Ding Dong! The Peg is Dead

From: Derek Hillen <derek.hillen@miraeasset.hk>
To: Derek Hillen <derek.hillen@miraeasset.hk>

Date: Mon, 21 Jun 2010 12:30:46 +0800
Subject: Ding Dong! The Peg is Dead

 

Ding Dong! The Witch is dead. Which old Witch? The Wicked Witch!
Ding Dong! The Wicked Witch is dead.
Wake up – sleepy head, rub your eyes, get out of bed.
Wake up, the Wicked Witch is dead. She’s gone where the goblins go…


China’s move toward “flexibility” on the RMB against an, as of now, secret basket of currencies is good news for us munchkins. We return to the old crawling peg and the implications as I see it are:

1)       Return of risk appetite – Beijing is emerging from its bunker and telling everyone recovery is here, buy some stuff.

2)       This breaks the back of the dollar for the short term. Sell it. China holds the most US treasuries, $900 bn worth, and now won’t need to buy so much going forward. A big overnight move in Treasuries is the beginning of more flow into equities.

3)   Watch other Asian currencies begin to appreciate against the dollar.

3)       For us in Hong Kong, watch fund flows reverse and come back into the territory pushing up all asset values (including my rent…)

As our head of property research, the venerable Keith Yeung writes:

Appreciation of the RMB will also improve liquidity flow which should help compress further rise in the HIBOR rates in Hong Kong. The recent sharp rise in the 3-month HIBOR to 0.3982% should be quite worrying given the huge base of HIBOR-based mortgages (over 80% of the market and over HK$300bm outstanding). History shows that liquidity flowing from overseas to Hong Kong far exceeded the liquidity flowing from Hong Kong to RMB-denominated assets. During this period of RMB appreciation between June 2005 and July 2008, HKD deposits jumped 42% to HK$2.86 trillion and growth in HKD deposits accelerated when RMB was appreciating.


He likes Kerry Properties (683 HK) at these levels which benefits from HK asset exposure but also has 42% of NAV in China yet sells at a 45% discount to NAV which means you get the China part for free.

More than the obvious beneficiaries, companies with high US dollar debt or those with high USD input costs (airlines), which everyone can figure out, I think this event more importantly shifts us back toward rising asset values here and the resumption of the Asian reflation story which is certainly easier to understand and play than a deflationary one.

$$$$$$$$$$$$$$

Nintendo (7974 JP) is rocketing on the announcement of their upcoming 3DS handheld device release, which some reviewers say is “visually stunning.” Historically this company is not one to bet against with new releases, think Game Boy, Wii, etc. (Actually, they bombed with “Virtual Boy” in 1995 which was voted by Time Magazine as one of the 50 worst inventions of all time, “…Nintendo’s shortest-lived system, staying on the market for just 6 months in 1995 before its mercy killing.”!!).

Another bad invention:


The major beneficiary from a successful launch of the 3DS will be Macronix (2337 TT), which is the number one supplier of Mask ROM to Nintendo. Our head of tech research, Warren Lau, points out that there is a pattern of Macronix outperformance with successful Nintendo product launches. The stock is not expensive: trading at 10X PE with almost a 9% dividend yield and 45% of market cap in cash. A solid short term momentum trade?

$$$$$$$$$$$$$

The eagle has landed…


Finally, some of you may have noticed my new email address. I have just started at Mirae Asset Securities in a senior regional sales role. This is a start up operation but intriguingly the company has spent the last two years building up a very strong research product before hiring sales traders (done) and sales (done now). We are strong in Korea and HK/China with a view to building up regionally. As ever, I appreciate your support and criticisms.
Please note my new contact details.

$$$$$$$

You can get our research by typing MASR <Go> on Bloomberg.

Cheers.

Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

 

 

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