Buffett and China banks top cash-rich list

Twenty of the largest listed companies in the world are sitting on a combined cashpile of $570bn, demonstrating how some of the world’s biggest groups retain substantial firepower in the current downturn.

However, only 29 of the top 100 global companies by market value have net cash, according to analysis by the Financial Times. But those that do should be in a strong position in a severe downturn that is causing companies to scramble to conserve cash.

The list is led by four financial institutions with Warren Buffett’s Berkshire Hathaway at the top with $106bn in net cash, defined as cash and short-term investments or marketable securities minus debt. Strikingly, the next three positions are filled by Chinese banks with Bank of China, ICBC and China Construction Bank having $101bn, $89bn and $82bn, respectively.

People are divided on what cash-rich companies are likely to do with their money. Some believe that with company valuations at a relative low compared with recent years the time is ripe for acquisitions. If you have the cash, there are some unparalleled opportunities out there. You have rock-bottom prices and some very willing prices.

But some others disagreed and argued obviously the banks are hoarding cash, so why shouldn’t the corporates. Probably both banks and corporates will remain cautious in this global market downturn.

Some cash-rich companies already took actions: Berkshire is one of the exceptions, having already invested in blue chips such as GE and Goldman Sachs. Some other cash-rich companies have looked to take advantage of the relatively low valuations by boosting share buybacks or trying to buy rivals. Microsoft has done both.

However, investors, who were only recently crying out for cash to be returned to them through buy-backs, now care cash position more. They’re being more relaxed with managements in a high net cash position.

M&A retreated in 2008

A record number of deals were cancelled in 2008 leading to a sharp fall in fees for investment bankers. The total volume of worldwide mergers and acquisitions reached $3,280bn in the year to date, down 29 per cent from the full year 2007 as financing difficulties, volatility in valuations and widespread risk aversion saw deals pulled.

Companies abandoned 1,309 transactions valued at a total of $911bn. In 2007, there were 870 withdrawn deals valued at $1,160bn.

BHP Billiton’s $147.bn bid for fellow miner Rio Tinto was the largest-ever withdrawn deal while the $48.5bn acquisition of Canada’s BCE telecoms group by a consortium of private equity groups marked the biggest failed buy-out ever. On the other hand, the fall in activity saw investment bankers generate less than $20bn in fees for advising on M&A in 2008, down 30 per cent from the $28.1bn in 2007.

But the floor has not been built yet. The combination of falling earnings, the absence of credit, lack of confidence and ongoing market volatility will deter activity. M&A outlook for 2009 was the worst for many years.

Deals among financial institutions helped prop up the volume of deals as banks and insurers raised capital and restructured assets to repair balance sheets.

Financial deals accounted for 19 per cent of all M&A volume with $636.6bn deals during the year, including the $44.4bn acquisition of Merrill Lynch by BoA. What’s worse, Private equity deals fell 71 per cent to $188bn from $658.9bn in 2007 – the lowest annual volume in five years as lenders stopped providing debt for buy-outs.

Global Macro rose up

Although losses and redemptions are drastically shrinking the entire hedge fund world, global macro funds are garnering more interest because of their stronger returns and easy availability of liquidity.

Global macro funds — which make broad bets, such as playing one country’s currency or stock market indexes against others, often using derivatives — are one of the only strategies tracked by the Hennessee Hedge Fund Index that has posted a gain in 2008, including a rise of 1.23% for November. With cash reigning as king these days, investors are shunning funds that cannot return principal quickly, like those that specialize in fixed-income investments or merger arbitrage situations.

If you look at the performance of hedge funds, global macro guys have shown the best performance. Among the leaders, a $15 billion global macro fund run by Brevan Howard Asset Management gained 3.7% in November, and is up 21.2% for the year.

It’s not just high-net-worth clients, who can change direction of their money quickly, who are looking more at global macro. Larger investors, like pension funds and hedge funds of funds, have put global macro at the fore of their 2009 plans. Overall, macro strategies accounted for $300 billion, or 19%, of total industry assets of $1.564 trillion on Oct. 31, up from 15% at the end of 2007.

They trade in liquid markets, like futures, with an event horizon of two hours and two weeks. This enables them to take advantage of this short-term choppiness the market has presented better than most.

The hedge-fund allocation is currently shifting from one that invests mostly in hedge funds of funds to a strategy that invests in hedge funds directly. And, in the move to specific hedge funds, tactical trading, global macro funds and Commodities Trading Advisers, or CTAs, could see a significant increase.

Hedge Fund Liquidation increases

A record number of hedge funds liquidated in the third quarter of 2008 with 344 funds closing, far exceeding the previous quarterly record of 267 set two years ago.

On the other hand, there were 117 new funds launched in the third quarter, bringing the total for the year to 603, 90 fewer than were liquidated during the same nine month period. The third quarter is the first period in which the industry experienced more liquidations than launches since HFR started tracking this data in 1996.

The hedge fund industry is currently experiencing a structural consolidation that mirrors broader trends across the entire financial industry. The combination of a sustained increase in asset price volatility with the decrease in liquidity has widened the differentiation between funds and increased the challenges for both funds and investors.

EM Hedge Fund scaled back

A sharp spike in investor risk aversion had a significant impact on hedge funds investing the emerging markets in the third quarter, when the HFRI Emerging Markets (Total) Index declined nearly 29%.

According to Hedge Fund Research, investors redeemed over $5.2 billion in capital from hedge funds investing in emerging markets during the same period. When performance-based asset losses are included, capital invested in emerging markets hedge funds fell more than 33% to almost $75 billion, less than 5% of all hedge fund capital and an absolute level not seen since end of 2006. Total capital invested in hedge funds globally has fallen by 19% over the same period.

Asset declines were widespread across all emerging market regions and strategies, but the most severe losses were in equity hedge funds, which lost over $23 billion in assets, and in funds focused on Russia and Eastern Europe, where assets fell by over $12 billion. But while emerging markets hedge funds have declined over 34% over the last 12 months, the losses have still not exceeded those from the financial crisis of 1997 and 1998, when emerging markets hedge funds declined over 43%.

Emerging Market underpinnings of secular growth and improved fundamentals were ignored and overwhelmed by fear and risk aversion. In a tumultuous flight to quality, investors looked to liquidate portfolios of any risky assets in favor of the perceived security of developed government bonds, and emerging markets hedge funds were some of the most heavily impacted by this.

Risk, of all types, was out of favor in the third quarter.

China aims to boost consumption

I never thought so-called RMB4000 billion stimulus plan has any meaningful points to current painful China economy, but this time, China government seems to be on the right track.

China’s economic policymakers meet towards the end of every year to establish a broad agenda for the coming 12 months. Yet this year’s conference, which begins on Monday, December 8, is likely to focus on specific policy measures.

When the Chinese government launched a fiscal stimulus package a month ago, it was more a statement of intent than a battle plan. Officials wanted to send a signal that they were taking action.

The “central economic work conference”, as the meeting is known, will give leaders a chance to refine and potentially expand spending plans for the next two years. The government has indicated it will introduce measures to boost consumption.

The initial announcement of the fiscal stimulus was rushed out, officials have acknowledged, because growth in the economy was slowing rapidly. And since the first announcement, the economy appears to have deteriorated further, including a drop in car sales and electricity production in November and reports that exports had decreased for the first time in nearly a decade.

One of the main criticisms about the fiscal stimulus plan is it focuses too heavily on infrastructure. According to the commission, about 80 per cent of the Rmb4,000bn ($581.8bn) investment over two years will be in roads and railways.

Ha Jiming, economist at China International Capital Corporation, an investment bank, said that infrastructure spending would not have as big an impact as it did after the 1997 Asian financial crisis because facilities were much better developed than a decade ago and state-owned companies were no longer such an important part of the economy.

If not carefully controlled, economists warned, infrastructure spending could also stimulate even more investment in the manufacturing sectors which are suffering from over-capacity, such as steel.
Given the concerns about the efficacy of massive infrastructure investment, there is widespread speculation that the authorities will do more to try to boost domestic consumption. That could include raising the threshold for income tax and help for low-income families, as well as accelerating spending on pensions, education and healthcare.

There appears to be a growing consensus within the central government that China has to stimulate domestic consumption more aggressively. The authorities are also under pressure to boost the stock market.

In the fact, this worldwide financial crisis offers an opportunity for China government to adjust the economic development path and solve the deep-rooted social issues. It’s hard to wheel a big train, but we have to.

Asian wine collectors defy slowdown

Over last weekend, investors bid aggressively for rare Bordeaux wine at a Christie’s auction in Hong Kong. The sale showed that Asian collectors were still prepared to pay high prices for wine, even in a global economic slowdown.

Christie’s booked HK$31.5m ($4m) from the sale of 231 lots of wines on Saturday, surpassing a pre-sale estimate of about HK$20m.

It was said that bidding at the Christie’s wine auction was aggressive, reflecting strong demand in Asia – all top 10 of the lots were sold to Asian private buyers.

The Hong Kong government’s decision in February to abolish wine duties also helped.
For art auction business, other sales were unlikely to perform as well as the wine auction. But as no one can escape from this financial crisis, the art market has started to show signs of faltering amid the economic downturn, after a six-year boom. In a separate charity auction in Macao on Saturday, Stanley Ho, the casino tycoon, paid US$200,000 for a 1.08kg truffle, or $185.19 per gramme. A year ago, he paid a record $330,000 for a 1.5kg specimen, or $220 per gramme.

However, for the wine collectors, it’s not all doom and gloom. There will be slight price correction but not a bubble bursting in the wine price.