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Category Archives: Investment

Charts: The Best and Worst Performing Assets in November and YTD

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Source : Deutsche Bank and Bloomberg

Infographic: The World’s 100 Biggest Pension Funds

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Source : Visual Capitalist

Chart: U.S. Farmland Prices Soared in 2022

Source : Bloomberg

China’s Property Investments Continue to Drop in October: NBS Data

China’s property sector investment fell at a faster pace in the first 10 months this year, dropping 8.8 percent year-on-year, compared with the 8-percent decline in the first nine months of 2022, data from National Bureau of Statistics (NBS) showed on Tuesday.

From January to October, the sales area of residential housing reached 1.1 billion square meters, down 22.3 percent from 2021, including a 25.5 percent drop in residential properties.

Sales of residential housing stood at 10.8 trillion yuan ($1.53 trillion), down 26.1 percent, and residential housing sales declined 28.2 percent, data from the NBS showed.

In the first 10 months of 2022, the new housing construction area totaled 1.03 billion square meters, a year-on-year drop of 37.8 percent; while housing completion area stood at 465.6 million square meters, falling 18.7 percent from the same period last year.

Fu Linghui, a spokesperson for the NBS, said on Tuesday that the real estate market has seen some positive changes, as the decline in sales of residential properties and the area of completed houses narrowed, after local governments implemented targeted policies to ensure housing delivery and promote the stable development of the sector.

However, the downward trend of the real estate market continues, Fu said.

“Data of land purchases and new construction starts remains weak, while the demand side showed hesitancy by home buyers,” Yan Yuejin, research director at Shanghai-based E-house China R&D Institute, told the Global Times on Tuesday.

Fu noted that the government will actively encourage both housing purchase and renting as well as support housing needs under the principle of “housing is for living in, while not for speculation”, in a bid to promote the gradual stabilization and healthy development of the real estate sector.

Recently, the People’s Bank of China, the country’s central bank, and the China Banking and Insurance Regulatory Commission released a notice, which detailed 16 measures to ensure stable and healthy development of the country’s real estate sector.

Experts noted that with the promulgation of the 16 measures, property-related indicators are expected to improve in the last two months this year.

According to the notice, starting from November 1, property developers’ outstanding loans and trust borrowings due within six months can be extended for up to 12 months. In addition, trust companies are encouraged to offer reasonable funding support to developers.

Yan said that the policy will help improve liquidity for housing companies and also prevent the deterioration of development investment.

“The real estate industry is an important sector of the national economy and is closely related to people’s livelihood, so timely delivery of housing projects is still the focus of the policymakers,” Yan noted.

Source : Global Times

12 Lessons on Money and More From Warren Buffett and Charlie Munger

Haywood Kelly wrote . . . . . . . . .

It’s easy for me to make a list of ideas from Warren Buffett and his partner Charlie Munger at Berkshire Hathaway that have influenced my own thinking and that of my fellow Buffett-heads here at Morningstar. The hard thing is confining the list to only 12. But here goes.

1) Be Skeptical of Exotic Financial Instruments

Buffett and Munger have been consistent critics of derivatives, catastrophe bonds, crypto, and other types of financial “innovation.” The way they run Berkshire Hathaway reflects this prudence. The company operates with very little debt and a large cushion of cash and investments, an approach that has influenced the way Morningstar manages its own balance sheet. The skepticism of Wall Street’s creativity in new-product development has influenced our analysts over the years when faced with the latest and greatest product offering from asset managers or investment banks.

One of my favorite Buffett quotes is, “If you’ve been playing poker for a half an hour and you still don’t know who the patsy is, you’re the patsy.” Unfortunately, the financial industry is chock-full of players eager to induce you to play the game on their terms, always with a hefty entry fee attached. To this day, I’ll admit I’ve never bought or sold an option, shorted a stock, bought a triple-inverse-short ETF or 130/30 fund, dabbled in structured notes, or invested in a variable annuity. Simplicity is good. It certainly lowers costs.

2) Inflation Is Another Reason to Favor Moats

Until 2022, it had been easy to ignore inflation for about 40 years. But any student of Buffett’s writings knows that inflation was a regular topic of his in the 1970s and early 1980s. What he emphasized then was the difficulty for companies, especially those most exposed to inflationary cost pressures, to earn decent returns for shareholders in a period of high inflation. Very few companies—those with strong economic moats—can raise prices to offset the erosion of purchasing power. This underlying pricing power is one reason we like wide-moat companies so much. They’re better able to withstand what the macro environment throws their way. Now that inflation is back with a vengeance, it’s a good time to reread Buffett’s sobering inflation commentary.

3) Volatility Is Not Risk

My longtime boss at Morningstar was a Buffett and Munger fan, and the first words I ever heard out of her mouth were: “Beta is bullshit.” (I knew then that Morningstar would be an interesting place to work.) Given that writing massive insurance policies is a significant part of Berkshire Hathaway’s business, it’s no surprise that risk has consumed a large part of Buffett’s and Munger’s attention. They have a very different conception of risk than academic finance and its emphasis on metrics like beta or standard deviation. Financial academics like using volatility as a proxy for risk (largely because it’s so easy to measure), but that has the perverse effect of implyingthat an asset becomes riskier when it drops in price—the exact opposite of how a rational buyer thinks about a lower price. Risk, says Buffett, is the chance you suffer a permanent loss of capital. I’ve also appreciated that Buffett and Munger have consistently emphasized systemic and existential risks—for example, the risk that derivatives cause a series of financial institutions with interlocking exposures to collapse like dominoes, or the risk of nuclear war or biological infection (natural or otherwise). As investors and citizens, we need to acknowledge these risks and do what we can to minimize them.

4) Integrity Made Simple

Buffett famously said to the employees of Salomon Brothers when he stepped in to run the company in 1991: “Lose money for the firm, and I’ll be understanding. Lose a shred of reputation for the firm, and I’ll be ruthless.” He also suggested the following as a guide to behavior: If you would be comfortable having your actions described in detail on the front page of your local newspaper, where your family and friends will read it, go ahead and do it. At Morningstar, we modified this to: Would you be comfortable with this appearing on page C1 of The Wall Street Journal?

5) Fund Boards Are Lap Dogs

That was Buffett’s conclusion in his classic 2002 letter to shareholders, and it certainly jibes with what Morningstar has seen over the years. Despite their explicit role as guardians for fund shareholders, fund directors—even independent directors—rarely push back against fund managers, and almost never vote to fire the fund manager. Buffett criticized corporate boards for the same reason: Their culture of rubber-stamping what management or compensation consultants put in front of them. (He’s even been critical of his own performance as a board member.) The lesson: Look for board members with business experience and skin in the game (in the form of meaningful ownership in the company they oversee), but even then don’t expect much. Most important is that the management team and other employees have integrity (see previous point). Hoping that a board of directors, no matter how independent on paper, can effectively police a management team is a pipe dream.

6) In Investing, It’s OK to Do Nothing

Buffett compared investing to a baseball hitter waiting for a fat pitch—a nice straight ball down the heart of the plate. But unlike in baseball, in investing you’re not called out after three strikes. You can let as many pitches whiz past as you want. This concept of patience has influenced the way we rate stocks at Morningstar in that we have no minimum number of stocks we have to rate 5-stars; sometimes we have very few stocks we recommend. In my personal portfolio, I’ve never felt pressure to swing if I’m not comfortable. Letting cash pile up is fine. There will usually be a market correction at some point to bring prices down again to attractive levels.

7) Always Be Learning

Both Buffett and Munger are always reading, and Munger in particular emphasizes the importance of science—including an understanding of evolution—as essential for understanding what makes people tick. Many of my favorite books were Munger recommendations, including Influence: The Psychology of Persuasion, by Robert Cialdini, The Selfish Gene by Richard Dawkins, and Guns, Germs, and Steel by Jared Diamond. Such eclecticism has always influenced the hiring philosophy at Morningstar. We’d much rather hire someone with intellectual curiosity than a narrow focus on finance. Munger once said, “You’d be amazed at how much Warren reads—at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

8) The Markets Are Good, but Not Perfect

Having studied economics at the University of Chicago, I started my professional career with a firm faith in the wisdom of markets. Fortunately (at least in retrospect), my first job was analyzing Japanese stocks just as the bubble in Japanese asset prices, arguably the most egregious asset-price bubble in history, was bursting. It was an early lesson that sometimes markets go haywire—or more precisely, the people who make up markets go haywire and come to believe that trees grow to the sky. It’s amusing now to think about it now, but serious people in the late 1980s and early 1990s concocted stories about why price/earnings ratios of 80 or 90, which were common in Japan at the time, were reasonable, or recommended allocating 30% or 40% of a portfolio to Japanese stocks because that offered the optimal mix of risk and reward. Reading Buffett and the kinds of books Buffett and Munger recommend, you come to internalize that while markets usually do a wonderful job of allocating capital, they’re only as reliable as the (imperfect) humans making up the market.

9) Index Funds Are a Wonderful Invention

This may appear at odds with the previous point about imperfect markets, but it’s actually not. Markets may sometimes go haywire, but it’s still mighty hard to outperform them. When I started at Morningstar in 1991, it seemed the only fans of index funds were Jack Bogle, a few university professors, and a handful of academically minded financial advisors. Index funds made up a tiny percentage of overall fund assets. My, how things have changed. One might think Buffett—the quintessential active investor—would have been among the biggest detractors of index funds. I remember many Morningstar conferences at which active managers pooh-poohed index funds as un-American or as settling for mediocrity. (Most of these managers are long gone.) Buffett, by contrast, has consistently heaped praise on index funds as the best way for most investors to gain exposure to the stock market. He repeatedly singled out Bogle for special praise for launching the index revolution. Buffett showed that intellectually you can embrace both active and passive investing—it’s not either/or.

10) No Good Investor Is Either “Value” or “Growth”

Munger famously helped induce Buffett to move beyond Ben Graham’s cigar-butt-style of value investing (which consists of looking for stocks with one good puff left in them) and embrace great companies—even if it means paying higher prices for them. The key insight is that the worth of any company is a function of its growth prospects and how confident one can be that the growth will materialize. You shouldn’t analyze a “value” company any differently than a “growth” company. While we popularized the distinction between growth and value with the Morningstar Style Box—and it is a helpful shorthand to see what kind of companies a particular fund manager favors—from the perspective of a stock investor, to think of value and growth as separate investing styles is a mistake.

11) What It Means to Win the Birth Lottery

The final two lessons apply to life in general and not just the little corner of life we spend investing. Buffett has emphasized how lucky he was to be born where he was (the United States) and when he was (the 20th century). Had he been born in another time and place, his somewhat specialized talents of company assessment would have been worthless. He’s called this the birth lottery. It’s a good reminder to all of us the role luck has played in our lives. If you’re reading this, chances are you’ve been pretty darn lucky. I know I have.

12) The Key to Happiness

The key to a happy marriage isn’t a beautiful spouse, smart kids, or pleasant conversation. No, say Buffett and Munger, the key to a happy marriage is finding someone with low expectations.

The same holds for reading articles like this one; I hope you clicked on it with sufficiently low expectations. And the same holds true for investment success. I make a habit of mentally lopping off 30% of whatever my portfolio value happens to be, simply because stuff happens. Generalizing this bit of wisdom, I’d suggest that low expectations are pretty much the best way to ensure a lack of regrets on one’s deathbed. And the best way not to be disappointed after death, too!

Source : Morning Star

Infographic: Dove vs. Hawk – The Financial Conditions Index

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Source : Visual Capitalist

Global Funds Cut China Bond Holdings for Eighth Straight Month

wrote . . . . . . . . .

Global investors sold China’s onshore bonds for the eighth straight month, the longest streak on record, as the notes’ appeal was dampened by a surge in Treasury yields and a weaker yuan.

Foreign investor holdings of Chinese bonds in the interbank market fell by about 70.7 billion yuan ($9.7 billion) in September following net sales of 35.4 billion yuan in the previous month, according to data from China Central & Depository Clearing Co. and Shanghai Clearing House.

China’s bond outflows intensified last month as the yuan fell to the weakest level since 2008, reducing the appeal of the nation’s assets for global investors. Surging treasury yields due to a hawkish Federal Reserve bets also dented the attractiveness of yuan-denominated debt as the People’s Bank of China maintained an accommodative stance to boost the economy.

Continued outflows amid the Fed’s aggressive tightening in September were expected, said Qi Gao, strategist at Scotiabank, adding that the market may need to be patient before global buyers return.

In September, foreign investors sold a net 35.8 billion yuan of Chinese government bonds and 20.8 billion yuan of the quasi-sovereign policy bank notes. They also sold 410 million yuan of local government bonds and 3.1 billion yuan of negotiable certificate of deposits, a popular short-term debt issued by banks.

Government bonds ended a streak of steady inflows that started in July that were partly driven by passive fund flows following the inclusion of Chinese bonds into the FTSE Russell’s World Government Bond Index.

Global investor holdings of Chinese bonds in the interbank market stood at 3.4 trillion yuan as of last month. Foreign ownership of government notes declined to 9.4% of the total outstanding volume at the end of September from 9.8% a month before.

Source : BNN Bloomberg

Chart: Assets Performance (in USD) in October and YTD

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Source : Deutsche Bank

Chart: Capital Flees China’s Tech Sector

Source : Sixth Tone

China to Offer Tax Concessions for Private Pension Schemes

China will offer tax concessions for private pension schemes that enjoy policy support and are run commercially to meet people’s diverse needs, according to the decision made at the State Council executive meeting chaired by Premier Li Keqiang on Sept 26.

The meeting noted that the development of policy-supported and commercially-operated private pension is a useful complement to the basic old-age insurance scheme, and can better meet people’s diverse needs and enhance social security safeguards.

The meeting decided that personal income tax concessions will be made available for those participating in policy-supported and commercially-operated private pension schemes: participants will be entitled to a contribution deduction of up to 12,000 yuan (about $1,687.6) each year from their annual taxable income.

No tax will be levied on investment yields for the time being. The actual tax burden for receiving pension benefits will be lowered from the previous 7.5 percent to 3 percent. This policy will be applied retroactively to January 1 this year.

“The policy support we introduced this time will deliver sizable benefits. In the process of implementation, we need to gradually fine-tune the policies and sum up experience before applying such policies more broadly,” Premier Li said.

The meeting also decided to temporarily defer payments of certain government-levied charges and deposits to further ease the burden on market entities and help them overcome difficulties.

“Market entities, especially micro, small and medium-sized enterprises, self-employed households and manufacturing firms now face considerable difficulties. Postponing the collection of government-levied charges and deposits is an important step to support market players. All policies must be delivered on the ground without delay,” Premier Li said.

The meeting rolled out an additional set of fee deferral policies for the fourth quarter. Payments of 14 government-levied charges, including farmland reclamation fee and sewage and household waste disposal fee, amounting to over 53 billion yuan, will be deferred without overdue fines.

Localities will be encouraged to postpone the collection of sub-national government-levied charges on enterprises, and arbitrary charges will be strictly prohibited.

Payments of project quality deposits of various kinds, amounting to about 63 billion yuan, will be deferred. Due responsibilities must be fulfilled, and promises delivered with concrete actions to ensure that market entities truly benefit from the policies.

“Relevant institutions and mechanisms of charge levying should be refined to foster a world-class and market-oriented business environment governed by a sound legal framework,” Premier Li said.

The meeting also decided on measures to make more government services inter-provincially accessible to further unlock market vitality and bring greater convenience to the people.

On top of the 187 government services already inter-provincially accessible, additional 22 high-demand items that affect a wide range of sectors will be added to the list to address the pressing concerns of households and businesses.

Inter-agency information sharing will be enhanced and operational standards aligned to make more inter-provincial services available online and processed on a one-stop basis. The needs of senior citizens for in-person services will also be well met. Personal privacy and trade secrets will be protected pursuant to law.

Source : The State Council