shockwaves around the world.
Between now and then will be a week of economic and political turmoil.
Greek Prime Minister Alexis Tsipras addressed the nation from Athens,
Greek Prime Minister Alexis Tsipras addressed the nation from Athens, Photo: Reuters
I thought they were about to agree a solution to all this?
So did (almost) everyone else. For the last fortnight Greece has been negotiating with the IMF and other Eurozone countries for 7.2 billion euros in new loans, to help pay old loans. The creditors were demanding that Greece make some reforms and cuts before they handed over the money.
While some warned that Greece was sleepwalking into a crisis by playing hardball in Brussels, others praised their bold approach to negotiations, their 'red lines' that they would not cross.
According to calculations by Reuters, Greece owes its official lenders 242.8 billion euros, with Germany its biggest creditor.
According to calculations by Reuters, Greece owes its official lenders 242.8 billion euros, with Germany its biggest creditor. Photo: Reuters
They figured Greece was bluffing. That they had to act crazy, give every impression they would push the button on default, otherwise they would again be steamrolled by the lenders and Euro zone countries. But few thought they would actually go through with it.
The collapse of the talks was met with shock and disbelief in northern Europe. They clearly thought that they were just a few hours of haggling, a few billion euros here and there, from agreement.
But it showed a wilful ignorance of the reality on the ground in Greece. Syriza was elected this year to change the script on negotiations with Europe. The Greeks sent their new government to Brussels with an ultimatum to get the country a better deal, not just a general mandate to 'give it another go' then settle for more austerity policies such as cuts to pensions, wages and public sector jobs.
People line up to withdraw cash from an automated teller machine on the island of Crete.
People line up to withdraw cash from an automated teller machine on the island of Crete. Photo: Stefanos Rapanis
So what exactly is the problem?
Basically, Greece was hit hard by the financial crisis, and since then it has borrowed a lot of money that it says it can't pay back – at least not yet.
According to calculations by Reuters, it owes its official lenders 242.8 billion euros, with Germany its biggest creditor.
The lenders include the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments.
Many of the loans don't mature for years, even decades.
However some do. In particular, Greece was due to pay 1.6 billion euros to the IMF by the end of June in overdue interest. After that, 3.5 billion is due to the ECB on July 20, and another 3.2 billion in August.
On top of that, more than 8 billion euros in short-term bills are due over the next two months.
Greece says it has scraped together all the money it can to pay its debts – it even called in cash reserves from councils, hospitals and other public bodies. It says that, to pay the money owed, it would have had to stop paying money into pensions and public wages – which it refuses to do.
What happens if Greece doesn't get the rescue money?
Barring further surprises, it will default on at least some of its debts.
Sovereign default does have precedents, but it always comes with major economic upheaval.
Though the consequences of that are long-term (difficulty finding lenders willing to invest in the country), there will be immediate side-effects.
After months of massive withdrawals, fearing this very crisis, Greece's banks are surviving on emergency credit from the European Central Bank. Without that, they have had to impose capital controls to stop any more money going out.
Greek people will have less money they are able to spend. Business will be unable to invest. The economy will head into recession.
So far the Greek government has refused to countenance 'Grexit'. However if no new rescue deal is negotiated, Greece would have to supply the banks with money itself, or they will collapse.
But the government has no money. The only obvious solution is to start printing new money to get cash back into the economy.
This 'new drachma' would effectively mean Greece has left the euro – at least temporarily.
The 'new drachma', even if it began on parity with the euro, would quickly lose up to half its value. Essentially, the value of everything in the country would be halved.
There will be high inflation, and the new exchange rate would make imports much more expensive. Life will get even harder for ordinary Greeks and Greek businesses.
On the other hand, some economists say it would stimulate the local economy and, in the long run, leave the country stronger. There is fierce disagreement over this view.
Why would the Greek people possibly want this?
They are sick of austerity. Unemployment has sky-rocketed, wages halved, pensions were slashed, public bodies like hospitals, schools and universities starved of funds.
Many no longer believe that austerity is just a necessary, temporary measure to put the country back on its feet. They believe it is wrecking their economy and their lives. They are willing to take a risk and try something else.
Does it affect Australia?
A loss of faith in the Eurozone could make Australia more attractive to overseas investors, driving up the Australian dollar – hurting our export industries. On the other hand it could scare away investors and push down the dollar.
Either way, though, there would be widespread market instability, a loss of investor confidence and morale. None of which is good for business and growth.
How will all this affect other countries?
The euro is already tumbling on international markets.
If Greece defaults it leaves many of its neighbours short. Germany is owed 57 billion euros, France 43 billion, Italy 38 billion and Spain 25 billion – on top of those countries' contributions to the IMF loans.
The loans don't mature for almost 30 years, there is almost no interest on them and some of the loans came with a 10-year moratorium on interest payments, so it's not like the countries need the money back immediately. However it's still a lot to have to take off the bottom line.
Confidence in Europe, and the euro, has been profoundly shaken. Eyes will turn to the continent's other weak economies such as Portugal, Spain and Italy. They may start to lose capital and investment.
Is it just an economic problem?
No.
This could also drastically change the political balance in Europe. If Syriza makes a success out of splitting Greece away from the rest of the continent, it will embolden other nationalistic parties such as the National Front in France or UKIP in the UK.
Future elections in Europe could see a surge in nationalism, a rejection of the European project, potentially enough to threaten Europe's stability as a political union.
Speaking of which, the UK is in the early stages of debate on a referendum on whether to stay in Europe, next year. If Europe is a basket case this time next year, public opinion (currently in favour of staying in) may drastically change.
Then there is the question of Russia. Syriza has already made overtures to the Kremlin, with Tsipras a star speaker at Putin's recent big international summit in St Petersburg.
If Russia comes to Greece's aid, with money, other support (or both), it will be a new factor in the current Cold War-like tensions between east and west.
Greece has already expressed its anger at Europe and NATO for not doing enough in its regular chest-bumping with Turkey. If Russian warships find a friendly berth in Greek ports, the strategic map of Europe is drastically redrawn.
What happens next?
The next set-piece is a referendum on Sunday, in which Greece votes to accept or reject the terms of the rescue deal most recently proffered in Brussels.
Between now and then, of course, anything could happen.
If the referendum takes place, and is a 'no', then Grexit appears all but inevitable.
On the other hand if it is a 'yes', then the Syriza government has effectively lost power. It will return to Brussels and hope that the deal is still on the table – which is not guaranteed. And after that, the country will probably pretty quickly go back to the polls to find a new government.

http://www.smh.com.au/business/world-business/greece-explainer-what-the-financial-crisis-means-20150628-gi05r2.html


Comment:

When you owe money, it is a big problem for you.  Your future is no longer totally in your control.  Your creditor can demand and you need to comply.

When you owe a lot of money and cannot pay back, it becomes a huge problem for your creditors.  

Saturday, June 27, 2015

5 Retirement Lessons From Warren Buffett


When you think of great investors, the name at the top of the list is Warren Buffett. The Oracle of Omaha's insights and ideas can guide you in your own efforts to build wealth. As you consider your retirement future, here are five takeaways from the Oracle of Omaha:
1. Invest for the long term. Many of us are short-sighted. We panic at every market crash or try to chase a quick buck. However, Buffett teaches us to invest for the long term. When Buffett buys a company, he thinks of the long-term value. He doesn't look for something that offers splashy returns in the short term. He looks for something with staying power.
When investing for retirement, you need to think the same way. You won't be able to buy up whole companies, but you can invest for the long term by buying the market through index funds, and then staying in for the long haul. Your future self will thank you.
2. Have a purpose. Buffett has talked about the importance of having a purpose. You need to have an idea of what you want to do that gives meaning to your life. Studies show that retirees often lose their health shortly after quitting, when they don't have something to look forward to each day. Think about what you want to do with your life during retirement, and make it a new stage, rather than an end.
3. Learn from the mistakes of others. There is no reason to repeat the mistakes of others. Instead, learn from them. Many people sold at the bottom of the market in early 2009. Those folks locked in their losses. If they had been willing to wait a few years, they would have seen tremendous gains instead. Don't panic just because everyone else is panicking, and pay attention to the mistakes that bring others down. When you learn from the mistakes of others, you are less likely to fall victim to them.
4. Don't invest in the exotic. Buffett has talked about how he keeps enough cash on hand to meet his upcoming needs, but other than that, he keeps his money working for him. But that doesn't mean that he's investing in exotic assets. Buffett stays away from gold and currencies, and he also avoided the complicated credit default swaps that he famously referred to as instruments of mass financial destruction.
You can be the same boring investor. Focus on stocks, using index funds, and you will be likely to build wealth over time, without the stomach-churning volatility and risk that comes with more exotic assets.
5. Don't worry too much about leaving wealth to your children. While Buffett has said publicly that he wants his children and grandchildren to live fulfilling lives, he isn't taking care of everything for them. Indeed, a large portion of his wealth is going to charity, not his posterity, when he dies.
You can learn a similar lesson. Don't be so worried about providing everything for your children that you neglect your own retirement. And don't be so concerned about leaving them a pile of money that you don't enjoy your retirement when it comes.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com . 


http://finance.yahoo.com/news/5-retirement-lessons-warren-buffett-141437202.html

Chinese Stocks Tumble, Heads for Biggest Loss Since 2007




By Amy Li

Chinese stocks sank the most in five months, leaving the benchmark index on the cusp of a bear market, after leveraged investors cut holdings and Morgan Stanley joined a chorus of analysts warning that valuations have climbed too far.
The Shanghai Composite Index fell 7.4 percent to 4,192.87 at the close, bringing its drop from this year’s high to 19 percent. Chinese stock-index futures tumbled by the 10 percent daily limit as investors rushed to hedge their positions, while the benchmark index in China’s smaller exchange in Shenzhen sank 20 percent from this year’s peak. A gauge of equity volatility jumped to the highest level since 2009.
China’s $8.8 trillion stock market has plunged from first to worst on global performance rankings, threatening to bring an end to the longest bull market since the ruling Communist Party introduced equity trading to the world’s largest population in 1990. Morgan Stanley advised clients to refrain from purchasing mainland shares in a report on Friday, saying the Shanghai Composite’s June 12 high likely marked the top of the rally.
“This is probably not a dip to buy,” wrote Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley in Hong Kong. “In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place.”
The Shanghai gauge has surged 106 percent over the past year as margin debt climbed to a record and investors speculated monetary stimulus will revive the weakest economic expansion in more than two decades. The bull market, which turned 935 days old Friday, is more than five times the average lifespan of previous rallies.
Black Friday
Friday’s rout was led by technology and smaller companies, the leaders of China’s world-beating rally through mid-June. The ChiNext index slid 8.9 percent, extending losses to 27 percent since hitting a high on June 3. The Shenzhen Composite Index also entered a bear market after falling a further 7.9 percent.
The Shanghai Composite’s losses were broad-based with 44 stocks falling for every one that gained. The index slid 6.4 percent this week, adding to a 13 percent plunge last week that was the steepest since the global financial crisis.
The CSI 300 Index of China’s largest companies slumped 7.9 percent on Friday. The Hang Seng China Enterprises Index of mainland companies in Hong Kong fell 2.8 percent and the Hang Seng Index lost 1.8 percent.
With little in the way of economic data or corporate announcements to spark the plunge on Friday, some investors pointed to signs of a pullback by leveraged traders. Outstanding margin debt on the Shanghai Stock Exchange dropped for a fourth day on Thursday to 1.42 trillion yuan ($229 billion).
“The correction is basically margin selling,” said Francis Lun, the chief executive officer at Geo Securities Ltd. in Hong Kong.
Heading Lower
The stocks favored most by margin traders at the height of China’s boom in mid-June have since tumbled 26 percent. The benchmark index has had nine straight sessions of intraday swings exceeding 2 percent.
PetroChina Co., the biggest stock in the mainland, slumped 7 percent on Friday. East Money Information Co., the most heavily weighted stock in the ChiNext, dropped by the 10 percent daily limit. Poly Real Estate Group and Gemdale Corp. led declines for developers, tumbling 10 percent.
Bubble Warnings
The stock market is experiencing a “self-correction,” Zhang Xiaojun, a spokesman at the China Securities Regulatory Commission, said at a weekly briefing after the market close. The benefits of reforms haven’t changed and liquidity will remain ample, Zhang said.
Concern over a shortage of liquidity has helped fuel losses this week as investor funds got tied up in new share sales and the People’s Bank of China refrained from easing monetary policy, disappointing some analysts who had anticipated a cut in interest rates or banks’ reserve requirement ratios.
Guotai Junan Securities Co., China’s largest brokerage by revenue, surged 44 percent on its first day of trading in Shanghai on Friday after it completed the nation’s biggest domestic initial share sale since 2010.
“The Shanghai Composite may fall to the 4,000 level in the next five to eight weeks as the government tightens margin lending, new share sales sap liquidity and concern grows the central bank won’t cut lenders’ reserve-requirement ratios,” said Hou Yingmin, an analyst at AJ Securities in Shanghai.
Morgan Stanley cited increased equity supply, weak earnings growth, high valuations and the surge in margin debt for its pessimistic stance, saying the Shanghai Composite may fall as much as 30 percent through mid-2016.
Strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. all said last week that Chinese equities are in a bubble, while the median stock on mainland exchanges is valued at 85 times earnings -- higher than when the market peaked in October 2007.
More from Bloomberg.com

Friday, June 26, 2015

"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:
  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO
Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic
Regards
Signature

Mark Moreland

Co-Founder



NOTES:
Stock selection
- Read the annual reports
- Read all the analysts reports
- Visit the stores or use their products and services

If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons.

They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision.

These are the 4 behavioural biases, which we refer to them as:

  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.


Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  


FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   



These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 



# Reinvestment risk.

The Perfect Moment to Buy a Stock

Hi, 
I hope you've been enjoying my newsletter so far! 
You've been a subscriber for about a month now, so I would like to take this moment to really thank you for your support! I truly appreciate it, and I'm hoping I can continue to provide you with some excellent content that you can't get anywhere else, and keep you as a loyal subscriber for even longer. 
Today I will share with you how to identify the perfect moment to buy a stock, and it's probably different from what you expect. Why? Because it has little to do with timing, and more to do with the stock price in relation to the intrinsic value of a company. Let me explain. 
"Price is what you pay, value is what you get." 
There is a crucial difference between price and value, and the above quote by Warren Buffett captures this perfectly. If you want to sell your desk chair on eBay, you can ask any price for it you like. However, the value the buyer receives in return, a desk chair, remains exactly the same, regardless of the price you decide to ask. 
It's the same with stocks. A stock price says little about how much a stock, which is essentially a tiny slice of a business, is actually worth. Investors can ask any price they like, but this doesn't change the underlying business. This means it is possible for stock prices to deviate significantly from their intrinsic value, which is great, because exploiting mispriced stocks is what value investing is all about!

So what is the perfect time to buy a stock? 
Well, you first have to determine whether you are dealing with a financially healthy company. Secondly, using conservative inputs, you need to estimate the intrinsic value of a company to determine what a stock should realistically be worth. Is the stock trading at a price way below the intrinsic value you calculated? Sweet! Then this is the perfect time to buy. If not, put it on your watch list until it is finally cheap enough to get in. 
Timing the market, or trying to predict when a stock will move up or down in the short run, is impossible. You might get lucky a few times, but this strategy is doomed to fail in the long run, since prices can be extremely volatile, highly irrational and therefore 100% unpredictable. The only sound way to determine when to buy is to look at the stock price in relation to the intrinsic value of the underlying company. 
Don't worry if the price declines further after your initial investment, because now you can buy more of a wonderful company at an even lower price! You don't have to buy at the absolute bottom. You just have to buy it for a cheap enough price to make a more than handsome return. 
Now that you know when to buy a stock, you might be interested in learning when to sell. In episode #18 of my value investing podcast I cover the only three reasons to ever sell a stock. Here is a link for you below:
https://www.valuespreadsheet.com/investing-podcasts
Cheers, and all the best to you! 
Nick

CEO of Tesco - Customers are buying more things, more often, at Tesco

26 June 2015

First Quarter Trading Statement

Tesco PLC’s First Quarter Trading Statement 2015/16 was announced today at7.00am. To view the full announcement, please go to: www.tescoplc.com/1Q2015.

Highlights

- UK like-for-like sales performance improved to (1.3)% despite significant deflation and the impact of reduced couponing

- UK like-for-like volumes up 1.4%; transactions up 1.3%; 180,000 more customers shopping with us*

- Like-for-like sales growth in Central Europe and Turkey; Central European restructure largely complete

- Some improvement in performance in Asia, in challenging market conditions

- Short-term volatility remains; transformation programme progressing


Dave Lewis – Chief Executive

“We set out to serve our customers a little better every day and the improvements we are making are starting to have an effect.  We are fixing the fundamentals of shopping to win back customers and relying less on short-term couponing.  Customers are experiencing better service, better availability and lower, more stable prices and are buying more things, more often, at Tesco.

These improvements have come during the restructuring of our office and store management teams, which testifies to the focus, skill and commitment of colleagues across the business.  We have also seen an improved performance in our international markets, as we continue to focus on serving customers better.

Whilst the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction.”

To view the full announcement, please go to: www.tescoplc.com/1Q2015.

Contacts

Investor Relations:
Chris Griffith: 01992 644 800

Press:
Tom Hoskin: 01992 644 645
Brunswick: 0207 404 5959

We are a team of over 500,000 people in 12 markets dedicated to providing the most compelling offer to our customers.

Tuesday, June 23, 2015

China Margin Trades Buckle Leaving $364 Billion at Risk


China Margin Trades Buckle Leaving $364 Billion at Risk



The biggest tumble in Chinese shares since 2008 is proving especially painful for margin traders as their favorite stocks sink faster than the benchmark index, raising the risk of forced liquidations.
The 30 equities in Shanghai with the highest levels of margin debt relative to tradable shares have dropped 17 percent on average since the market peaked on June 12, versus a 13 percent decline for the Shanghai Composite Index. Margin positions on the city’s bourse fell for the first time in a month on Friday, a sign that leveraged investors are unwinding bets after they grew more than five-fold in the past year.
With at least $364 billion of borrowed money riding on stocks in Shanghai and Shenzhen, losses on those positions threaten to magnify market declines as traders sell shares to meet margin calls. China’s benchmark index tumbled at the fastest pace among global equity gauges last week, after a world-beating 152 percent gain in the previous 12 months.
“It’s a self-fulfilling prophecy,” Roshan Padamadan, the founder and manager of Luminance Global Fund, said in an interview on Bloomberg Television from Singapore. “As people try to book profits, they’ll find out that there’s nobody on the other side of the trade.”
EGing Photovoltaic Technology Co., a Chinese solar-equipment maker in eastern Jiangsu province, dropped 21 percent since June 12 after outstanding margin bets climbed to 44 percent of the company’s free-float adjusted market capitalization, the highest level among more than 480 equities tracked by Bloomberg and the Shanghai Stock Exchange.

Margin Call

Shanghai Construction Group Co., with a margin trade ratio of about 34 percent, has retreated 19 percent, paring gains over the past year to 243 percent. Shenzhen-based Joincare Pharmaceutical Group Industry Co. declined 20 percent after margin bets reached almost 27 percent of free float.
In a margin trade, investors use their own money for just a portion of the stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be compelled to sell to repay their debt when prices fall.
“You can see from Friday’s sharp decline that people are already cutting losses on margin trading,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. “This is still ongoing, so we should watch out for further selling pressure.”
While margin debt has surged in recent months, it’s still at manageable levels relative to the size of China’s $8.8 trillion stock market, according to Aaron Boesky, the chief executive officer at Marco Polo Pure Asset Management, which runs a China-focused hedge fund.

Rally Forecast

Investors should take advantage of market declines to increase holdings, Boesky said, anticipating the Shanghai Composite may rally another 36 percent to surpass its all-time high in October 2007.
“It is best to buy the dips,” he said in an e-mail on June 21. “Consolidation allows for those already high returns to sell and take profit, and those who have resisted jumping into the market to now have an appetizing entry point.”
Margin traders have been such an important source of demand for Chinese shares that any pullback, particularly one caused by regulatory efforts to curb the use of leverage, will weigh on the market, according to Ronald Wan, the chief executive officer of Partners Capital International in Hong Kong.
Almost all of this year’s biggest declines in the Shanghai Composite, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions.
The China Securities Regulatory Commission is planning to curb the amount of margin trades and short sales financed by brokerages to no more than four times their net capital, according to draft rules posted on its website June 12. Brokerages including GF Securities Co. and Haitong Securities Co. have already tightened lending requirements to limit their exposure to any market downturn.
Chinese stocks have been “heavily reliant on margin financing,” Wan said in an interview on Bloomberg Television. “If the government actually cracks down on certain forms of financing, a correction is unavoidable.”


http://www.bloomberg.com/news/articles/2015-06-22/china-margin-trades-buckle-as-selloff-puts-364-billion-at-risk