E The China Investment Outlook

As I have no idea what the latest judicial coup d'etat in Thailand portends, and as I have not heard from either Cousin Simon or Paul Renaud who live there, I am not even going to try to figure out what it all means. Nor will I risk predicting the outcome of the Putin concessions on eastern Ukrainian elections.

It is puzzling that the dollar, US Treasury yields, and gold are all losing altitude; normally they price against each other. No, I cannot explain why the 10-yr Treasury yield fell to 2.59% from 2.62% yesterday as the dollar and gold both dropped. Putin's concessions may explain this--or not.

Let's change the subject. Shareholders are revolting.

Warren Buffett compares voting against excess executive pay to burping at the dinner table. You will be banned to the kitchen if you do this, he remarked at the weekend Omaha rally when criticized for backing the high and dilutive payouts at Coca Cola, where Berkshire Hathaway is the largest outside shareholder.

But in Britain, Alan Tovey writes in The Telegraph (Weds.) that there is a different mood:

A new wave of shareholder activism is building after investors in some the country’s best-known companies showed their disapproval over boardroom pay. Investors [are] actively voting against levels of pay and bonus, and do not include abstentions, where shareholders do not vote down a measure but do not back it either.

The revolts come a[s] investors in blue-chip companies AstraZeneca and Barclaysvoted their concerns over pay, echoing the “shareholder spring” that caused upheaval in boardrooms 2 years ago.

Online grocery business Ocado also felt shareholders’ ire, with 1 in 5 going against its remuneration report and almost 1 in 8 voting against the remuneration policy.

More follows from one of our British companies also facing shareholder rebellion plus news from Canada, Israel, Brazil, New Caledonia (a first), Britain, Mexico, China, Hong Kong, Taiwan, Macao, Panama, and Spain. Today's blog is late because I joined a conference call at 11 am on China and regional markets also summarized below. I listened mainly because Chinese trade grew modestly in April (exports up 0.9% vs Mar. decline of 6.6% imports up 0.8% vs Mar. decline of 11.3%.) The trade surpluse doubled to $18.45 bn and beat forecasts of $13.9 bn. China's may not be slowing down as much as expected.

*The conference call was for JP Morgan China Region Fund, JFC, with lead portfolio mgr Emerson Yip, a Yale math graduate. JFC gained more than double the benchmark in 2013 thanks to its heavier China investment "because of attractive valuation"; a lower Hong Kong level "based on stock-picking"; and "roughly even Taiwan weighting".

In 2014 YTD however the fund missed its benchmark so far. Moreover it is at an 11.6% discount from net asset value, greater than its norm. Blame too much Mainland, "high-flying growth stocks correcting" and the weakening RMB.

Taiwan outperformed YTD and Hong Kong (which Yip called "a derivative play on China outbound spending") lost tourist and retail spending, to say nothing of selling apartments where prices have slipped sharply. Taiwan has been in a slow growth pattern for years, its export-oriented economy hurt by the global economic crisis. Closer integration with China should drive better performance going forward. Taiwan can benefit from becoming the main seller of smart phones and devices to China. It can parallel "what has happened to Hong Kong from China integration".

Mr. Yip is sticking to his guns. Reforms by Beijing aim at "quality and sustainability at the expense of short-term growth". This Mr Yip says is "a medium-term buying opportunity which will translate to higher equity returns". "The desired slowdown by Beijing is a healthy adjustment," he added.

Some other take-aways: "We tend to be underweight energy, materials, and construction and think solar, wind, and gas will outperform." "We are negative on Hong Kong property and utilities" but think "Chinese property will be able to outperform the broader market" along with autos. Macau gaming is a theme not being abandoned, with the offshore center offering gamblers a way to play without doing so within China. But the govt-sector high rollers are no longer the key profit driver.

Back to the big country, China is undergoing a slow-down but for a while now "exports have not been an important driver of GDP growth" . In fact "investment and consumption have to increase to have a sustainable growth for China." "The world's factory has to move on to the next stage and become the consumer of the world," Mr Yip summarized. This he added, "presents a growth opportunity for Chinese corporates".

However he is not a status quo kind of guy. "Market forces need to play a bigger role in the Chinese economy while the role of the state has to recede. China has to open to the outside world. China has to change its social safety net to improve pension, healthcare coverage, relax the on-child policy, and liberalizing the hukou system" [of residency permits].

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