Three of the better performing emerging markets are Singapore,
Hong Kong and Malaysia. A recent Standard and Poor's report
notes it expects most rated
banks in these three countries to further
expand
over the next several years.
[caption id="attachment_57941" align="alignright" width="300"
caption="The Singapore skyline"]
[/caption]
According to the report, "Regional Expansion by Singapore, Hong
Kong, and Malaysian Banks is a Double-Edged Sword," the banks'
financial health, risk management, and internal support from
respective governments is expected to continue to support the
ratings and expansion. The report says these banks are likely to
continue expanding over the next several years to take advantage of
higher yields and the growth potential in emerging markets.
But while these banks expand, new evidence suggests sovereign
wealth funds are becoming more conservative as cash levels are
increasing -- in some cases to peak financial-crisis levels. The
Government of Singapore Investment Corp. (GIC), which manages more
than $100 billion, boosted cash to higher levels than during the
financial crisis, reducing exposure to both stocks, bonds and its
European holdings.
Cash was increased to 11% of the portfolio as of March from 3%
the year prior. Stocks dropped from 49% to 45%, reflecting a
reduction in developed markets, while bonds were reduced to 17%
from 22%.
The move to cash is testament to the limited options government
funds have when seeking to preserve capital in light of ongoing
global uncertainty. GIC's holdings in Europe were reduced to 26%
from 28%. While investments in the U.K. were held at 9%, its assets
in Portugal, Ireland, Italy, Greece and Spain made up 1.4% of its
portfolio. 33% of the portfolio is in the U.S., a majority of the
42% invested in the Americas. Allocation to Asian emerging markets
increased to 29% from 27%.
Reflecting the ongoing global malaise and the challenge for
large institutions to make reasonable investments, the moves are
not so different from individual investors striving for a semblance
of safety and growth. While Singapore's GIC moves to cash, and
banks in Malaysia, Hong Kong and Singapore look to expand, we can
heed the message.
A look at the recent charts of the three aforementioned regions,
Malaysia (
EWM
,
quote
), Hong Kong (
EWH
,
quote
) and Singapore (
EWS
quote
), compared with the iShares MSCI Emerging Markets Index ETF
EEM
(
quote
) shows a developing divergence from the aggregate emerging markets
performance.
Singapore is the real standout with a
significant out-performance compared to the overall
index.
Malaysia looks very good as well.
Finally Hong Kong looks a little better, but clearly not as good
as the other two. Its ties to mainland China are having an impact,
but it still looks impressive considering China is
significantly underperforming the index.
Banks are the type of business that needs to be followed closely
because understanding where they are expanding gives us an edge
when determining where to put our own money. Paying attention to
the choices sovereign wealth funds are making is just as
beneficial. They are out there to make money. Increasing cash and
liquidating positions in developed markets is an ominous sign --
one we should heed with caution.