InvestMacro Forex News

By HY Markets Forex Blog

Stocks – Asia

Stocks in Asia were seen trading mixed on Wednesday as stocks in the US climbed to a record high overnight.

The Japanese benchmark Nikkei 225 index lost 0.14% closing the session at 14,405.76 points, while Tokyo’s Topix index edged 0.41% higher ending at 1,183.15 points.

The Japanese publisher Kadokawa advanced by 10%, while the Nikon lost 4.04% after the company said its annual profit climbed by 10%.

The South Korean Kospi index advanced 4.41%, to close the session at 2,020.84 points, while Taiwan’s benchmark Taiex index added 0.6%.

Hong Kong’s Hang Seng index gained 0.96%, trading at 22,566.95 points at the time of writing, while the mainland Chinese benchmark Shanghai Composite slid 0.14% closing at 2,047.91 points.

Property developer China Resources Land saw the most gains in the Chinese market, as the company’s shares climbed 5.29%.

Australia

In Sydney, the benchmark S&P/ASX 200 index slid 0.09%, trading 5,493.30 points, after the government released the annual budget release for the nation, which revealed further cuts to the nations funding is expected.

The government’s total deficit in 2014/2015 will be at A$25.9 billion, lower than the A$46 billion recorded in the last financial year.

“Budget repair involves cutting back on unsustainable spending and putting a stop to unconstrained increases in debt,” the publication stated. “To restore budget sustainability, the government has focused on taking savings decisions that build over time.”

“The government will also increase the pension age to 67 years by July 2023, and further still to 70 years by 2035,” it said.

US Markets

Gains were seen in the US markets overnight after data from the Commerce Department showed that retail sales in the US rose by 0.1% in April.

Stocks – Europe

European stocks were little changed on Wednesday, with the European Euro Stoxx 50 dropping 0.15% to 3,206.89 at the time of writing, while the German DAX lost 0.05% to 9,750.11. Meanwhile, the French CAC 40 edged 0.10% lower to 4,500.65, UK’s benchmark FTSE 100 fell 0.02% to 6,871.32.

Economic News

Germany’s consumer prices for April dropped by 0.2% on a monthly basis, but were seen rising by 1.3% on an annual basis, according to reports from the Federal Statistical Office.

In France, the inflation data for April was flat on a monthly basis and 0.7% on a year-on-year basis, reports showed.

A separate report from the European statistical office Eurostat showed that the industrial production for the eurozone as a whole fell in March, with a reading of 0.3% on a monthly basis and rising 0.2% in February on a seasonally- adjusted basis.

Visit www.hymarkets.com   to find out more about our products and start trading today with only $50 using the latest trading technology today.

The post Stocks Market Report 14th May appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By HY Markets Forex Blog

Crude prices were seen trading higher on Wednesday as the North American West Texas Intermediate (WTI) crude climbed for a third day indicating hints that the US may lift its ban on crude exports.

Futures for the West Texas Intermediate (WTI) crude for June delivery increased by 0.31% to $102.18 on the New York Mercantile Exchange at the time of writing, while futures for the European benchmark Brent crude for June settlement  climbed by 0.21% to $109.47 on the ICE Future Europe exchange at the same time.

On Tuesday, the US secretary of Energy Ernest Moniz said the US is going over its ban on crude exports, “A driver for this consideration is that the nature of the oil we’re producing may not be well matched to our current refinery capacity” Moniz said.

Crude Stockpiles

Reports from the API showed that supplies increased by 912,000 barrels in the week ending May 9. The report also showed that crude inventories at Cushing dropped by 590,000 barrels in the previous week. WTI futures bounced back after reports from the EIA showed that crude inventories dropped from 399.4 million barrels, the highest since 1982.

The report from  Energy Information administration (EIA) due later in the day is expected to show a rise in supplies by 300,000 barrels.

The international Energy Agency is expected to release its monthly estimates of global oil demand and supply on Thursday.

Visit www.hymarkets.com   to find out more about our products and start trading today with only $50 using the latest trading technology today.

The post Crude Prices Lifted as US Reviews Crude Export Ban appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

Article By RoboForex.com

Analysis for May 14^th, 2014

EUR USD, “Euro vs US Dollar”

Euro expanded its consolidation channel downwards. We think, today price may expand its upwards as well and reach next target at level of 1.3846. Later, in our opinion, instrument may form continue falling down to reach target at level of 1.3700. Pair may form consolidation channel in the form of triangle pattern.

GBP USD, “Great Britain Pound vs US Dollar”

Pound is forming the third descending wave; market completed its first part and right now is correcting it towards level of 1.6858. After reaching it, pair may start another descending structure to break level of 1.6825 and then expand this trading range towards level of 1.6790. Later, in our opinion, instrument may return to level of 1.6825 to test it from below and then continue moving downwards to reach local target level of 1.6750.

USD CHF, “US Dollar vs Swiss Franc”

Franc expanded its consolidation channel upwards. We think, today price may expand this consolidation channel downwards as well and reach level of 0.8806. Later, in our opinion, instrument may form another consolidation channel in the form of triangle pattern and continue moving upwards to reach level of 0.8955.

USD JPY, “US Dollar vs Japanese Yen”

Yen is still moving downwards; market is forming another structure with target at level of 101.37. Later, in our opinion, instrument may return to level of 101.80 and then continue falling down towards level of 100.00.

AUD USD, “Australian Dollar vs US Dollar”

Australian Dollar is trying to stay at current maximums. We think, today price may reach level of 0.9415 and then continue moving inside descending trend towards target at level of 0.9200.

USD RUB, “US Dollar vs Russian Ruble”

Ruble is still forming the fifth descending wave, which may be extended up to level of 34.46. We think, today price may reach level of 34.70 and then continue growing up towards level of 35.40.

XAU USD, “Gold vs US Dollar”

Gold is forming the fifth ascending structure. We think, today price may continue growing up to reach target at level of 1321. Later, in our opinion, price may form new correction to return to level of 1295.

RoboForex Analytical Department

Article By RoboForex.com

Attention!
Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.

By WallStreetDaily.com

Merger arbitrage is consistently one of the most powerful strategies for making money on Wall Street.

The definition alone says everything…

arbitrage (ärbiˌträZH) noun – the practice of taking advantage of a price difference between two or more securities.

Well, one such opportunity just presented itself in the biotech industry.

It’s a juicy one, too.

Forest Laboratories (FRX) recently announced a definitive agreement to acquire Furiex Pharmaceuticals (FURX).

Although the deal’s agreed-upon price is $95 a share, it also includes an additional $30 “contingency.”

On the news, Furiex’s stock shot from $80.15 to $103.76.

But since the contingency could push the final value to as high as $125, the prudent move is to investigate the matter further.

Reason being, if the contingency is realized, Furiex shareholders would pocket a quick 20% as soon as the deal officially closes, which is scheduled to happen in late September.

So I asked biotech expert, Marc Lichtenfeld, to brief us on the situation.

He even agreed to handicap the likelihood of the deal closing at $125.

You’ll be hard-pressed to find anyone who can match wits with Marc in the biotech niche.

Onward and Upward,

Robert Williams
Founder, Wall Street Daily

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Transcript:

Robert Williams: Hi there. Robert Williams of Wall Street Daily. I asked biotech expert, Marc Lichtenfeld, to join us today. Marc, let’s just jump right in. Get us up to speed on the very latest.

Marc Lichtenfeld: So Forest Labs is acquiring Furiex Pharmaceuticals for about $1.1 billion, and the reason that this deal makes sense is, Forest Labs, the big pharma company, about $25 billion, has I think almost two dozen products. But the jewel crown in their product portfolio is a drug called Linzess for Irritable Bowel Syndrome with constipation, severe constipation.

Now this is a drug that has recently been approved, but it’s expected to be a blockbuster, it should do a billion to maybe even as much as $1.4 billion in revenue this year, so it’s a big drug. Furiex also has an Irritable Bowel Syndrome drug but it’s for IBS with diarrhea so it’s for people with a similar condition but a little bit of a different situation.

This really would give Forest Labs the dominant position in Irritable Bowel Syndrome, which is a very big market, there are tens of millions of people in the United States and Europe who suffer from Irritable Bowel Syndrome and so if Furiex’s drug is approved, which is expected because it had very good Phase III data, then it really puts Forest Labs in a very strong position in a very lucrative market.

RW: Now Marc, if I understand this correctly, the wild card in all of this is the FDA. They’re going to make a classification on a certain drug of Furiex, correct?

ML: Exactly, so Furiex’s drug, Eluxadoline, is also considered a pain killer and pain killers are looked at very, very carefully by the FDA. So there’s two issues here, one, does it even get approved? And, as I mentioned, I think it does and a lot of people expect it to be, and clearly Forest Labs does, as well. But the fact that it’s a pain killer means that it can be classified according to what they call the schedule. It can be schedule 1, 2, 3, 4, or 5. The terms of the deal say that Furiex shareholders will get $95 a share, minimum.

Then if the drug is approved without any of these classifications or restrictions on it, they’ll get another $30 a share, so $125. If it’s labeled a schedule 4 drug, then it will get $10 a share, another $10 to make it $105. If it’s a schedule 5, it’ll be another $20. Just to give you an example of the kinds of drugs that are considered schedule 4 and 5 drugs, so schedule 4 drug would be valium and Xanax. A schedule 5 drug would be cough syrup.

So even cough syrup is looked at by the FDA as a drug with the potential for abuse so any time you have a pain killer the FDA does look at that and consider that.

Depending on how the FDA regulates this or classifies this with the schedules will depend on – weight the difference in how much Furiex shareholders receive. The fact that it is a pain killer that – and as I mentioned even cough syrup gets the scheduling. I would say there’s a decent chance it will be a schedule 4 or 5.

RW: Ok, Marc. So our readers out there who are looking to earn the arbitrage spread in this, the FDA ruling is everything in this. It’s going to dictate how much this deal closes, correct?

ML: Exactly, and so right now the stock is trading, like you said, about $103, which is just $2 off where it would – where Furiex shareholders will get paid if the drug is classified as a schedule 4, which is the most aggressive FDA classification that is expected. So like you said, that 21% is kind of misleading ‘cause that’s really a best-case scenario where shareholders get the $125 when there’s no scheduling or no classification at all. But I’m not sure how likely that is given that there is a pain-killing element to this drug and the FDA is always very, very concerned about the potential for abuse.

Right now the drug – I mean the stock is trading with the most conservative assumption that it gets a schedule 4 classification. If it gets schedule 5, then you’ll see it jump another $10 or so.

RW: So maybe the play isn’t to buy shares, Marc. Is there a way we can participate in all the upside if the FDA approval goes favorably, while also, at the same time, protect our downside?

ML: Yeah, well, I think maybe in the options market and I haven’t looked at the prices so I couldn’t tell you for sure if the options represent good value or not. But I think if there is an opportunity in the options market that would be the better way to go because that would limit your downside but let you participate in upside. So whether it’s buying the stock but owning a cheap put or just buying a call or if maybe there’s even a call spread opportunity, something like that.

But you really, if you are gonna take a shot at that extra $10 or $20, you really want to make sure that your downside is limited and you’re not risking too much to make that $10 or $20. ‘Cause right now the market is telling you that it’s gonna be – the deal’s gonna go off at $105 so you really want to protect yourself in case something unforeseen happens.

RW: Marc, you’re the biotech expert. You’re embedded in the industry more than anyone I know. Can you handicap this for us? What, in your opinion, is the FDA likely to do here?

ML: It’s so hard, the FDA is so unpredictable. I would say – if I had to guess – you can see how hard it is, I’m struggling here, but you would – I would guess that they’re gonna get something. They’re gonna get the schedule 4 or 5. I have a hard time picturing any kind of pain killer, as I mentioned even cough syrup gets a schedule 5 classification, so I have a hard time – any pain killer that you need a prescription for would not have something. But whether it’s a 4 or 5 I don’t know.

I haven’t seen all the data as far as the potential for abuse and the company certainly had to provide that data and do that kind of analysis but I would guess that it’s gonna be at least a 4 or 5 and the likelihood of it not getting anything where the deal goes off at $125 is probably pretty slim.

RW: Ok, there you have it. Thanks for your time as always, Marc.

ML: Oh, my pleasure, thanks for having me.

RW: Marc Lichtenfeld is the Associate Investment Director at The Oxford Club. And anyone who’s interested in checking out some additional research by Marc, click the link below. For Wall Street Daily, I’m Robert Williams.

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The post Is This the Merger Arbitrage Play of a Lifetime? appeared first on Wall Street Daily.

Article By WallStreetDaily.com

Original Article: Is This the Merger Arbitrage Play of a Lifetime?

Article By RoboForex.com

Analysis for May 14^th, 2014

GBP USD, “Great Britain Pound vs US Dollar”

GBP USD, Time Frame H4. Tenkan-Sen and Kijun-Sen formed “Dead Cross” (1) above Kumo Cloud; Tenkan-Sen is directed downwards. Ichimoku Cloud is going down (2), and Chinkou Lagging Span is below the chart. Short‑term forecast: we can expect decline of the price towards support from D Kijun‑Sen.

GBP USD, Time Frame H1. Tenkan-Sen and Kijun-Sen formed “Golden Cross” (1). Ichimoku Cloud is going down (2), and Chinkou Lagging Span is on the chart. Short‑term forecast: we can expect attempts of the price to stay above Kumo.

XAU USD, “Gold vs US Dollar”

XAU USD, Time Frame H4. Tenkan-Sen and Kijun-Sen are close to each other inside Kumo Cloud (1). Chinkou Lagging Span is close to the chart. Short-term forecast: we can expect attempts of the price to stay above Kumo.

XAU USD, Time Frame H1. Tenkan-Sen and Kijun-Sen formed “Golden Cross” above Kumo Cloud (1). Ichimoku Cloud is closed (2), and Chinkou Lagging Span is above the chart. Short‑term forecast: we can expect support from Tenkan-Sen, and growth of the price.

RoboForex Analytical Department

Article By RoboForex.com

Attention!
Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.

By MoneyMorning.com.au

What happened to Transfield Services’ Shares?

Shares of Transfield Services Ltd [ASX:TSE] soared more than 11% Wednesday, closing at the highest level since 26th November after the company successfully completed a restructure of its debt facilities.

Why did this happen to Transfield Services’ Shares?

Transfield Services had a potentially major debt problem brewing for the end of this year. In December it was due to repay $275 million to creditors. That’s a lot of money for a company that had just $178 million in cash and had made a loss of $250 million for the last financial year. The debt refinancing means the company should have a secure future until its next debt obligation falls due in 2017.

What Now for Transfield Services?

Transfield Services operates in the mining, energy, road, rail, water, power, telecommunications, and defence industries. It provides operations services, maintenance, and project management expertise.

The Transfield Services share price had been in a tailspin since late 2009. The share price has fallen from above $4 to as low as 66 cents. Today’s debt news has pushed the share price to a close today of $1.20.

Under the deal Transfield Services has refinanced a US$325 million debt facility that will now mature in May 2020. It has also completed a financing deal for a further AU$400 that will mature in July 2017.

It has been a tough time for all industries connected to the mining sector. That’s especially true for mining services companies. But now that Transfield Services has refinanced its debt this should give the company the upper hand when negotiating contracts with prospective customers. With Transfield’s debt problems in the past, this could be a great opportunity for the company to grow.

Cheers,
Kris+

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By MoneyMorning.com.au

What Happened to CSR Shares?

Shares in building products group CSR Ltd [ASX:CSR] fell by almost 5% today as the market digested the company’s earnings for the year ending March 31 2014. CSR has endured a tough few weeks, with the shares down more than 13% from their recent peak.

Why Did this Happen to CSR Shares?

At first glance it’s hard to fathom why the stock got belted today. CSR reported a net profit (pre significant items) of $72 million, 143% more than what the company made the previous year. The company’s full-year dividend of 10 cents per share is up 96% on the prior period. And managing director Rob Sindel gave an upbeat assessment of the outlook for Australia’s construction market. So why the rout?

Well, you’ve got to remember what keeps share prices moving. Companies have to keep impressing investors. Stocks have to keep beating raised expectations to maintain an upward trajectory. And CSR shares have had a stellar run, rising from less than $2.00 this time last year to an April 2014 high of $3.86.

Although this profit result came in ahead of what most share market analysts predicted, investors seem to have taken the view that the profit was already in the share price…and so they have taken the opportunity to sell out of the stock.

What now for CSR Shares?

I don’t think there’s any reason for CSR shareholders to panic. The company is strongly leveraged to new housing starts, and the recent pick-up in activity seems to be spreading. Meanwhile, CSR is entering the digital age and will now offer an online sales platform. That’s the kind of sales channel that more Aussie large-caps should embrace.

That said, construction is a highly cyclical industry…so if you own this stock, keep your eye on the economic headlines.

Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator

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By MoneyMorning.com.au

By MoneyMorning.com.au

What happened to the Fortescue share price?

Shares of Fortescue Metal Group [ASX:FMG] dropped slightly by 1.46% on Wednesday, closing at $4.73. This is close to the lowest it’s been since 8th October 2013.

Why did FMG drop?

Fortescue Metals Group Ltd is an iron ore production and exploration company with assets located in the Pilbara region of Western Australia.

Fortescue’s share price has struggled recently, despite its plans to boost iron ore production by 35% in the next quarter. The company’s share price has fallen by 20% since the beginning of this year.

Effectively, Fortescue is a leveraged play on the iron ore price, which has fallen 23% for the year to around US$104 per tonne.

The issue is two-fold:
1) Fortescue has an extremely high cost of production. Analysis suggests that if the iron ore price falls below US$80 per tonne, Fortescue will be losing money.
2) Fortescue’s net debt (cash less debt) represents roughly 55% of its market capitalisation of around US$8.6 billion. This is very high.

If the iron ore price falls further, its profit margin will be squeezed. As such, it will become more difficult for Fortescue to repay its debt. This is probably what worries punters.

What now for the Fortescue Metal Group?

FMG has recently reached its long-term ore production goal of 155 million tonnes per year, thanks to completion of the Kings Valley project.

At the moment, Fortescue’s share price has broken through its technical downtrend support line. Indications suggest the share price may fall further from here. Major long term support for the stock exists around the $4.40 level.

Nonetheless, if iron ore rallies, the share price could rise above the six dollar level in the next few months as a result of increasing production.
 
Jason Stevenson+
Resources Analyst, Diggers and Drillers

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By MoneyMorning.com.au

By MoneyMorning.com.au

It’s hitting the market.

But not like a freight train.

That would be quick. It would put the market out of its misery quick-smart.

No. This is more like a slow-moving iceberg hitting the market.

Bit by bit it’s crushing everything in its path.

But surprisingly, it’s not having a huge impact on stock prices. It’s as though the market is pushing back.

What’s going on…?

We’re talking about the Australian resources sector.

We frequently cover this sector in Money Morning. There’s a simple reason for that. It’s one of the Aussie market’s most important sectors.

And it feels as though it has been falling non-stop for the past six years. Of course, that’s not true. Resource stocks had a great ‘recovery rally’ from 2009 through to 2011.

Since then it has mostly been nothing but down, down, down.

But there are signs — potentially — that things could be looking up for Aussie resource stocks.

This isn’t how a ‘dead’ market behaves

Two resource stories caught our eye yesterday.

The first was news that Orica Ltd [ASX:ORI] reported worse-than-expected results. The stock price fell more than 5% on the news. It later recovered to be down just 3.9%. We asked small-cap analyst Tim Dohrmann if he had a take on it.

Orica isn’t really a small-cap, so it’s not in his wheelhouse. But Tim does know a thing or two about explosives, given his science background.

Here’s what he told us about Orica:

‘Back in March, Orica told the market that it would earn less money this half than it did in the same period a year earlier. Today, Orica’s managing director Ian Smith reminded everyone that conditions remain ‘challenging’…so much so that net profit fell by 7.8% to $242 million. Markets hate surprises of that magnitude for companies in the ASX 50. Hence today’s savage price action.’

Clearly when the market heard that earnings would be lower, it didn’t expect them to be that much lower.

But stop. A 3.9% drop? Is that really all that bad?

We’ve seen worse. And so have Orica shareholders.

If you look at the 10-year chart you’ll see the share price has been all over the place:

Source: CMC Markets Stockbroking
Click to enlarge

The message is simple: if you don’t like volatility, don’t buy Orica. If you’re happy with rapid ups and downs then Orica could be just your cup of tea.

Even after the drop, the stock is trading above $21, and has a 4.4% dividend yield.

In other words, if the resource sector was as dead as everyone claims, why did Orica’s profits only fall 7.8%? Why didn’t they fall 50%, 75% or even 100%?

Could it be the resources market isn’t dead? One other bit of news yesterday provided some proof of that. And it had resources analyst Jason Stevenson licking his lips at what could be coming next for the market…

The China bust story is yesterday’s news

Chinese state-owned Guangdong Rising Assets Management has made a takeover bid for Aussie-listed PanAust Ltd [ASX:PNA].

The company’s shares closed the day up 34.2% at $2.12.

Yesterday afternoon we asked Jason for his take on the PanAust story:

‘It’s a simple fact that the resource sector is out of favour. Money has chosen to flow into high yielding stocks and tech stocks instead. Since the beginning of 2013, the share price has drifted down from the $3.00 per share level.

‘The bid shows the true intentions of the Chinese — they want Aussie resources. Now that they’re cheap, they’re coming to get them.’

But again, isn’t the Australian resources sector supposed to be dead? Isn’t the China growth story supposed to be dead?

Even the Financial Times decided that yesterday was the day to call the end of the China boom…seven years after China’s stock market hit an all-time high:

‘China’s boom is over, but Beijing will avoid bust’

Well that’s comforting.

But if China’s economic boom really is over, how come one of the state-owned companies has decided to splash out $1.4 billion on an Aussie copper stock?

Could it be that the resource and China boom isn’t over? Could it be that yet again the mainstream press is doing what they always do — warning you about an event that has already happened?

It looks like it.

This market is about to change

The hardest thing with investing is to know exactly when a market will turn. It’s almost impossible. All you can do make your best guess on when you think it could happen and invest accordingly.

It means figuring out which stocks will benefit most from the turnaround, and even which stocks could move first when the market recovers.

China’s stock market has been in a downtrend for seven years now. And yet the economy has continued to grow. It’s now almost within touching distance of taking over from the US as the world’s biggest economy.

China may not ever again grow at the 8% or 9% rate that it did a few years ago. But it’s growing and growing fast. As an investor you should recognise that as a tremendous opportunity.

After seven years of bad news for China and resources stocks, things are about to change.

Cheers,
Kris+

PS: PanAust has said they will reject the takeover bid. But is that really a good idea? Check out the Money Morning Premium Notes to discover what this means for investors, and how it could affect other Aussie copper stocks…

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By MoneyMorning.com.au

By MoneyMorning.com.au

There are two opposing views on China these days.

One faithfully bets on China’s long term potential as still becoming one of the world’s most promising markets.

The other view believes China is facing an imminent and immediate crash.

We are hit by both positive and negative news from all directions. Alibaba’s high profile IPO is seen by some as the beginning of a new era for China’s technology firms. On the other hand, institutions such as the Conference Board believe stagnation is China’s most likely scenario: ‘Slow, continuous ±2 year fall to new, lower growth rate of 3.5-5.5%. Widespread debt-induced stagnation in many cities’.

On the negative side, there is China’s debt crisis, overcapacity, deflation and slowing growth. On the positive there is urbanisation, consumer society and rising wealth.

But let me tell you the real story. Dear investor, there is no need to panic over news reports or economists’ predictions on China.

What we are experiencing now is in fact the transformation from an ‘old economy’ to a ‘new economy’.

Half Empty or Half Full

It comes down to if you view a glass of water as half empty or half full.

While overcapacity, pollution and deflation represent the end of the ‘old economy’, one that is powered by the first phase of industrialisation, we are starting to enter the ‘new economy’. This is where the rise of technology firms is the best evidence that China is pivoting towards the service and consumption society.

What is going to make the difference is an orderly downsizing of the ‘old economy’ and the successful entrance of the ‘new economy’. Right now, that transformation is on a rough road.

Money Morning editor Kris Sayce hit the nail on the head when he contrasted China’s historical innovation with now. China has not caused any technological ‘disruption’ to the world since the invention of paper and gun power thousands of years ago.

China was the ‘sleeping dragon’ that was left behind, missing out on key periods of industrialisation and the rise of scientific thinking.

That is starting to change.

Even the Americans have been positioning themselves in China. Sequoia Capital, Matrix Partners, DCM and others have been behind some of the biggest internet IPOs in China.

What you need to do is to bet on the ‘new economy’ (however, this is not to say that secondary industries will stay in the morgue forever).

Think Service

You need to think service. The ‘new economy’ of China will see the rise of a lot more services and more consumption of those services. What kind of services will they be? Well, all kinds.

You need to put on your entrepreneur hat and think. If there is a problem, there will be a solution. China’s track record in the last 10 years tells us that China’s market system does facilitate creative solutions at scale. This process is going to happen a lot faster with the coming-of–age of the private equity and venture capital industry.

The recent labour strike in Dongguan cost Nike millions of dollars. The strike was at the company Yu Yuen [HKG:551]. This no doubt exposes a major problem in China’s industrial relations, particularly in management systems and management philosophies. While this is an area of weakness, it’s also the growth area of the future.

There will no doubt be a Reid Hoffman (founder of Linkedin) equivalent in China who will clean up!

Not to mention pollution management, renewable energy, food quality control, tourism, investment products. There is a whole array of investment opportunities for those looking to invest in the growth of China’s ‘new economy’.

Simply look at what is empty, and it will be filled.

The Winter Soldier

You may be aware of the Marvel Comics franchise and the film Captain America: The Winter Soldier. It has been the top box office film in China for the past three weeks.

Don’t be surprised if the Chinese population becomes the main consumers of American movies, culture, food, technology and consumer goods; in fact, they always have been.

Even Coca Cola secured a spot in China’s early primary school education (this is the sort of advertising you can only wish for), in a compulsory school book article, named: ‘American Water’. Movies work very well in China, especially when Vmax and Imax are everywhere to be found.

So media is one of the growth areas to look at. Advertising contributed 0.9% to overall GDP in China in 2012. That’s far behind the 2% contribution rate the US enjoys. Internet advertising continues to grow at a fast pace, achieving year on year growth of 46.1% in 2013.

In movies, ticket sales in China achieved US$600 million, a 30% year on year growth. That makes China the world’s second largest market by ticket sales value. However, in per capita ticket sale terms, China lags behind advanced economies.

There are two supporting factors to the movie market in China. One is government policy and the other is better quality and greater variety of films. Growth of this market will again reach 30% in 2014.

Companies in the Chinese media space are expected to see earnings per share (EPS) growth in excess of 30% in 2015. The sector is expected to outperform the index. And the price to earnings (PE) ratio will drop from the current 42 to 32 within two years, making it an even more attractive proposition.

The Great Transformation

The era of the ‘great leap’ is over.

Here, I’m referring to the failed attempts to fast track development in the 1960s. China is undergoing a great transformation, this great transformation should see early investors in the ‘new economy’ do extremely well.

I’ll leave you with what a Chinese government official told me during a conference:

‘The end of capitalism, as described by Karl Marx, comes from too much assets and wealth being sucked to the investment side. Not only does this lead to an unsustainably small consumption side, it eventually leads to an imbalance in the distribution of wealth, and the rise of the working class. Through class struggle, the imbalance is corrected. China was lucky in the last 10 years because it had exports to suck up all the overcapacity. Now, we are running out of options. We need a ‘new economy’.’

Ken Wangdong
Emerging Markets Analyst

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By MoneyMorning.com.au