Sunday, June 7, 2015

2015-05 Relative Equity Trends

Both the Chinese materials sector and consumer sector continued their upward movements from last month, with both sectors seeing double digit growth. The materials sector represented by CHIM appreciated 46.23% over the twelve months ending in May. The consumer sector represented by CHIQ appreciated 13.12% over the same time period.

Fosun continued its acquisition binge in May as it offered to buy the remain shares in Ironshore Insurance for US$1.8 billion. Before that deal, it had already made $6.0 billion in acquisitions since the beginning of 2014.[1] Two issues stand out for these deals. The first is that until the Ironshore deal, most of these acquisitions had been financed with debt. The Ironshore deal will mostly be funded by issuing more shares in Hong Kong. Second, even though Fosun is considered part of the materials sector, all of its recent high-profile acquisitions have been focused on consumer spending. Its recent deals or offers have included Portugal’s Caixa Geral de Depositos SA, Italy’s Raffaele Caruso SpA, America’s Meadowbrook Insurance Group Inc., and France’s Club Mediterranee SA.[2] China’s largest private sector company is selling overvalued equities in China to invest outside of China in less-cyclical businesses than it traditionally has dealt with. Perhaps others should take note.

The other business deal of note was the US$298 million that Fujian-based Zijin Mining Group paid for 49.5% of Canada-based Barrick Gold’s Porgera gold mine in Papua New Guinea. Barrick’s statement on the transaction described the reasons for going forward with the deal: “Substantial synergies and value may be realised by bringing to Barrick the expertise and relationships that Zijin offers, including low-cost capital from Chinese institutions, leading Chinese engineering and construction skills, and Chinese machinery.”[3] Does Barrick really need outside help with engineering, construction, or machinery? The first reason, “low-cost capital from Chinese institutions”, was the main driver. The People’s Bank of China’s interest rate manipulation is now creating mal-investments outside of China.