Asia's Financial Stocks Drop on Credit Woes
"In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment."
Charles Darwin
Naturalist and author, 1809-1882
The Financial Stock Shock is hitting Asia with full force. Investors are reassessing balance sheet risk, downgrading dividend yields and running en masse from global bank stocks.
In the latest sell-off Chinese banks have taken the heat. Apparently, the Bank of China (the number 2 bank in the country) will write-down a significant portion of its US$7.95 billion in U.S. subprime assets. One may recall that when the whole Subprime Syndrome bandwagon started rolling last fall the authorities claimed that Chinese bank exposure to such toxic assets was minimal. Then, subprime amounted to 3% of US$775 billion in total assets so only US$473 million had been set aside for portfolio writedowns.
As a result, Chinese and other Emerging Market banking stock outperformed their Developed Market counterparts in the U.S. and Europe.
Clearly, the goalposts are now being moved to reflect closer with reality.
Certainly the fact that bond insuers too are being downgraded may have ripple effects on a definition of quality assets that stretch beyond simply subprime tainted CDOs. This will inevitably lead to more surprise writedowns by banks throughout Asia including the current equity market "ragdoll" of Japan.
Just think about how the downgrading of bond insurers could cascade through the financial system as it applies to re-grading across all bond holdings including munis. And, now more than ever banks have become very sensitive to Basel II capital adequacy requirements.
In China, hedge funds and other investors will now focus on the changing storylines that emerge from other major banks like ICBC and China Construction Bank. Look for continued selling of their stocks until at least 80% of their respective subprime exposure is captured in reserves (US$6.4 billion for the Bank of China) - until then the spread/pair trade between developed and emerging market financial equity stocks will tighten for now.
One subtle implication might be the emergence of a political voice among the Chinese population against foreign financial institutional investments - a theme among global SWFs in recent months. Indeed, there are indications that is already the case in some local media circles.
As investors, it is now time to ask your China and pan-Asia hedge fund manager how he/she is taking advantage of this deepening crisis and how that translates in monthly P&L attribution. If the answer is not clear or positive, the advice must be to get out!
The best long/short managers should now be making healthy profits on their short book; these managers forsaw this trade last year and should now be reaping the benefits as they are adaptable. The others will suffer just like the traditional market benchmarks. Mahalo.
"In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment."
Charles Darwin
Naturalist and author, 1809-1882
The Financial Stock Shock is hitting Asia with full force. Investors are reassessing balance sheet risk, downgrading dividend yields and running en masse from global bank stocks.
In the latest sell-off Chinese banks have taken the heat. Apparently, the Bank of China (the number 2 bank in the country) will write-down a significant portion of its US$7.95 billion in U.S. subprime assets. One may recall that when the whole Subprime Syndrome bandwagon started rolling last fall the authorities claimed that Chinese bank exposure to such toxic assets was minimal. Then, subprime amounted to 3% of US$775 billion in total assets so only US$473 million had been set aside for portfolio writedowns.
As a result, Chinese and other Emerging Market banking stock outperformed their Developed Market counterparts in the U.S. and Europe.
Clearly, the goalposts are now being moved to reflect closer with reality.
Certainly the fact that bond insuers too are being downgraded may have ripple effects on a definition of quality assets that stretch beyond simply subprime tainted CDOs. This will inevitably lead to more surprise writedowns by banks throughout Asia including the current equity market "ragdoll" of Japan.
Just think about how the downgrading of bond insurers could cascade through the financial system as it applies to re-grading across all bond holdings including munis. And, now more than ever banks have become very sensitive to Basel II capital adequacy requirements.
In China, hedge funds and other investors will now focus on the changing storylines that emerge from other major banks like ICBC and China Construction Bank. Look for continued selling of their stocks until at least 80% of their respective subprime exposure is captured in reserves (US$6.4 billion for the Bank of China) - until then the spread/pair trade between developed and emerging market financial equity stocks will tighten for now.
One subtle implication might be the emergence of a political voice among the Chinese population against foreign financial institutional investments - a theme among global SWFs in recent months. Indeed, there are indications that is already the case in some local media circles.
As investors, it is now time to ask your China and pan-Asia hedge fund manager how he/she is taking advantage of this deepening crisis and how that translates in monthly P&L attribution. If the answer is not clear or positive, the advice must be to get out!
The best long/short managers should now be making healthy profits on their short book; these managers forsaw this trade last year and should now be reaping the benefits as they are adaptable. The others will suffer just like the traditional market benchmarks. Mahalo.
posted by Franklin Scruggins | 7:13 AM
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