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Focus on Fuller
03/24/2006 12:00 am EST
Unlike more formal publications, FullerMoney provides a free-flowing real-life glimpse into the thoughts and investment ideas of London's David Fuller. It’s an always fascinating and diverse journey for sophisticated traders and investors. Here’s a sampling.
"Japan and South Korea remain my favorite industrial-based, developed country stock markets for the very long term. However in my view we have certainly seen the best of the initial move up out of the bases for these two markets. Also, the global stock market recovery, now in its 34th month, is extremely long-in-the-tooth. Long-term investors may wish to ride out what is unlikely to be more than a medium-term (three to six months) correction for Japan and South Korea.
"The overall stories are so attractive, not least because both have emerged from secular bear markets and have improving fundamentals, that share indices for these two countries probably have less downside risk than most other developed country stock markets during the more risky environment that I envisage. Or if not less downside, then they are likely to recover from a ranging correction more quickly than most.
"Personally, I will defer any additional purchases until we have seen a setback, and I do not expect to buy Japanese or Korean equities until later in the year. However, we believe Japan to be in the early stages of a new bull market. If further profit taking drags Japanese stocks lower in the next few months, which it could easily do as part of a global correction, I would regard it as a buying opportunity. I do not think we have seen the highs for the year.
"Hypothetically, if I were to increase my Asian investments in this environment, I would almost certainly opt for China and/or Taiwan, mainly because having lagged last year they should be less susceptible to profit taking. Moreover, their relative performance is likely to improve in the next few years. In my personal investment portfolio, I look for core positions that I hope to hold for many years, subject to performance and events.
"High on the list is a China fund. From a technical standpoint, we have been looking at the basing characteristics of China’s Shanghai A-Shares index since the climactic downward acceleration was followed by that trend-ending upward dynamic in mid 2005. Subsequent action shows all the characteristics that might suggest a sustainable uptrend— which may have already commenced.
"Further, China’s leaders want a stronger stock market. And most importantly, they are also doing a bit of a cleanup in terms of corporate governance. And while this process has a long way to go, I do not doubt China’s economic potential. China’s GDP growth continues to surprise on the upside, despite many forecasts of a hard landing in recent years. While governance remains a long-term concern, I’m reasonably optimistic about China through at least the 2008 Olympics and note that they will not want to have one of the world’s weaker stock markets prior to that showcase event.
"I am also considering an investment in Taiwan. The Taiwan Fund (TWN NYSE) is a US dollar-denominated, US-listed closed-end investment company with a $281 million capitalization. Importantly, this Boston-based fund is outperforming the Taiwan exchange. The fund currently trades at net asset value. Also outperforming the Taiwan exchange is the Taiwan Greater China Fund (TFC NYSE), another US dollar-denominated, US-listed closed-end investment company. It has a capitalization of $118 million, and is currently selling at a 1.6% discount to NAV. Barclays also has the iShares MSCI Taiwan Index Fund (EWT NYSE).
"What is the main reason why investors everywhere have been avoiding Taiwan’s stock market in recent years? Political concerns, of course. And in terms of risk perceptions, invasion by a bellicose China has to be high on the scale of worries. Can we overlook the remaining political risk? Yes, if your answer to the next question is similar to mine. On a scale of 1 to 100, how likely is China to crank up the bellicose rhetoric, let alone invade Taiwan before the 2008 Olympics? On a relative basis, I believe the rhetoric will decline and rate the chances of an invasion—surely a lose/lose proposition— at no more than 1 out of 100.
"Meanwhile, due to these perceived political concerns, Asia’s other developed country markets have romped ahead in recent years while Taiwan has stayed in the starting blocks. Consequently, Taiwan’s current P/E of 13.77 and yield of 3.84% are competitive. From a technical standpoint, I believe Taiwan is consolidating its gains from the October reaction low, prior to completing its five-year base with a decisive break above 7000 later this year. I maintain that downside risk is limited to further base extension and that the next big move will be on the upside.
"India remains my favorite stock market for the very long term. However, from a short to medium-term perspective it is no longer the valuation bargain of two to three years ago. Does this mean that I should abandon my investment in India’s stock market, in search of short-term performance? I certainly don’t think so, not least because trading and investing are not mutually exclusive. And as I’ve said before, if I were going on a ten-year sabbatical with no opportunities to review markets, I would worry least about a long-term investment in India, which I believe is capable of a performance that even Warren Buffett would envy. Why? I suspect corporate profits, on average, will grow at least as fast in India as anywhere else.
"Meanwhile, there are plenty of pundits attempting to talk India’s stock market down. However, I suspect many missed the India boat and are hoping that it will reverse back to the last port, enabling them to jump on board, on their terms. Maybe they will get lucky, not least because some of us suspect 2006 will be a choppy year. If so, I’ll happily increase my investment in India’s stock market. If not, I hope to resist the temptation to sell my favorite long-term position, probably outsmarting myself in the process.
"Behaviorally, one reason why India’s high-performing stock market has remained firm is because even the bulls are cautious. Lots of intelligent people are trying to talk India’s share market down so that they can jump on board without having to pay new high prices. India will experience its corrections, along with the global trend for stock markets, but the charts have been telling us for a long time that there are many more people willing to buy, relative to those who wish to sell. The moral: Monitor momentum but don’t tell the market what to do.
"Not a day goes by that I do not see or read about some spokesman from a major institution saying either: ‘There is no real inflation’ or ‘Inflation is not a problem.’ Well if you pay the household bills you know better. Central banks—all central banks— have sown the seeds of future inflation for a number of years and that they continue to germinate. The statement: ‘No country wants a strong currency’, has become one of our mantras in recent years. In an increasingly competitive global economy, their economies cannot handle the competitive squeeze that a strong currency would induce.
"So they are all born-again inflators, who hope that they can get away with it due to disinflationary or deflationary pressures from globalization. Consequently there are no hard currencies, other than gold and other precious metals. In other words, within the fiat currency world there is only the ‘least ugly.’ Countries have other export considerations that are damaged by relative currency strength, so they print more paper and their currencies weaken against gold. It’s always horses for courses, to coin a phrase, so for a store of value currency, I want precious metals in this cycle.
"Thus the big story for gold, recently and increasingly in the future, will not concern jewelry and industrial usage, but will be global investors' rediscovery of gold as a monetary metal, in terms of value in a fiat currency world. I maintain that investment demand for gold will cause the price to at least triple from current levels over the next ten to 15 years. Just consider the scarcity of gold relative to all the money printing— past, current, and no doubt in future.
"And what about the short term outlook? We could easily see a further correction before the secular uptrend is resumed. From an investment perspective, if I were using a bullion ETF, gold at $545 would tempt me to commence nibbling once again. However in secular bull markets most surprises are on the upside.
"However, gold and other precious metals continue their secular swing back into fashion as monetary metals. I expect investment managers and financial advisors to significantly increase the precious metals weighting in their portfolios over the next decade or more, and they are starting from a very low base.
"One of my mantras has been: Don’t pay up for commodities! We prefer to buy the reactions, and there will always be reactions. Following a 21-year bear market in commodities, we should not be too surprised to see a very powerful secular bull market. And like all secular trends, this will have its seemingly irrational or euphoric phases. The market is manic/depressive— it always has been and always will be, while emotional humans are involved.
"As for mining, one of the few world-class mining companies that I could buy today, actually I did, and know that it was unlikely to cause me many sleepless nights, is Inco (N NYSE). "Inco is an outstanding investment for the very long term, due to its near monopoly among developed country nickel miners. I believe nickel is completing a two-year plus consolidation and will reach new all-time highs this year, in which case the estimated P/E is below ten. I’d caution that fundamental analysis is not my forte but this looks like a no brainer and the chart shows plenty of medium to longer-term potential.
"Given all the problems faced by mining companies, not least rising costs and political risks, from an investment perspective I am only really considering large companies with substantial reserves in the ground, in stable countries where rule of law is not subject to the whims of autocrats. Inco certainly qualifies with its near monopoly in nickel mining in the Western world. Following any medium-term correction, I would buy other world-class mines such as Rio Tinto (RIO NYSE) and BHP Billiton (BHP NYSE).
"Rio Tinto and BHP Billiton remain two of my absolutely favorite shares for the very long term and I hold positions in both. The corrections that we have seen recently are similar in size to some earlier reactions. On this basis one could nibble but I would do no more than that. Both shares ran ahead very strongly prior to this correction and have probably peaked for the medium term, at a time when I suspect stock markets in general are entering more choppy waters. Therefore I would hold back some capital earmarked for these shares, for additional nibbling because they could easily react further before the overall upward trends resume.
"Meanwhile, I'm in no hurry to deploy cash earmarked for equities. I wish to reiterate that I suspect we have only commenced the medium-term topping process. During this phase I would not be surprised to see some new highs for stock market indices that do not hold. Equally, we can expect some downside breaks. In other words, I expect a choppy, ranging phase which could last for several weeks or even a few months, followed by a sell-off, leading to the next great buying opportunity, perhaps in the fourth quarter of 2006."
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