EM worries

Not much update this week. Markets continue to be worried about emerging markets currencies weakening.

In China this week Macau casino names continue to sell off even though monthly GGR numbers were better than expected and with Golden week coming up, numbers should improve further. Further evidence that fundamentals are not in the driving seat at the moment. Chinese autos continue their slump as Mercedes and BMW recorded teens growth yoy for the month of August. Not bad if you ask me especially with overall auto sales showing signs of weakness lately. Note to self: watch Geely. To be honest, didn’t pay much attention to the name before. Many years ago, the common conception was that the company was just padding itself up with local government subsidies which accounted for a significant chunk of their profits. But in recent years it did extremely well and became the darling of the market, which was the reason why I wasn’t inclined to look at it. But now it has become a fallen angel as well with share price down more than 50% from recent peak together with the rest of the Chinese auto stocks. 1H18, the company grew profits more than 40%. And the company is indicating that 2H18 should at least maintain the momentum if not be better. So why the slump? Wrong question. It is the way it is. Mr Market has decided to quote you a very low price so don’t argue with him.

What intrigues me at the moment is 3 tech related industries: DRAM, passive components, raw silicon wafers. Demand remains robust according to the companies. Supply remains in the hands of a few companies. This is the result of more than a decade of oversupply previously. So much so that competition has either gone out of business or have been acquired by the current big players. Remaining players have been reluctant to invest more money to buy more expensive machinery. They are increasing prices in the face of fast growing demand instead. And why not, after suffering for so many years? The interesting thing is no new competitor will add new capacity either. Otherwise they will be suffering from huge depreciation vs existing players who have fully depreciated machines now. Oh if that is if they can get manufacturers to provide them with machines. Apparently machines for some of the older technologies are no longer in production even though demand for the end product is still growing rapidly. One of the quirks in the current tech cycle – most of the older tech is sufficient to meet most of our every day needs. And yet share prices have halved in some cases and in the case of DRAM players like SK Hynix, it is now trading at a PER of 3x. I personally don’t forsee a scenario where demand for DRAMs will collapse in the next few years. We are dealing with demand for more data and more computing power and speed than the previous year, not less. So what is the market thinking? I don’t know. I would like to see how this plays out. This week famous hedge fund manager Tepper is on the record for saying that he is adding more Micron shares and that it is his largest exposure. Well, at least some one out there is expressing his conviction and sticking to it.

So if we were to be more charitable, we can say that the markets are possibly anticipating a slowdown when it has yet to happen, or when it has yet to show in any real world data yet. I wouldn’t argue that this would be the case. In fact it’s not hard to believe that things might slow down a little after a few years of heady growth. But the brutal sell down we have witnessed so far in Asia is something else. Like they say, every cycle is different and this one is no exception. I would definitely like to document this cycle as it unfolds. No one knows what will happen next after all. For all we know, something in the system might go horribly wrong (again there is no shortage of material in the current world for this to happen) and that might push us into the next deep crisis where markets go down another 50-70% from here. Why not? Let’s see.

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