Wednesday, November 30, 2011

Monthly Review - November 2011

November saw the value of the portfolio decline, largely in line with the decline in equity markets and adverse exchange rate movements.

Positive cash from on the properties (fully leased) and a healthy savings rate were not enough to overcome the mark to market losses.

Here are the details:

1. my Hong Kong equity portfolio declined, with HWL leading the way down. I purchased shares in CMR , Cosco Pacific, K Wah and HKR and sold some shares in Kenford, Perennial and CMOC to partially pay for the purchases; . The amounts involved were not large;

2. my AU/NZ equities declined; ETFs declined in line with the local markets, with India being the worst affected. There were no ETF purchases this month;

4. my commodities fell slightly, led by silver;

5. all of my properties are occupied with all tenants paying on time. No repairs this month;

6. currency movements were very negative, as the NZD and AUD fell sharply against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had no open derivative positions;

9. savings were good with high income and low expenses.

My cash position increased in spite of making net new investments. I currently hold 22.3 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth decreased by 2.74%. The year to date increase is a meagre 3.84% - which is less than my net savings and cash flow from properties, indicating that I have had material losses on investments this year.

Tuesday, November 29, 2011

Cosco Pacific purchased

Ok, my self control didn't last long. This morning I added a few more Cosco Pacific (HK:1199) to the portfolio paying an HK$8.65 for the additional shares.

I have become very marginally more optimistic about the US economy (primarily on the back of strong corporate balance sheets, slowly growing employment numbers and improved retail sales) and China (some monetary and fiscal easing, moderating inflation and clearance of developers' housing stocks (although at low levels)) but remain concerned about Europe's dysfunctional leadership.

Friday, November 25, 2011

Some small portfolio sales

A rather tardy update: to pay for last week's purchase of additional shares in CMR (HK:773), I sold a few shares in Kenford (HK:464) at HK$0.57 and Perennial (HK:725) at HK$0.62.

As I watch the Hang Seng Index drift below 18,000, it is very hard to resist the urge to spend all the cash I have on hand. Very.....very.....hard....

Sunday, November 20, 2011

Hong Kong trailwalker 2011

Nothing to do with personal finance, but my team took part in this year's 100 km Oxfam Hong Kong Trailwalker. Warm and very humid weather combined with a muddy and very slippery trail to put us a few hours behind target, but the whole team made it to the finish line with no serious injuries (only the usual collection of blisters).

Apart from the benefits of raising a modest amount of money for Oxfam, completing an event which is a considerable step up from running a marathon provides a great sense of achievement.

Wednesday, November 16, 2011

CMR purchased

This morning I added a few more shares in China Metal Recycling (HK:773) to the portfolio. This was largely on the back of a broker's report giving a price target of HK$13.50. Nothwithstanding some weakening in scrap prices and the impact of rising operating costs, my expectation is that the company will continue to benefit from the considerable investments in new capacity and the on going industry consolidation.

I paid HK$8.70 for the additional shares.

Monday, November 07, 2011

Hong Kong property - random musings

Hong Kong property is a subject that produces a very wide range of views, currently ranging from the cautiously confident to the extremely bearish.

The cautiously confident camp largely rest their case on:

(i) continued demand from mainland investors;

(ii) sell side structural issues which act as an impediment to selling or trading up - specifically the difficulty in replacing existing low cost mortgage financing, tighter lending criteria and the punitive stamp duty regime adopted to curb speculation;

(iii) the likelihood of continued inflation as central banks continue to try and inflate their way out of what may or may not be a double dip recession.

The bearish camp typically put forward a number of reasons why the property market will decline including:

(i) rising interest rate costs for new borrowers. While old HIBOR loans are still costing less than 1% pa, new loans typically cost around 2.5% (+/- a bit depending on bank and borrower). This is enough to make borrowing more expensive by a meaningful margin;

(ii) tighter lending criteria. Loan to value and payment to income thresholds being tighter than during the bull market. Funding pressures on banks are contributing to the tighter lending conditions;

(iii) reduced future demand from mainland buyers;

(iv) increased supply as the government releases more land for development and developers rush projects to market before sale prices start falling (this is already happening);

(v) property prices are high by historical standards, high in absolute terms and high in relative terms.

Predictions for the size of the expected decline range from a relatively mild 10% to a very damaging 50%.

Both the optimists and the bears count among their numbers rather shrill "perma" members who occasionally appear quite emotional on the subject.

It seems beyond debate that, at least in the short term, prices are headed lower. In fact they already have in both the secondary and the primary markets although it is unclear by how much. FWIW, my view is that there is far more downside risk that upside risk at the moment. I expect property prices to fall further, largely due to further increases in supply and the continued effects the tight market for property finance. That said, while we have experienced greater than 50% falls in the past, given the very high levels of equity in the market, it would take a significant further deterioration in market fundamentals (e.g. a very large increase in HIBOR etc) to produce a 50% fall. This doesn't mean in can't happen, only that I consider a much smaller decline to be more likely - possibly something in the order of 20% (although that is a complete guess). I also expect rents to level off or even soften a bit as more owners put their units out for lease and/or the banking sector sheds jobs.

If prices do fall significantly, I will probably buy again. Realistically, given the impact of the 1997-2003 bear market, I would expect the Hong Kong government to reverse some or all of the cooling measures long before we got to that stage.

Wednesday, November 02, 2011

CMR purchased

This morning I added some more shares in China Metal Recycling (HK:773) to the portfolio. The combined effect of the very strong interim results, bullish forward looking statements from the company, insider buying, a sound macro environment, industry consolidation and, most recently, a very aggressive price target released by one research house made a compelling case for adding to my position. I paid HK$7.96 for the additional shares.

In an effort to avoid running down the cash too far, to fund the purchase I sold some of my shares in each of CMOC (HK: 3993) at HK$3.56, Herald Holdings (HK:114) at HK$0.90 and AUPU (HK:477) at HK$0.62.

Some small portfolio adjustments

A slightly late update.

On Monday I added a few additional shares in K Wah (HK:173) and HKR International (HK:480) to the portfolio. I paid HK$2.12 for K Wah and HK$3.25 for HKR.

K Wah is a mid tier Hong Kong property developer (some projects in the PRC as well). Sales of its current JV project Marinella have been going well even without allowing for current market conditions. The balance sheet is strong. The discount to NAV is large - even if there is a very large write down in asset values - but so are most property companies. IMHO the shares have been oversold.

HKR is a smaller property investor and developer (with a few other businesses). The companies track record of delivering growth and keeping up a respectable dividend is excellent. The discount to NAV is huge and, together with a strong balance sheet, provides considerable long term downside protection.

Right now it seems a bit counter intuitive to be buying property companies.

I'm trying to get into the habit of funding new acquisitions by selling some existing investments rather than repeatedly running down my cash position - once I eventually stop working I won't have much choice in the matter. The K Wah and HKR purchases were funded by selling part of my position in CMOC (HK:3993) for HK$3.88. CMOC has been a disappointing investment (to put it mildly). That said, I have no particular views on whether to hold or sell my remaining shares in CMOC.

The amounts involved are not large.

Greece - digging a deeper hole

The announcement that Greece intends to put the austerity/bailout package to a national referendum undid much, if not all, of the positive that could be taken from the rather sketchy EU bailout plan.

There is widespread and probably realistic expectation that, when the time comes to vote, the Greek people will reject a package of tax increases and entitlement cuts. This is likely to be true, even if the alternative is the national equivalent of bankruptcy and even greater hardship. Even if the referendum is passed, it would be a safe assumption that no sane person would have failed to take their money out of the Greek banks, out of overseas banks based in Greece (ring fencing risk etc) and out of Greece generally. (Quite frankly, I'm a little surprised that Greece hasn't been stripped bare already.) At this point, no amount of regulation is going to stop that from happening and, one way or another, people will get everything they can off the ship before it finally sinks.

For what it's worth, matters have reached the point where the rest of the EU should wash its hands of Greece, let the country (and its creditors) sort out its own mess and put the stability fund to work to ensure that European banks do not fail (or, if they do, nationalise them to prevent a domino effect). Greece clearly wants to fail and should be allowed to do so as a lesson to other states that consistently spending beyond your means will, sooner or later, lead to considerable economic hardship. I'd say it would also teach lenders and investors to at least consider the possibility of country default risk when lending/investing but that would be a waste of effort - every few years they seem to need re-educating.