Saturday, February 26, 2005

Financial Times Editorial: Philippine fiddling

Philippine fiddling
Published: February 24 2005 02:00 | Last updated: February 24 2005 02:00
Financial Times

It is not every day that government leaders warn that their countries are heading for an Argentina-style fiscal crisis. Gloria Macapagal Arroyo, the Philippines' president, has done so twice in six months, most recently last week, in an effort to goad lawmakers into acting to put its public finances in order. But is anybody listening?

Not, apparently, members of the national Congress, who are holding up Mrs Macapagal's proposals for badly needed tax reforms - yet who reacted indignantly when Moody's rating agency sharply downgraded the country's sovereign debt this month. Nor is the stock market, which remains strong. Nor, so far, do foreign investors seem any less tempted by the relatively high yields on Filipino issues.

The president's alarmism may seem overdone. Unlike Argentina when it hit trouble, the Philippines has a floating currency and less of its debt is short term. It has also sought to boost revenue by raising alcohol and tobacco taxes and beefing up tax collection.

Yet those measures have, at best, only slowed the sharp deterioration in the country's public finances since Asia's 1997 financial crisis. Lax fiscal policies, lower tariff revenues and corruption have cut its tax take to only 12 per cent of gross domestic product. Public debt, including guarantees to state companies, is about 130 per cent of GDP, while servicing costs may absorb a third of this year's budget.

The country is far from achieving a primary budget surplus large enough to stabilise debt levels - a goal Mrs Macapagal has set for 2010. Congress has put even that leisurely timetable in doubt by passing only two of eight emergency fiscal measures she had vowed to enact by last autumn.

The economy's outwardly robust performance has fuelled political complacency. It grew more than 6 per cent last year and the current account is in surplus. However, this was due largely to remittances and call-centre earnings. Manufacturing exports to China have trailed those of the rest of Asia, and the foreign direct investment needed to increase them remains scarce.

Those structural weaknesses increase the Philippines' vulnerability to external shocks, such as a steep rise in US interest rates, a sharp fall in the dollar or higher oil prices. That makes reforms essential well before campaigning starts for the 2007 elections.

Mrs Macapagal understands the urgency. However, she has too often vacillated in public and yielded too readily to opposition from vested interests. Her re-election last May handed her valuable political capital. She should now spend it by staking her future on ramming her fiscal programme through Congress.

Congress's dawdling is as hard to justify as foreign investors' willingness to indulge it by snapping up public debt. Although some investors sense a crisis in the making, they reason they can get out in time. The longer Filipino politicians procrastinate, the more likely that is to prove a delusion.

Prudent Investor says...

While the current flow of regional economic developments tend to favor the recovery of the Philippines, complacency by the country's political leaders are likely to cause a setback on its recent gains.

The deep-seated problem with most politicians of all nations are that they tend to be short sighted and reactive instead of being pro-active and work for the long term interests of their constituents.

Political impediments would likely cause short term volatilities, until the domestic leaders realize that the 'crisis' is staring them on their face. As for the Philippine President, hasn't she learned from Aesop's fable "The Boy Who Cried Wolf"?

Financial Times Editorial: Dollar scare reveals fragile support

Dollar scare reveals fragile support
Published: February 24 2005 02:00 | Last updated: February 24 2005 02:00

Financial Times

Crisis over? Not really. For sure, the market overreacted to reports that the Bank of Korea wanted to reduce the share of dollars in its portfolio. What the Koreans actually said was that they want to diversify out of low-yielding US Treasuries into higher yielding securities, which could include riskier US assets as well as non-US government bonds. And they intend to do so by diversifying the flow of reserves, not the $200bn (£105bn) stock. But while Tuesday's sell-off was founded on error, it nonetheless exposed the underlying weakness of the US currency. If the mighty dollar can be rocked by a single paragraph in a report to the Korean parliament something is amiss.

That something is the dependence of the dollar on a handful of Asian central banks, which between them control $2,400bn reserves. These reserves are already large relative to the size of the Asian economies, and getting bigger by the day. As they grow so does the incentive to guard against capital loss from further dollar depreciation.

Very obviously, if all the Asian central banks were to start selling their stock of dollars the US currency would plunge. But such a generalised rout would also force the Asian currencies to appreciate against the dollar. If either Japan or China were to sell dollars, the effect would probably be the same. However, the first mid-sized country to bail out of the dollar might be able to get a good price for its assets and maintain its bilateral exchange rate, encouraging others to follow.

But even if Asian central banks do not sell their stock of dollars, the US currency is not safe. With private appetite for US assets inadequate and volatile, the US relies on continued purchases by central banks to fund its current account deficit and acquisition of foreign assets by US residents. If their appetite dims, unless private flows soar, the dollar will still fall (and keep on doing so until the change in the relative price of imports and exports narrows the current account deficit to a sustainable level.)

Diversification might not succeed in its objective of minimising capital loss. It all depends on what currency one diversifies into. The euro is no longer obviously cheap. If and when Asia revalues the euro could even fall against the dollar. In this case the capital loss would be greater on euro holdings than on dollars. Asian countries need more Asian assets. Again, in aggregate they cannot obtain them without forcing up their currencies, though individual countries acting alone could do so.

In the end the only sure way to limit capital loss is to stop intervening and allow currencies to rise. The yen and Korean won have appreciated significantly since 2002. But while others remain pegged, such appreciation disrupts intra-Asian exchange rates and trade. The optimal solution is a co-ordinated revaluation, led by China. But while the Chinese economy thrives and inflation stays under control, Beijing has little incentive to agree.

Prudent Investor says,

As editorial says, the recent gains of US dollar stands on tenuous grounds such that unconfirmed reports of Central Banks 'diversifying' away from the US dollar could provoke a dash to the exit doors. Currency volatility and the risk of a dollar run remains entrenched for as long as the structural imbalances exists. It surely does look as if Asian Currencies are the best bet in today's largely dicey environment.

Friday, February 25, 2005

Bloomberg Analyst William Pesek Jr.: Is Kafka Running Korea's Currency Policy?

Is Kafka Running Korea's Currency Policy?
by William Pesek Jr.

Feb. 25 (Bloomberg) -- It's THE question in global currency markets: What force of nature prompted South Korea suddenly to scrap plans to sell dollars?

On Tuesday, the dollar was plunging amid a comment by Asia's No. 3 economy that it would diversify foreign-exchange reserves into other currencies. By Wednesday, Korea's central bank said it had no such plan, leaving traders scratching their heads.

Dumping dollars would be a logical move for the world's fourth-largest holder of reserves after Japan, China and Taiwan. Korea, after all, is going against the tide in Asia, letting its currency rise. It no longer needs so many U.S. Treasuries, nor does it want to sustain huge losses as the dollar falls.

Korea's hasty and counterintuitive about-face makes you wonder if U.S. Treasury Secretary John Snow himself made a call to Seoul. It's hardly in the U.S.'s interest to see Korea pull the plug on Treasuries. It could prompt other Asian central banks to do the same, driving up U.S. debt yields.

Or maybe it was Japan, the biggest foreign holder of U.S. Treasuries, pressuring Korea. Shortly after Korea's denial, Japan's vice finance minister for international affairs, Hiroshi Watanabe, referred to ``wild'' moves in the yen and said Tokyo ``will act when necessary'' if its currency rises too rapidly. Asia hardly wants a resumption of Japan's yen-selling campaign.

Franz in Charge?

Conspiracy theories aside, markets could be excused for wondering if Franz Kafka is roaming the halls of Korea's Ministry of Finance -- and whether the Czech writer is running its currency policies.

Kafka, of course, is famed for tales possessing bizarre, illogical and nightmarishly complex qualities. And there are some rather Kafkaesque aspects to recent events, not only in Seoul but also on currency policies throughout Asia.

Korea's retreat from dumping dollars shows the bind central banks are in these days. This region's mercantilist tendencies have manifested themselves in exchange-rate management efforts the likes of which have rarely been seen before.

``Bretton Woods II'' economists have dubbed the system that unofficially replaced the original post-World War II currency regime, which was based on a gold standard that collapsed in 1973. In gold's place, many nations adopted the U.S. dollar as an anchor, formally or informally pegging their currencies to it. We may be seeing the demise of this new system, with Korea in the vanguard.

`Risk Is Growing'

``The risk of a disorderly unraveling of Bretton Woods II -- a sharp correction of the U.S. dollar and of the U.S. bond market, a surge in U.S. long-term interest rates, and a sharp fall in the price of a wide variety of risky assets such as equities, housing, high-yield bonds and emerging-market sovereign debt -- is growing,'' Nouriel Roubini of New York University's Stern School of Business and Brad Setser of Oxford University said in a research paper this month.

As their findings suggest, the current system is looking more and more like a huge pyramid scheme. As long as Asian central banks stick together and buy dollar-denominated securities, things are fine. Once they start selling, virtually everyone loses -- central banks experience capital losses and economies become less competitive. Central banks have an interest in keeping the game going and hoping others do, too.

Yet this week's events underline ``how vulnerable the dollar is to negative news,'' says Carl Weinberg, chief global economist at High Frequency Economics, referring to the dollar's biggest drop against the euro in six months. The news, Weinberg says, ``unwrapped a lot of tightly-wrapped traders who were spring- loaded to sell greenbacks on adverse news.''

No Altruism

Sure, Korea's Treasuries holdings are much smaller than China's, Japan's or Taiwan's, but its $200 billion of reserves may be at the forefront of trends to trim dollar holdings.

Central banks here don't buy U.S. debt out of altruism; it's to hold down currencies to boost growth. Monetary officials find themselves in the unenviable position of having to buy lots of dollar assets they know are likely to lose value over time.

This may be as good a time as any for the region's monetary authorities to avoid losses ahead of a possible surge in U.S. debt yields. Investors won't ignore the record U.S. current-account and budget deficits forever.

Yet it's a complex issue for Asian economies, which find themselves in a ``damned-if-you-do, damned-if-you-don't'' situation.

Devalue vs Reform

Korea seems to have chosen to let the won rise, and it's a good thing. Asia spends inordinate amounts of time weakening currencies, worried about growth a quarter or two out. That distracts from repairing structural problems. It's always easier to devalue your way to growth than to reform financial systems, improve corporate governance and promote entrepreneurship.

Hopefully the rest of Asia will follow Korea's example. Rising currencies are a sign of confidence in an economy, not a problem. They lower bond yields and boost stock prices. Capital a hard money brings in can be more important than increased trade attracted by a softer one.

The Kafkaesque state of the global financial system may leave Asia little choice in the matter.

Prudent Investor says

Should Mr. Pesek's wish come true, it would mean a BIG "OUCH" for the US dollar and its economy.

Thursday, February 24, 2005

Wall Street Winner's Elliot Gue: George Kleinman's Trading Tips

Commodity Trader George Kleinman offers us a few important tips, through Elliot Gue of the Wall Street Winners...

"If emotions kill you in the markets, then the way to survive and thrive must be by being unemotional.

"Years ago, a successful trader friend of mine cashed in on a major score in wheat. I saw him in the Member's Dining Room and said something to the effect of 'You must be feeling damn good, having cashed in right at the top.'

"He was a calm sort of fellow, and I still remember what he said: 'George, when the markets treat me well, I don't dance in the streets and when they don't, I don't beat myself up. Always remember this: Slow and steady wins the race.'

"Years later, I think I know what he meant by this. A loser hopes too much. He has an inability to get out of a losing trade early enough because he keeps hoping the market will turn back his way.

"There's one way to avoid this: Don't get attached to any position. This shouldn't be an ego thing. There's always another market and another day.

"I've seen thousands of trades from hundreds of brokerage clients over the years. I've seen what those who make money do, and I've seen what the losers do.

"Invariably, the losers make the same mistake. They make money initially, maybe even more than winners do, but there always seem to be those few large losses that wipe out whatever gains had built up.

"A few years ago, the Chicago Mercantile Exchange had an advertising campaign in which they tried to teach the public how to trade-an impossible undertaking.

"There was a full-page magazine ad that pronounced, 'Do not risk thy whole wad.' How profound. Yet this is the mistake too many novice traders make. They bet too much money on one trade or one market.

"This is the first tenet of good money management. You must know how much you're risking on a trade, and unless it's a small percentage of your risk capital, don't take it.

"I could start to get into theoretical probability here, but common sense is better. Some of the most important advice to listen to is to plan for slow and steady gains with minimal drawdowns. The way to do this is by quickly cutting the losses on bad trades.

"How much should this be? Definitely no more than 10 percent of your total trading capital, and ideally 2 to 5 percent per trade.

"If you trade and risk only 5 percent on each trade, you'll need to be wrong 20 times in a row to be totally wiped out, and you'd need a poor trading system for that to actually happen.

"To avoid major drawdowns, follow these other tips:

  • Diversify. Don't put all your eggs in one basket, and don't put all your chips on one roll of the dice. This reduces the opportunity for any one trade to be your last.
  • Stick with the trades that work and cull the ones that don't. If you don't have the discipline to get out of the bad trades when you need to, make it a personal rule to place a stop-loss order the moment you enter the trade. Tell your broker that if you haven't given him a stop, he or she should twist your arm until you do. Believe me, your stops won't be hit on the best trades.

Once you have a reasonable paper profit on a trade, move up your stop, and never let it turn into a loss."

Reuters: World Must Act on Bird Flu or Face Pandemic -- U.N.

World Must Act on Bird Flu or Face Pandemic -- U.N.
Wed Feb 23, 2005 04:16 AM ET
By Darren Schuettler

HO CHI MINH CITY (Reuters) - The world is overdue an influenza pandemic and it must act swiftly to prevent one being triggered by bird flu now endemic in parts of Asia where it has killed 46 people, U.N. officials said on Wednesday.

The world usually had a flu pandemic every 20 or 30 years, but it has been 40 since the last one.

"The world is now in the gravest possible danger of a pandemic," Shigeru Omi, the head of the World Health Organization in Asia, said at a bird-flu conference in Vietnam, the country hardest hit by the H5N1 virus.

Omi said it was "highly likely" the bird flu virus that swept through large parts of Asia from the end of 2003 would be the source of the next one, unless concerted action was taken.

Joseph Domenech of the Rome-based Food and Agriculture Organization called on rich countries to do more.

"If they don't do more, sooner or later the problem could appear in their place," he told reporters in Ho Chi Minh City, home to 10 million people and close to the Mekong river delta where Vietnam's latest outbreaks began in December.

"The ball is on their side," he said.

The latest outbreak in Vietnam has killed 13 people. All, like earlier victims, appear to have contracted it from direct contact with sick birds.

But what these experts fear is the H5N1 virus could get into a human or animal with a human flu virus and mutate into a strain that could sweep through a world population with no immunity and kill millions.

At the first bird flu summit in Bangkok last year, experts spoke confidently about eradicating the virus.

They now say it could take many years to eliminate and a huge effort is needed just to contain a disease that has jumped to a range of animals including cats, leopards and now flies.

Omi said Tuesday's news that Japanese researchers had found flies infected with bird flu last year showed the virus was "versatile and resilient."


The conference, which ends on Friday, will review how Asian governments have fared against the stubborn virus and plot a battle plan.

Bird flu has already devastated poultry flocks in worst-hit Vietnam and Thailand, where most people live in the countryside and keep chickens, which are often free to wander and mingle with people and other livestock.

Nearly 140 million birds have been slaughtered or died in the Asian epidemic, and the financial cost is already up to $10 billion, according to some estimates.

Domenech said affected countries will need hundreds of millions of dollars from donors to sustain a prolonged fight against the disease.

Host Vietnam, where bird flu resurfaced in 35 of 64 provinces, has ramped up surveillance systems and imposed tough restrictions on poultry movements.

But like many poor countries hit by bird flu, it has limited knowledge of the virus, its veterinary staff need training and its labs are poorly equipped.

"In order to prevent and control the disease efficiently, international cooperation should be strengthened," Vietnam's Agriculture Minister Cao Duc Phat told the conference.

A central issue in Ho Chi Minh City will be how to overhaul age-old methods of farming in Asia -- where families live cheek-by-jowl with chickens and ducks that roam freely in farmyards, spreading the virus.

Public awareness campaigns about the health risks of bird flu are running in several affected countries. But traditional practices, such as drinking raw duck blood, still go on.

Experts and government officials agree the task will be huge, costly and may be impossible.

"It's a rural disease and people have diehard traditions that are difficult to change," said Omi.

Wednesday, February 23, 2005

Bloomberg: Dollar Declines as Bank of Korea Plans to Diversify Reserves

Dollar Declines as Bank of Korea Plans to Diversify Reserves

Feb. 22 (Bloomberg) -- The dollar fell the most in more than two years against the yen and dropped versus the euro, Korean won and at least 30 other currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth-biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg.

``The market will now be looking to other central banks and what they will be doing, including the European central banks and Middle Eastern banks,'' said Mansoor Mohi-Uddin, head of currency strategy at UBS AG in London. ``The market has got nervous and has continued selling the dollar.''

The dollar fell to 103.87 yen at 11:15 a.m. in London, from 105.54 late yesterday in Toronto, according to EBS, an electronic foreign-exchange dealing system. It dropped to $1.3216 per euro, from $1.3068. U.S. markets were closed yesterday for a national holiday. UBS forecasts the dollar will fall to a record $1.40 per euro by year-end.

``Support for the dollar is quickly disappearing,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. ``This Korean story is having quite an impact because it feeds into suspicion that others are also seeking to cut their exposure to the dollar.''

Pimco's Call

The dollar has dropped for the past three straight years against the euro and the yen, in part on concern demand for U.S. assets will fail to match a widening current-account deficit. The gap was a record $164.7 billion in the third quarter, meaning the U.S. must attract $1.8 billion a day to fund the shortfall and support the dollar's value, according to Bloomberg calculations.

``I'd prefer not to own dollars,'' said Andrew Bosomworth, a former European Central Bank economist and a fund manager at Pacific Investment Management Co. in Munich. Pimco manages about $415 billion in assets. ``The list of fundamentals doesn't add up to a stack of positives for the U.S. currency.''

Korean investors, including the central bank, are the fifth- biggest foreign holders of U.S. Treasuries, with $69 billion as of December, the most recent figures available, according to the Treasury Department. Japan, the largest, has $711.8 billion. The Bank of Korea report was given to some legislators on Feb. 18 and reported by Reuters yesterday.

`Still Have Faith'

``The likes of Thailand, Taiwan and smaller, medium-sized central banks may follow suit'' in diversifying their reserves, said Stephen Jen, global head of currency research at Morgan Stanley in London. Japan and China, the two largest holders of Treasuries, probably won't shift out of the dollar, he said. They ``cannot diversify while the dollar is under pressure.''

China has kept its currency pegged to the dollar since 1999. Japan sold a record amount of yen in the first quarter of last year to help stem its advance. The dollar in 2004 fell for the third straight year against the yen and the euro. It is up about 3.6 percent from a record-low $1.3666 per euro on Dec. 30.

``In the long run I still have faith in the U.S. dollar,'' said Jen, who raised his forecasts for the currency on Feb. 10. Jen predicts the dollar will trade at $1.24 per euro and 96 yen at year-end, up from previous estimates of $1.32 and 92 yen.

The Bank of Korea report, distributed to members of the parliament's finance and economy committee in advance of a debate scheduled for Feb. 24, also said the bank will expand investments into assets with lower credit ratings than the South Korean government. The plan must be approved by parliament.

`Sheer Size'

``The sheer size of Korea's reserves makes it unignorable,'' said Tetsu Aikawa, currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``That revives the memory in people's minds how badly the dollar was sold when Russia said it was diversifying.'' The U.S. currency may weaken to $1.32 per euro today, he said.

The dollar fell to a then record against the euro on Nov. 23 after Russia's central bank said it may increase the amount of euros in its reserves. The dollar fell as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.

Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004. Fifty-two percent said they reduced exposure to the dollar.

`Good to Diversify'

U.S. Treasuries were the second-worst performing major government market in the world last year, returning 3.5 percent to investors, according to Merrill Lynch & Co. indexes. Only Japanese bonds, which returned 1.3 percent, did worse among the world's largest government bond markets.

``To have a high proportion in U.S. assets is far from ideal so it's good to diversify,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London. HSBC forecasts the dollar will fall to a record $1.40 per euro and to 98 yen, the weakest in a decade, by the end of the year.

``South Korea wants to start picking up higher yields so that includes moves in to the Australian currency and sterling, and they'll be buying government bonds,'' said Austin.

The yen's advance began earlier today on speculation Japan's economy will recover from its fourth recession since 1991. The U.S. currency also weakened versus the euro.

Traders may renew bets on the yen after it retreated 3 percent from a five-year high of 101.69 on Jan. 17, said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein. Japan's trade surplus widened for a second month in January, a government report tomorrow may show.

Japanese Economy

``Investors are increasingly realizing that the second-half recession in 2004 was the low point in Japan and that it's most likely getting better,'' said Singapore-based Jacobs. ``That's helping the yen.''

Japan's trade surplus probably grew to 508.5 billion yen ($4.84 billion) from a year earlier, according to the median forecast of 24 economists surveyed by Bloomberg.

Finance Minister Sadakazu Tanigaki said on Feb. 20 Japan's economy will ``improve in the latter half of this year,'' after it contracted at an annualized 0.5 percent pace in the fourth quarter. The economy contracted for three straight quarters.

Japan's Cabinet office kept its assessment that the economy is recovering, in its February report released today. The government removed currency moves as a risk for the economic outlook in its report. A stronger currency may slow export growth by making Japanese goods more expensive abroad.

Heineken NV, the world's third-largest brewer, said today profit may fall for a second year, in part because the dollar's drop against the euro will crimp U.S. revenue. The firm may shed 50 million euros in net income this year because of currency effects, Chief Financial Officer Rene Hooft Graafland said on a conference call today.


Prudent Investor Says,

If the article is accurate to say that South Korea's Central Bank is intending to diversify into Canadian and Australian currencies, then this simply exhibits the Bank's recognition of the unfolding commodities 'boom'.

Tuesday, February 22, 2005

Reuters: Oil Exporters Behind Weak Dollar-Soros

Oil Exporters Behind Weak Dollar-Soros
Mon Feb 21, 2005 05:23 AM ET

By Mona Megalli, Gulf Economics Correspondent

JEDDAH, Saudi Arabia (Reuters) - Moves by Middle East oil exporters and Russia to switch some revenue from dollars to euros lie behind the U.S. currency's weakness, and a further rise in crude prices could prompt more declines, the billionaire investor George Soros said on Monday.

Soros told delegates to the Jeddah Economic Forum that the dollar's fall should help to lower the U.S current account and trade deficits, but warned that a fall beyond an undisclosed "tipping point" would severely disrupt markets.

The U.S. current account deficit is more than five percent of gross domestic product despite the currency's three-year slide. The dollar, however, has staged a comeback recently, gaining about 3.6 percent against the euro and three percent versus the yen so far this year.

"The oil exporting countries' central banks ... have been switching out of dollars mainly into euros and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros said.

Soros, dubbed "The Man who broke the Bank of England" for his role as a hedge fund manager in betting the pound would drop in 1992, said he was not predicting further falls in the value of the dollar. But he linked its fate to the price of oil.

"The higher the price of oil the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."

U.S. crude hit a record $55.67 a barrel late last year and prices remain close to $50 a barrel.

In later comments to Reuters, Soros said the U.S. current account deficit could be financed at the current level of the dollar. "There are willing holders of the dollar. There are the Asian countries that are happy to accumulate dollar balances in order to have an export surplus and a market for their dollars," he said.

Soros would not make detailed comments on why long-term borrowing costs have fallen in the face of short-term rate increases, a development U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he found difficult to explain.

"A flattening of the yield curve is usually an indication of a slowing economy, but here I don't know," Soros said.

The Hungarian-born financier, a critic of U.S. involvement in Iraq, said he was considering backing an Arab foundation to promote the ideals of civil and open societies in the region.

Saturday, February 19, 2005

CBS MarketWatch Barbara Kollmeyer:Storming foreign shores

Storming foreign shores
Non-U.S. stocks gain favor among investment advisers
By Barbara Kollmeyer, MarketWatch
Last Update: 8:37 PM ET Feb. 16, 2005


LOS ANGELES (MarketWatch) -- Conventional wisdom suggests devoting 10 percent to 15 percent of an investment portfolio to international stocks, but nowadays that advice might be short-sighted.

Recommended allocations of 20 percent, 30 percent and even 50 percent have become increasingly popular as financial advisers and investment professionals look outside of the U.S. for better stock bargains and corporate earnings growth.

"Valuations look better overseas right now. Prospects for stocks look good around the world, but foreign markets are a little cheaper on average," said Tom Hazuka, chief investment officer at Mellon Capital Management.

The firm's model portfolio favors stocks over bonds and cash, Hazuka said, with two-thirds of that stance earmarked to non-U.S. companies.

While shareholders of large U.S. multinational stocks will gain exposure from the foreign revenues those companies generate, most U.S. investors are short of even a 10 percent portfolio allocation to international markets. Yet for others, the importance of non-U.S. stocks is not lost in translation.

According to TrimTabs Investment Research, $48.2 billion flowed into international mutual funds (not including U.S. stocks) in 2004, the biggest tally since $31.2 billion poured into that sector in 1996.

Investors have pumped an estimated $4.6 billion into non-U.S. equity funds this year through Feb. 9, according to Emerging Portfolio Fund Research data. The pace reflects an "extensive asset allocation shift taking place," the report noted, with cash going to global/international, emerging markets, Europe, Japan and Pacific funds. Meanwhile, investors have pulled about $1.6 billion from U.S. equity funds, EPFR said.

U.S. dollar weakness is a key reason for the favorable interest. The dollar's 20 percent decline versus the euro in 2004 alone put wind in the sails of many non-U.S. stocks, especially those with large-scale European operations. That, in turn, tended to lift results for related mutual funds.

Faraway eyes

Ben Tobias, a certified financial planner at Tobias Financial Advisors in Plantation, Fla., invests aggressively outside of the U.S. on behalf of clients, allocating 25 percent to 35 percent of a portfolio to non-U.S. stocks.

"If you believe in true globalization, and I do... capital markets overseas over the long term will have to grow faster than the markets in the U.S. to achieve equality," Tobias said. More rapid growth, he added, should deliver higher returns over time, but he advised keeping a wide geographic moat.

"A very big risk overseas as opposed to the U.S. is the currency and political risk," he said. "It's important to be well-diversified overseas between countries and sectors and continents."

Tobias recommends four mutual funds for broad international exposure: American Funds EuroPacific (AEPGX: news, chart, profile) ; Julius Baer International Equity (BJBIX: news, chart, profile) ; DFA International Value (DFIVX: news, chart, profile) and DFA International Small Company (DFISX: news, chart, profile) .

The Julius Baer fund, for example, counts among its top holdings energy giant BP (BP: news, chart, profile) (UK:BP: news, chart, profile) and telecommunications leader Vodafone (VOD: news, chart, profile) (UK:VOD: news, chart, profile) , both U.K.-based, and OTP Bank (OTPGF: news, chart, profile) , a top financial services provider in Hungary.

Chris Orndorff, managing principal for Payden & Rygel Investment Management, advocates more targeted international exposure. He suggests that investors divide a 25 percent non-U.S. stock allocation by putting 5 percent in Europe, 10 percent in Asia and 10 percent in emerging markets.

"The fastest economic growth is in the emerging markets -- Korea, Taiwan, China, Mexico," Orndorff said.

A place for emerging markets

The emerging-market theme is a common strategy among advisers who are increasing allocations to non-U.S. stocks.

Leila Heckman, president of Heckman Global Advisors in New York, which advises mutual funds, said exposure to Asia, both developed and emerging markets, is a top recommendation.

"We continue to like emerging markets because they tend to be cheaper. Interest rates are coming down in general, and they continue to have momentum money flow in," she said.

But given the volatility of emerging markets, Heckman advises investors rely on a fund or financial adviser with experience in this specialized area.

One often overlooked advantage to investing outside of the U.S. is that increasing exposure to international stocks beyond a 15 percent allocation can actually reduce overall portfolio risk, Heckman added.

"The riskiness of a portfolio is determined by several things," she said. "One is the volatility of the assets you're investing in, and the other is the correlation of the stocks or countries you're investing in. When you put those things together...around 20 or 30 percent you actually get a reduction in risk from a 100 percent U.S. portfolio."

Brad Durham,'s managing director, said he favors a 50-50 divide between non-U.S. and U.S. stocks.

Emerging-markets stocks belong in a portfolio for several reasons, Durham said. He pointed to four consecutive years of superior returns and improved corporate credit quality and economic growth in these regions.

"The Julius Baer International Equity fund has a 20 to 25 percent weighting in emerging markets. It's no coincidence that it's one of the top performing international equity funds," Durham said.

John Rice, investment officer at Keats, Connelly and Associates in Phoenix, allocates about 50 percent of his clients' portfolios to international stocks. Almost half of that investment is given to large-capitalization companies, 30 percent to smaller stocks in developed markets and 25 percent to emerging markets, he said.

"If you're going to go after the exposure for overall stock markets, you should have half outside the U.S.," Rice said. After all, he noted, "Half of the world market is outside of the U.S."

Barbara Kollmeyer is a reporter for MarketWatch in Los Angeles.

New York Times' Keith Bradsher: 2 Big Appetites Take Seats at the Oil Table

2 Big Appetites Take Seats at the Oil Table
New York Times

MUMBAI - India, sharing a ravenous thirst for oil, has joined China in an increasingly naked grab at oil and natural gas fields that has the world's two most populous nations bidding up energy prices and racing against each other and global energy companies.

Energy economists in the West cannot help admiring the success of both China and India in kindling their industrialization furnaces. But they also cannot help worrying about what the effect will be on energy supplies as the 37 percent of the world's population that lives in these two countries rushes to catch up with Europe, the United States and Japan. And environmentalists worry about the effects on global warming from the two nations' plans to burn more fossil fuels.

With engineering expertise and equipment more available around the world, one result is that oil executives and drillers in remote spots increasingly speak Mandarin or Hindi, not English. Their newfound commercial confidants live in pariah states like Sudan and Myanmar, one sign that the political dynamics of the world oil market pose a difficult challenge for the Bush administration.

The prospect of China's consuming ever growing lakes of oil has been noted over the years, although it is gaining new urgency as Chinese consumption continues to soar. China's oil imports climbed by a third last year as its oil demand exceeded Japan's for the first time.

Now India is joining China in a stepped-up contest for energy, with both economies booming recently just as their oil production at home has sagged. China trails only the United States in energy consumption; India has moved into fourth place, behind Russia.

Voracious energy demand is coming from people like Kalpana Anil Gaikar, a 35-year-old unemployed widow with three children here who keeps running up costly electricity bills. Her appetite, millions of times over, is pushing India and China to vie for control of oil and natural gas fields from Sudan to Siberia.

Both countries are also expanding their navies as they become increasingly dependent on lines of oil tankers from the Mideast, posing the beginnings of an eventual challenge to American influence in the Indian Ocean and South China Sea.

As millions of Indians and Chinese buy cars, television sets and air-conditioners, the fossil fuels burned to power their purchases have become some of the fastest-growing contributors to global warming. Chinese emissions alone soared close to 15 percent last year.

Under the Kyoto Protocol, neither India nor China faces any specific limits on its emissions of global warming gases. Both countries joined the agreement with promises to try to restrain emissions, but even environmentalists hesitate to demand stringent restrictions on China or India. That is because their energy consumption per person remains less than one-sixth the American level.

Ms. Gaikar pays $9.30 a month in rent for her tiny apartment in a public housing project here in Mumbai, formerly known as Bombay, but up to another $4.50 a month for electricity to power the lights, ceiling fan and other amenities. That is a hefty electrical bill for someone who earned less than $30 a month at a bedsheet factory until she lost her job in late December because of a broken leg.

Her children need the lights to study for school, however, and she has no intention of cutting the power. "Whatever my leg, I'll have to go back to work," she said.

To meet the demand, India's government, like China's, is looking to tap countries the Bush administration and the European Union have tried to isolate.

During a recent conference in New Delhi, a succession of top Indian officials saluted Omer Mohamed Kheir, the secretary general of the Ministry of Energy and Mining in Sudan, who sat beaming in the middle of the front row. The Oil and Natural Gas Corporation, which is controlled by the Indian government, recently began producing oil in Sudan in cooperation with Chinese state-owned companies. It is now building a pipeline in Sudan and negotiating to erect a refinery as well.

"The Asians came to Sudan in a very difficult time, and we created a very good strategic relationship with them," Mr. Kheir said in an interview.

He dismissed Western accusations that militias with links to government forces have been raping and murdering large numbers of villagers and refugees in the Darfur region. "Darfur is not a deeply rooted problem; we think it is quite artificial," he said.

Three government-controlled Indian companies concluded a $40 billion contract with Iran on Jan. 7 for the purchase of liquefied natural gas over 25 years and for stakes in oil fields there. The Indian government followed up on Jan. 13 by concluding a deal with the military government of Myanmar for the construction of a gas pipeline.

Subir Raha, chairman and managing director of the Oil and Natural Gas Corporation, said that Western countries had been arbitrary in their imposition and removal of sanctions on countries like Libya, so his company could not be expected to follow their practices for countries like Sudan and Myanmar.

"If you talk about pariah states, Libya is an excellent example," he said. "One fine morning, you see there are no sanctions."

China has also been in the spotlight lately because of suspected sales of missile technology to Iran, one of the biggest sellers of oil to China and other Asian markets.

China's deputy foreign minister, Zhou Wenzhong, took similar positions to India's in an interview in the summer of 2004. "Business is business," he said then. "We try to separate politics from business. Secondly, I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them."

India's oil imports climbed by 11 percent in 2004, and China's by 33 percent, straining the capacity of production operations, pipelines, refineries and shipping lines and helping to keep oil prices above $40 a barrel. The International Energy Agency expects them to use 11.3 million barrels a day by 2010, which will be more than one-fifth of global demand.

Western engineers and equipment for complex drilling are now readily available for hire, making it easier for India's and China's state-owned companies to work together and undertake ventures on their own.

Around the world, countries "are using their state oil companies to ally with each other," said William Gammell, the chief executive of Cairn Energy of Scotland, one of the biggest foreign oil companies operating in India. "The majors used to have all the technology, and now you can get the technology by buying it."

India's recent enthusiasm for energy security has extended to assets that are the subject of legal scrutiny as well. Companies controlled by the Indian and Chinese governments are the two main bidders publicly pursuing large stakes in the Yukos oil and gas assets that the Russian government recently confiscated in a tax dispute. The confiscation is the subject of litigation in Texas.

Mr. Raha said he would not be dissuaded from the pursuit by the controversy over how the Russian government obtained the assets. "I haven't seen a single deal or transaction basically that didn't have legal issues," he said.

A vigorous debate has emerged in India over whether this country's need for oil will inevitably put it at odds with China. Mani Shankar Aiyar, India's minister of oil and natural gas, said that India and other Asian nations needed to pursue their own interests in oil markets and that he wanted to cooperate with China, not compete with it.

Greater private automobile ownership and expanding industries have increased energy demand in China and India just as traditional sources of energy are fading away. In India, thousands of villages are switching from burning dried dung or brush for fuel to buying liquefied petroleum gas for stoves or plugging into the national electricity grid to power everything from ceiling lights to computers.

Beijing and now New Delhi are following a long tradition of rising economic powers seeking to secure energy supplies. Britain, Japan and the United States wheeled and dealed in the years leading up to World War II for control of oil fields around the world, with diplomats often working with oil company executives. Through the 1980's and early 1990's, government-controlled oil companies from Malaysia and Brazil also invested in distant oil fields, notably in China and the South China Sea.

As Chinese and Indian companies venture into countries like Sudan, where risk-averse multinationals have hesitated to enter, questions are being raised in the industry about whether state-owned companies are accurately judging the risks to their own investments, or whether they are just more willing to gamble with taxpayers' money than multinationals are willing to gamble with shareholders' investments.

"Sudan is the beneficiary," said Philip Andrews-Speed, a former BP geologist in China who now runs an oil policy study center at the University of Dundee in Scotland. "If these state-owned companies were not in the game, there would not be much interest in Sudan."

China made many of its investments in the 1990's, when oil fell as low as $10 a barrel, and signed large contracts for liquefied natural gas in 2002, before recent sharp increases in gas prices. India made its first big investment in Sudan three years ago, but its national leaders are calling for a greater effort to secure oil fields now despite high prices.

Some Western countries, like Germany, have dismissed as outdated the whole idea of owning far-flung oil fields. They have relied on being able to buy oil in world markets, instead of buying oil fields, and have emphasized energy conservation, notably through high gasoline taxes.

China and India have not only avoided imposing steep taxes, but have even regulated energy prices directly and indirectly for years. India in particular still keeps domestic prices for natural gas below world levels to subsidize power generation and fertilizer production, two industries with customers who still have the political power to prevent price increases.

"This is a basic reality of the Indian market," said Proshanto Banerjee, the chairman and managing director of GAIL (India) Ltd., a big state-controlled gas company, "and it would not be proper to ignore this."

Prudent Investor says,

Not limited to China, this article shows that India is likewise joining the hunt for securing energy resources. Pieces of the jigsaw puzzle clearly falling in place....