Still Looking Good – McLean, VA
Independently wealthy people are usually envied by others, mainly because people dream of being able to do whatever they like whenever they want. A friend who follows some of the investment advice dispensed here is the subject of this type of envy.
Toward the end of last year, this friend had the idea to invest a large amount of money–at least by my standards–in Russia. The gods of the Russian market were good to him, as Russia’s stock market climbed 30 percent (in USD) within two months. Following this phenomenal return, he–after thinking about it for a couple days–decided to sell and book the profits. Then he took off and promised to send a postcard from an “exotic” vacation spot.
He promised not to invest in the market for the rest of 2006. The rest of us, as he put it, can remain here and “try to make sense of the global economy while identifying new opportunities.”
The 2006 performance of Russia’s market, as well as Brazil’s which is up 25 percent, prompts a look into some of the indicators used to gauge the strength of economic growth. Although many are used, only two are examined here to avoid boring you with details.
The first is the Economic Cycle Research Institute’s (ECRI) weekly Leading Indicator for the US, which leads GDP by two quarters. Although the indicator caused some concern last year, it has since rebounded smartly and looks healthy. See the chart below.
Bloomberg
The second is the Organization for Economic Co-operation and Development (OECD) leading indicator for Belgium, which also generally leads the rest of Europe. This one looks good, too. See the chart below.
Bloomberg
These and other indicators are used to estimate economic growth of the Western economies, since a slowdown or, worse, a recession, could hurt emerging economies. Overall, the research makes me positive for at least the next four months.
The main worry is the shape of the yield curve in the US. Although inversion has been a harbinger of bad things (e.g., recessions) in the past, I maintain a more sanguine attitude for now, at least until the picture clears a little more. That said, be aware that an inverted yield curve suggests some sort of an economic slowdown in the US this year, probably by the second quarter.
Given my fairly bullish view, many questions have been asked regarding a potential correction in the global markets. A correction could come at any time, especially given the strong market performance during the past couple years. A potential correction, although painful in the short term, will prove healthy longer term, as genuine bull markets (e.g., Japan, Russia and India) will take a necessary breather before proceeding higher.
At the same time, expect 2006 to be a year investors will pay more for companies that invest in growth, especially given the healthy balance sheets corporations currently enjoy. Hence, a balanced portfolio that includes dividend and growths plays is–as always–the paramount need.
Asia remains the most important economic and political story in town–war related issues in the Middle East notwithstanding. European Union (EU) politicians and their US counterparts continue to try to contain China’s economic growth by constant threats of silly tariffs and the like, as if these types of measures can stop the changes taking place in the world, or would even benefit the EU or US populations. To his credit, though, President Bush has been quick to realize the importance of China and India to the US and has tried to make the process a beneficial one, for those countries as well as for the US.
Bush’s March visit to India the Chinese leader’s April visit to Washington are two of the most important events of the year. Business and political leaders from both sides are eager to increase cooperation, while common folk in Asia are interested in hearing what the US President has to say regarding Asia’s issues. The president’s words and actions, rather than Congress’, are what counts for Asia, as well as the rest of the world.
Less Risk, More Risk
When investors think of Taiwan, they think of a high-beta, technology-oriented stock market. Although this isn’t wrong, many people miss the fact that Taiwan remains a political market–political in the sense that until the unification issue is resolved, there will always be a “lid” restraining Taiwan’s economic growth. For more on the issue, please see Geopolitics & Investing Quarterly, which provides a clearer picture of the situation and the area’s potential outcomes.
Once the political issues are addressed, Taiwan’s market will decisively move higher. This is what makes Taiwan a riskier place, not its technology-heavy market.
For the time being, Taiwan-based Chunghwa Telecom (NYSE: CHT) is added to the Portfolio. The company is the main telecom company in Taiwan, and the Ministry of Transportation and Communications owns 41.48 percent of it. Chunghwa is the strongest telecom play in Taiwan, and it enjoys a strong market position in both its fixed and mobile operations.
The company’s dividend yield of 7.7 percent contributes to the balanced portfolio efforts mentioned above. Notice that dividends are taxed in Taiwan, and US-based stockholders can use the net amount of the withholding tax as a credit, deducting it from their federal income taxes.
Bloomberg
The company’s commitment to returning capital to stockholders is a central part of its strategy. Chunghwa’s management recently decided on a share buyback scheme to the tune of 250 million shares during the next two months. The shares are being purchased in the open market. This will help offset a one-off personnel cost incurred from its privatization last year. Furthermore, the company plans a staff reduction program, with 3,000 employees departing; this will save Chunghwa about TWD4.5 billion (USD140 million).
Another promising business move the company recently announced is its intention to enter the property development business, mainly through the redevelopment of some of land and buildings the company owns. That property is expected to remain empty, as staff reductions are taking place and the company is moving to a modern technology platform that requires smaller size equipment. Although the plan will require time, it’s expected to help Chunghwa generate big revenues. Buy Chunghwa.
Singapore remains one of the most defensive markets in Asia, especially in its telecom and bank sectors. The market, as a whole, enjoys one of the highest dividend yields in the region at 3.6 percent. Expect this number to increase this year. See the chart below, which shows the yields in percentage terms.
Bloomberg
On the policy level, Singapore continues to implement fiscally conservative policies while moving toward lower taxes. For example, the government recently announced it would lower the personal income tax rate to 20 percent from 22 percent.
On the economic side, a property recovery is starting, which will be extremely beneficial to the local economy. Furthermore, Singapore declared that investors putting SD5 million (USD3 million) or more into the country’s financial instruments can become a permanent resident–up to SGD2 million (USD1.2 million) of that amount can be used to buy property. The decision illustrates Singapore’s efforts to increase its appeal as a desirable destination for entertainment and high living standards, thus attracting the affluent from across Asia who want a personal getaway (e.g., Japanese).
Singapore Tel (OTC: SNGNY) is also added to the Portfolio. Apart from its steady and profitable domestic business, Sing Tel also offers a backdoor entrance to India’s lucrative and explosive telecommunication market. The company owns a 20 percent stake in India’s fastest growing telecom company, Bharti Group. That stake contributes a big part of Sing Tel’s profit growth, as does its operations in Indonesia. Sing Tel also does business in Australia, Bangladesh, the Philippines and other Asia Pacific countries.
Sing Tel offers a 4.8 percent dividend yield, which should gradually increase because of management’s payout focus. Buy Sing Tel.
Bloomberg
Portfolio Talk
A word is warranted regarding last week’s addition of Dr. Reddy’s (NYSE: RDY).
The company is a play on India’s continuously growing pharmaceutical industry. We’ve followed the company since 2001, but have had a negative opinion of the company for more than a year now. The main reason for this was the gradual change in the business environment, as the number of generic pharmaceutical companies grew while the pie remained basically the same. In addition, the company experienced a tremendous increase in costs that started hurting its revenues.
However, there’s been an effort to manage costs (although they still remain high at 34 percent of revenues), something that’s expected to continue. The company’s latest results are solid, as revenues grew by 27 percent.
Looking ahead, two main prospects make it an appealing Portfolio addition. The first is the company’s participation, together with Teva Pharmaceuticals and Aventis, in the generic Allegra business, which could generate about $20 million in profits. As Dr. Reddy’s has increased its US pipeline filings to 51 Abbreviated New Drug Applications (ANDAs) pending approval, its US business should be back on track soon.
The Waxman-Hatch Act codified the process for approval of generic drugs, allowing for approval of a generic copy of a previously approved “pioneer” drug product without the submission of a full New Drug Application (NDA). This process involves submission of an Abbreviated New Drug Application (ANDA), which relies upon US Food and Drug Administration approval of the pioneer drug to demonstrate safety and effectiveness. Generally, the ANDA needs only to establish that the generic drug is a bioequivalent to the pioneer drug (i.e., the reference-listed drug for which therapeutic equivalence is sought).
The second prospect is a rumored potential merger with the other giant of India pharma, Ranbaxy Laboratories. If a merger takes place–and I don’t pretend to have inside knowledge on this–it will create a stronger company. For starters, it will reduce research and development (R&D), as well as administrative costs, since there’s an overlap when it comes to filling for the approval of similar products.
In addition, a merger of that sort allows greater financial flexibility to compete with the bigger generic companies (e.g., Teva and Sandoz), which have the size and financial muscle to take the risks necessary to survive in the business.
If the merger happens, the benefit to stockholders will be huge. Until then, though, the Dr. Reddy’s is on its way to improve operations. Therefore, more upside in the stock is expected.
Toward the end of last year, this friend had the idea to invest a large amount of money–at least by my standards–in Russia. The gods of the Russian market were good to him, as Russia’s stock market climbed 30 percent (in USD) within two months. Following this phenomenal return, he–after thinking about it for a couple days–decided to sell and book the profits. Then he took off and promised to send a postcard from an “exotic” vacation spot.
He promised not to invest in the market for the rest of 2006. The rest of us, as he put it, can remain here and “try to make sense of the global economy while identifying new opportunities.”
The 2006 performance of Russia’s market, as well as Brazil’s which is up 25 percent, prompts a look into some of the indicators used to gauge the strength of economic growth. Although many are used, only two are examined here to avoid boring you with details.
The first is the Economic Cycle Research Institute’s (ECRI) weekly Leading Indicator for the US, which leads GDP by two quarters. Although the indicator caused some concern last year, it has since rebounded smartly and looks healthy. See the chart below.
Bloomberg
The second is the Organization for Economic Co-operation and Development (OECD) leading indicator for Belgium, which also generally leads the rest of Europe. This one looks good, too. See the chart below.
Bloomberg
These and other indicators are used to estimate economic growth of the Western economies, since a slowdown or, worse, a recession, could hurt emerging economies. Overall, the research makes me positive for at least the next four months.
The main worry is the shape of the yield curve in the US. Although inversion has been a harbinger of bad things (e.g., recessions) in the past, I maintain a more sanguine attitude for now, at least until the picture clears a little more. That said, be aware that an inverted yield curve suggests some sort of an economic slowdown in the US this year, probably by the second quarter.
Given my fairly bullish view, many questions have been asked regarding a potential correction in the global markets. A correction could come at any time, especially given the strong market performance during the past couple years. A potential correction, although painful in the short term, will prove healthy longer term, as genuine bull markets (e.g., Japan, Russia and India) will take a necessary breather before proceeding higher.
At the same time, expect 2006 to be a year investors will pay more for companies that invest in growth, especially given the healthy balance sheets corporations currently enjoy. Hence, a balanced portfolio that includes dividend and growths plays is–as always–the paramount need.
Asia remains the most important economic and political story in town–war related issues in the Middle East notwithstanding. European Union (EU) politicians and their US counterparts continue to try to contain China’s economic growth by constant threats of silly tariffs and the like, as if these types of measures can stop the changes taking place in the world, or would even benefit the EU or US populations. To his credit, though, President Bush has been quick to realize the importance of China and India to the US and has tried to make the process a beneficial one, for those countries as well as for the US.
Bush’s March visit to India the Chinese leader’s April visit to Washington are two of the most important events of the year. Business and political leaders from both sides are eager to increase cooperation, while common folk in Asia are interested in hearing what the US President has to say regarding Asia’s issues. The president’s words and actions, rather than Congress’, are what counts for Asia, as well as the rest of the world.
Less Risk, More Risk
When investors think of Taiwan, they think of a high-beta, technology-oriented stock market. Although this isn’t wrong, many people miss the fact that Taiwan remains a political market–political in the sense that until the unification issue is resolved, there will always be a “lid” restraining Taiwan’s economic growth. For more on the issue, please see Geopolitics & Investing Quarterly, which provides a clearer picture of the situation and the area’s potential outcomes.
Once the political issues are addressed, Taiwan’s market will decisively move higher. This is what makes Taiwan a riskier place, not its technology-heavy market.
For the time being, Taiwan-based Chunghwa Telecom (NYSE: CHT) is added to the Portfolio. The company is the main telecom company in Taiwan, and the Ministry of Transportation and Communications owns 41.48 percent of it. Chunghwa is the strongest telecom play in Taiwan, and it enjoys a strong market position in both its fixed and mobile operations.
The company’s dividend yield of 7.7 percent contributes to the balanced portfolio efforts mentioned above. Notice that dividends are taxed in Taiwan, and US-based stockholders can use the net amount of the withholding tax as a credit, deducting it from their federal income taxes.
Bloomberg
The company’s commitment to returning capital to stockholders is a central part of its strategy. Chunghwa’s management recently decided on a share buyback scheme to the tune of 250 million shares during the next two months. The shares are being purchased in the open market. This will help offset a one-off personnel cost incurred from its privatization last year. Furthermore, the company plans a staff reduction program, with 3,000 employees departing; this will save Chunghwa about TWD4.5 billion (USD140 million).
Another promising business move the company recently announced is its intention to enter the property development business, mainly through the redevelopment of some of land and buildings the company owns. That property is expected to remain empty, as staff reductions are taking place and the company is moving to a modern technology platform that requires smaller size equipment. Although the plan will require time, it’s expected to help Chunghwa generate big revenues. Buy Chunghwa.
Singapore remains one of the most defensive markets in Asia, especially in its telecom and bank sectors. The market, as a whole, enjoys one of the highest dividend yields in the region at 3.6 percent. Expect this number to increase this year. See the chart below, which shows the yields in percentage terms.
Bloomberg
On the policy level, Singapore continues to implement fiscally conservative policies while moving toward lower taxes. For example, the government recently announced it would lower the personal income tax rate to 20 percent from 22 percent.
On the economic side, a property recovery is starting, which will be extremely beneficial to the local economy. Furthermore, Singapore declared that investors putting SD5 million (USD3 million) or more into the country’s financial instruments can become a permanent resident–up to SGD2 million (USD1.2 million) of that amount can be used to buy property. The decision illustrates Singapore’s efforts to increase its appeal as a desirable destination for entertainment and high living standards, thus attracting the affluent from across Asia who want a personal getaway (e.g., Japanese).
Singapore Tel (OTC: SNGNY) is also added to the Portfolio. Apart from its steady and profitable domestic business, Sing Tel also offers a backdoor entrance to India’s lucrative and explosive telecommunication market. The company owns a 20 percent stake in India’s fastest growing telecom company, Bharti Group. That stake contributes a big part of Sing Tel’s profit growth, as does its operations in Indonesia. Sing Tel also does business in Australia, Bangladesh, the Philippines and other Asia Pacific countries.
Sing Tel offers a 4.8 percent dividend yield, which should gradually increase because of management’s payout focus. Buy Sing Tel.
Bloomberg
Portfolio Talk
A word is warranted regarding last week’s addition of Dr. Reddy’s (NYSE: RDY).
The company is a play on India’s continuously growing pharmaceutical industry. We’ve followed the company since 2001, but have had a negative opinion of the company for more than a year now. The main reason for this was the gradual change in the business environment, as the number of generic pharmaceutical companies grew while the pie remained basically the same. In addition, the company experienced a tremendous increase in costs that started hurting its revenues.
However, there’s been an effort to manage costs (although they still remain high at 34 percent of revenues), something that’s expected to continue. The company’s latest results are solid, as revenues grew by 27 percent.
Looking ahead, two main prospects make it an appealing Portfolio addition. The first is the company’s participation, together with Teva Pharmaceuticals and Aventis, in the generic Allegra business, which could generate about $20 million in profits. As Dr. Reddy’s has increased its US pipeline filings to 51 Abbreviated New Drug Applications (ANDAs) pending approval, its US business should be back on track soon.
The Waxman-Hatch Act codified the process for approval of generic drugs, allowing for approval of a generic copy of a previously approved “pioneer” drug product without the submission of a full New Drug Application (NDA). This process involves submission of an Abbreviated New Drug Application (ANDA), which relies upon US Food and Drug Administration approval of the pioneer drug to demonstrate safety and effectiveness. Generally, the ANDA needs only to establish that the generic drug is a bioequivalent to the pioneer drug (i.e., the reference-listed drug for which therapeutic equivalence is sought).
The second prospect is a rumored potential merger with the other giant of India pharma, Ranbaxy Laboratories. If a merger takes place–and I don’t pretend to have inside knowledge on this–it will create a stronger company. For starters, it will reduce research and development (R&D), as well as administrative costs, since there’s an overlap when it comes to filling for the approval of similar products.
In addition, a merger of that sort allows greater financial flexibility to compete with the bigger generic companies (e.g., Teva and Sandoz), which have the size and financial muscle to take the risks necessary to survive in the business.
If the merger happens, the benefit to stockholders will be huge. Until then, though, the Dr. Reddy’s is on its way to improve operations. Therefore, more upside in the stock is expected.