Platinum Capital is one of Australia’s biggest offshore investors.
It in fact specialises in offshore investment, especially in Japan and countries like China. It doesn’t neglect the US and Europe, but has tended to concentrate more on our region.
Last week it released its March quarter investment report with some valuable insights into the way the offshore recovery is going.
We admit surprise at the very strong profit recoveries we have witnessed to date. In terms of valuations, most developed markets are fairly priced although this depends on the premise that growth in the developing world will fully offset the impaired position of the developed world which will be preoccupied in righting its lopsided economies.
While stock markets have witnessed a very traditional two thirds recovery after a serious recession, the shock of the crisis has ensured a healthy divergence of views.
This is manifested in an attractive spread of valuations.
We are still finding a large number of companies that look good value or, indeed, are underpriced.
From this ground-up analysis we form the view that we should be able to make positive returns in the year ahead even though there are likely to be periodic wobbles.
We see the months ahead revealing many contrasts and contradictions.
There will be talk of the Fed tightening cycle and how shares traditionally respond to this.
Currency movements will throw-up winners and losers.
Pressure from gigantic issuance of bonds to meet the profligates budget deficits will impinge on the bond markets and create a lively debate about the appropriate clearing level of interest rates for long dated paper.
Muddying the issue will be the activities of the banks and the extent to which they accumulate government paper in the face of reluctant lending and cautious borrowers.
These probably should be regarded as sideshows and distractions from the behaviour of employers regarding staffing needs and how companies capitalise on the available opportunities.
The gears of international trade and commerce are gradually re-meshing but, on account of the earlier excesses, fundamental damage has been done so the recovery can be expected to be protracted and accompanied by setbacks.
Greece, while causing consternation, is merely part of the tapestry that made up the earlier boom.
Without an exchange rate mechanism to adjust living standards to reinvigorate that nation’s competitiveness, there is severe pressure on the government to make the necessary adjustments.
But how is this going to work?
The democratic process gives little comfort to those who want to believe that pleas by those asked to make sacrifices will go unnoticed.
Can one really envisage that those governments which accepted a blow out in central spending and accumulated deficits in the good times will somehow have the character to face down their electors in circumstances of underemployed resources and deepening gloom?
Surely the odds favour ultimate ejection of the profligate by more disciplined states who believe there are no remedies other than self-restraint and thrift, even if it is at the cost of the dream of an integrated greater Europe.
The pressures of national self-interest are conspiring against those with the lofty ideals of the greater good and a tightly unified Europe – federation may come to be seen as a least bad solution.
The other issue that is still far from resolved is the need for China to engage more openly with the rest of the world.
Here we have the world’s largest exporter and second largest economy, yet it operates with a closed currency market, termed a managed floating exchange rate.
We should indeed be most grateful to China for the short-term benefits it bestowed on the world with its massive interventions, both fiscal and monetary, to offset the global financial crisis, but the persistent accumulation of foreign exchange reserves tells of the underlying problem.
The Chinese internal political dilemma is painful. Investment activity has clearly shifted to the poorer inner provinces where presently investment is running at about twice the level, as a proportion of activity, compared to the coastal provinces.
Inflation across the country is showing signs of accelerating and there are indications of tightness in the labour markets in the coastal states.
The government is already directing lending and attempting to avoid an overheating of the property market, yet the Centre is loath to ease off until these less fortunate provinces gain their own momentum.
To counter the problem of Beijing trying to control too many variables at once, it seems inevitable that the Yuan will be the ‘sacrifice’ and will gradually revalue upwards.
With a current account surplus of over USD200 billion dollars a year, it is difficult to argue that the Yuan is anything but undervalued.
