My musings on the economy, life, technology, business and things I find interesting.

Sunday, June 1, 2008

Investing in the New Silk Road

Despite a heavy time at a friends wedding and a birthday to boot, I've been neglecting my intentions to be posting daily, so here's a quick post on an ancient route translated into modern times and some musings on it's investment potential

The HSI and HSCEI (aka the Chinese markets) have their respective valuations take a severe beating since November of last year, even worse though have been the performance of the port operators.

Roughly put the silk road was a series of routes that linked traders and citizens from Europe to China and beyond from 100BC to roughly the 15th century. It enabled the export of goods and culture to much of the world. The amount of goods travelling across it was a excellent indicator of the economies it served. In modern times a lot of China's trade now passes through it's ports. The ports serves as as economic barometer, much like other shipping based metrics.

You can imagine that the containers of goods coming and leaving ports would be a reasonable indicator to the level of trade happening between countries. In China's case the market felt that it's ports business would begin to grow at single-digit annual growth rates. That is to say the valuations reflected such expectations and they weren't good. Single digit growth rates aren't the norm for China, so this is the time when you raise your eyebrows and ask a perfectly reasonable question, why?

The answer, to my best guess, is that the market believes that the countries China serves will be in for rough times and will not care to import as many items as they once did to fill all the dollaramas, walmarts and foot lockers. This would namely be the US but also Europe and Asia.

In effect the market was saying, there will be no decoupling of economies, they shall all go down like a bunch of sailors drunk on subprime and good times. Your consumers will learn to save, pay off debt, afford their groceries and gas and buy less crap.

China has been exporting price deflation for a while but it seems that this is becoming harder and harder to do. Global wage arbitrage, rising commodity prices, gas prices, a booming local economy and an already efficient logistics and manufacturing framework mean that prices are heading higher and very stick downward. Higher prices will lower demand, but I don't think nearly as much as wage and credit deflation will.

Now none of that may concern you, and despite it all the New Silk Road may be a good investment if you feel:

  • The US recession will not drastically reduce the amount of items purchased from China

  • That Europe will remain in a health position and increase shipments from China to try and bring some of that Walmart style price deflation home to the aristocrats

  • The burgeoning emerging economies will pick up where the US left off

  • The local Chinese economy will stay strong ensuring the ports keep handling all the raw material imports China requires.

  • There hasn't been an overcapacity build out from the boom times that will keep fees low

Difficult questions and unclear time frames. No investments in HK listed port plays at this point but I'll be reading up on Dalian Port in conjunction with my macro musings on the overall economic picture. Remember getting the macro trends wrong means you might be waiting a long while for your return. If you're a hold for forever kind of guy, the annualized returns might still be okay, but we're the instant gratification generation afterall, or maybe that's changing too?

I will always be of the opinion that in good and bad markets there are not only ways to make money but good companies to buy. To quote a very rich man, I would pay you significant money if you could make the price drop in various equities I own. The answer as to why is simple: so I can buy more from the fools willing to sell to me so very cheaply.

The markets will always do what they do best: seperating fools from their money. So a toast and hope on my birthday to not being such a fool.

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