Australia is the New Asia

As the world continues to shrink with globalization, international real estate investment is becoming more popular than ever before. Improved communications, reduced transactional friction and investment-friendly policies are drawing Asian investment to the U.S. market in record numbers. However, there’s also been intense activity in Australian real estate, particularly from Asian investors.

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iProperty.com conducted a survey at the end of 2015, which showed that Australia was the first choice of investment location for international property buyers based in Singapore and Malaysia, second for Indonesian investors.

Experts suggest that these investors see Australian properties as a better investment than real estate in other countries. It is often relatively cheap, given currency fluctuations. The Australian dollar has fallen by about 30% in the last few years.

Asian investors are “looking at larger towns like Newcastle and Wollongong. Larger established towns (with) universities in place and also potential for growth from a commercial side of things.”

There’s been a high level of investment from China as well. The Wall Street Journal recently reported that Chinese investment in Australian real estate has doubled in the past year. This segment accounts for 16% of the total sales of Australian real estate. In fact, China invests 3 times the amount in Australian real estate that the U.S. does, and 6 times what Singapore invests. Prior to 2013, the U.S. was the leading investor in Australian property. China is extremely important to the Australian economy. It is Australia’s largest export destination and also contributes to that country’s growing international tourism.

This is partly fueled by uncertainty surrounding the Chinese economy. Favorable trade agreements and a growing Chinese middle class also encourage the flow of investment to the Australian market. High net worth individuals in China find the Australian market attractive, both in terms of price and economic stability.

Actions by the Australian government at the end of 2015 also put a bit of a damper on foreign real estate investors. The government cracked down on property owners who had not gotten the required approval for their investments. It also instated a new fee for international investors registering their Australian properties. Rules governing newly built properties are less restrictive, and this has led to record participation from foreign investors in development projects.

The international impact is being felt mostly in the residential market, in part due to the small size of the commercial market, which is dominated by domestic investors. However, foreign money is stillgoing into commercial properties as well as development plans. Overall, in the past year, 50% of Australian real estate investment capital came from foreign investors, according toAustralia’s Foreign Investment Review Board.

I can see this high level of foreign interest will have an impact on all sectors of the Australian market. Demand is expected to grow in hotels and resorts and even in the rural land market. It’s likely that this trend in high demand will continue.

Pandora’s Box of Apple vs. FBI

A US district court ordered Apple to break security protections on an iPhone used by the San Bernardino shooter, drawing the company into a legal fight with FBI and the US government. There has been a huge discussion based on the conflict between confidentiality and terrorism that is sweeping the globe. 

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Donald Trump says that Apple should comply with the California judge’s order to help the FBI hack the phone. Being in strong agreement with the government, Trump questioned Apple: “Who do they think they are? We have to open it up!”

Tim Cook, Apple’s CEO, replied that they won’t provide a “backdoor” for the FBI, saying, “It’s just something we simply don’t have.” Strongly against the order, Apple refuses to build something that could threaten their customers. Apple released an open letter written by Cook, stating “Opposing this order is not something we take lightly. We feel we must speak up in the face of what we see as an overreach by the U.S. government.”

Advisor Abbate is siding with Cook, against hacking the iPhone. “If this software was available to the government, then they may be able to access anyone’s phone they want to check without reasons and permission. And once the software gets leaked, you don’t want to imagine what you’ll be facing. There are millions of iPhone users who also need to be protected. If leaving the shooter’s phone locked brings potential crisis to homeland security, will hacking into people’s cell phones really provide safety to us? We have to draw a line to better balance the consequences.”

“We have been experiencing it time and time again, losing freedom by having privileges taken away from us. It’s very critical to make this decision, pro the order,” said Advisor Abbate. “Throughout my years spent managing businesses, I was disappointed by the government and the American traditional system. For example, with the attitudes of the prosecutors, they are so ‘eager’ to prosecute someone in order to advance their career, which is their primary concern. The government should be truly and primarily concerned about the public, they should be protecting and servicing the people.”

China is keeping its eye on the discussion. Analysts have said that in the regulation of information encryption, China would refer to the practice of the U.S. government, having similar requests to technology companies. China has passed new controversial anti-terrorism laws at the end of last year, saying that technology companies are needed to combat growing threats. It also states that if the government requests for technology assistance, the referring company should do it in order to help the police department.

What if this event happened in China? Would Apple make the same decision? Anyone adapting to doing business in China, should know the local “policy.” ApplePay is going live this week and they don’t want to lose such a tremendous market. Compared to Uber’s failure by losing over $1 billion a year in China, Didi Kuaidi, backed by the Chinese technology giants Tencent Holdings Ltd and Alibaba Group Holding Ltd, have each spent enormous amounts to subsidize rides to gain market share. “It’s getting better and healthier for the Chinese market, and it’s great they’re going towards the right direction”, said Advisor Abbate, “But AliPay will continue to lead the market.”

Apple’s battle with FBI is literally the Pandora’s box, “Once you open it, even a bit, there’s no way back.” Do you want to open it? Which side you would take?

ChemChina – Overseas & Overpaying

The government-owned agrochemical firm, China National Chemical Corporation (ChemChina) announced an all-cash proposal to buy Swiss rival, Syngenta for $43 billion. This deal is expected to improve China’s food production. Now, the world is asking China, “How?” and “Why?”

download (2)China’s GDP hit a 25-year low in 2015 so why does the government still want to support such a large acquisition while the economy is declining?

The Chinese government has an objective to diversify its overseas industrial sector. Regardless, these deals do not make financial sense. All Chinese companies that are owned by the Chinese government have a mandate to go overseas for these purchases.

This can be very critical because companies like ChemChina are incredibly over leveraged. In the standard commercial market, they will not be able to receive a loan because they are in debt – over 10 times than the gross they will receive. Sometimes, up to three or four times is acceptable in the commercial industry, but not 10.

Why are the overseas companies willing to deal with these large Chinese firms even if they’re over leveraged?

According to Advisor Abbate, “They are essentially dealing with the Chinese government. When they are looking at a deal, they’re looking at guarantees by the Chinese government to be able to pay for whatever it will take.”

“My concern is if these Chinese companies have generated so much debt, it means they’re not well-managed. If they’re not well-managed in China, what makes them think they’ll be able to go overseas and buy a large company like Syngenta or the Italian tire maker, Pirelli and be able to manage them well?” questioned AA. There are many international stories about when inter-cultural acquisitions don’t turn out well. More so, the key problem towards China is the amount of debt that they have.

How will the acquisitions turn out? Is there a successful example? 

In 2013, one of the major national oil companies, China National Offshore Oil Corporation, or CNOOC Group had problems and paid a record $15 billion for Canadian company, Nexon with 60% premium to Nexon share price, only to suffer from the slump in global oil prices. Based on Advisor Abbate’s analysis, “The only successful one was the acquisition when Lenovo purchased IBM.” Lenovo did a good job by not only keeping the Western employees, but even hiring more Westerners. The CEO, Yang Yuanqing, took a very slow step in merging the culture of East and West allowing the two companies to understand each other slowly.

“I believe that in the very near future, the Chinese companies, which are represented as major global investors are going to be highly damaged by the amount of debt they are carrying and the inability to properly manage.”

BETTER POLICY NEEDED. Right now, the only reason these companies can go around the world, buying these large enterprises is because the Chinese government is simply presenting a “blank check”. Meanwhile, the Western companies are being greedy, but not responsible sellers. The EU is planning to step in to oppose some of these acquisitions.

How will China or the Chinese government benefit from these acquisitions?

How can it be possible for companies that have nearly 80 times debt over their gross income be able to do this? Unsurprisingly, the Chinese executives have certain connections within the government to obtain financing. When doing business, they’re actually doing “PR” work. “I don’t believe that it will be a practice for China in the long run,” said AA.

Acquisition for China is not a philosophy of commercial, but EXPANSION. It is more important to China to become a global player quickly, rather than developing within their own country. 

With the slowing economy in China and with factories operating at 70% of their production capacity, it make sense that they would expand outside of their market so that they can leverage the 30% of inefficiency.Ren Jianxin, Chairman of China National Chemical Corp shakes hands with Swiss agrochemicals maker Syngenta's President Michel Demare (R) after the company's annual news conference in Basel, Switzerland February 3, 2016. China made its boldest overseas takeover move yet when state-owned ChemChina agreed a $43 billion bid for Swiss seeds and pesticides group Syngenta on Wednesday. The largest ever foreign purchase by a Chinese firm, announced by both companies, will accelerate a shake-up in global agrochemicals and marks a setback for U.S. firm Monsanto, which failed to buy Syngenta last year.  REUTERS/Arnd Wiegmann

Last year, ChemChina acquired Italian tire maker Pirelli in a $7.9 billion transaction. How will this influence Italy? 

Italy is a country of “crisis.” There has always been a shortage of liquidity because of corruption in the Italian government and a lot of money is wasted on “ghost projects.” The Italian government welcomes any type of foreign investment and why wouldn’t they? Pirelli made a good deal – the owners of the majority stock holders remain in charge, the investors (which were several banks) continued to maintain the stock into the company. China is a tremendous market, which continues to grow – it’s an amazing deal for the Italians.

China-based firm’s purchases of U.S. companies include: Haier Group’s $5.4 billion purchase of General Electric’s appliance business and Dalian Wanda Group’s $3.5 billion deal for Legendary Entertainment. Additionally, Astoria Waldorf has been acquired by China’s Anbang Insurance. How will these affect the United States? The world?

As the factory of the world, China’s actions are concerning many people. They may not necessarily have direct impact on their investments, but Western companies are going to react as a result of these acquisitions.

What a slowing economy really means to the West is – How many goods they are going to be able to sell China? China is already the type of economy where the citizens save quite a bit of their income. What will happen then?

 

 

Developed & Emerging Markets – Where Do They Stand?

Ever since the term, BRIC (Brazil, Russia, India & China) was created in 2002 by Goldman Sachs, the story of global growth has been emerging markets. Russia was driven by oil and Brazil by commodities, China and India were driven by demographic dividends in their immense populations. However, things have changed in the past three years.

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In 2008, the Lehman crisis put the developed markets in a precarious condition. Debt soared, liquidity tightened, growth collapsed and the global GDP trend shifted out of the developed markets and into the emerging markets. As the share of emerging markets started rising, the share of developed markets started falling. In 2009, emerging markets accounted for 35% of global GDP, while developed markets accounts for 42%. In 2013, emerging markets accounted for 48% and developed markets accounted for 32%.

While the U.S. grappled with low inflation and the EU was occupied with the problem in Greece, things took a sharp shift in favor of developed markets. There was clearly a lot of pressure on emerging markets. As liquidity dried up in U.S. markets, commodity producers suffered. The oil and commodity slowdown just made it all worse. In 2015, the share of emerging markets in the global GDP was down to 34%, but the share of developed markets finally increased to 43%.

I think that this trend is going to become more pronounced in favor of developed markets in 2016. India, China and Mexico will still be the fastest growing economies. However, other emerging markets are going to pay a price for the fall in China’s growth. The US, Canada, UK, Japan and Germany will most likely grow by 2%.

As the US creates record jobs, the EU gets growth back, Russia and Brazil will probably suffer from the weak commodity prices and bad policy decisions. That means that between the slowing of China and negative growth from Brazil and Russia, the emerging markets are going to have a rough year. 2016 may be the year that developed markets get back on track.

What do you predict will happen?

Consequences of China’s Two-Child Policy

China’s announcement that is will end its decades long one child policy is exciting news for married couples who want to have two children. However, what about unmarried women? China still makes it almost impossible for most single women to have a child.

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Single women that do not have a “reproduction permit” form the government are denied birth certificates for their children. If they do have a child anyway, the child will not receive a hukou, the official household registration. This means that their child will have trouble gaining admission to school and accessing affordable healthcare. The single mother will also get a “social maintenance fee” for violating family planning policies, which is quite expensive – $13,000.

Many women have taken to social media to voice their opinions proclaiming, “Single women with an education and a high income should immigrate to another country.” In face, some single women have already begun travelling abroad to freeze their eggs because China bans single women from using assisted reproductive technology. In July, a famous movie star of China, Xu Jinglei at 41, told a Chinese magazine that she flew to the United States to freeze her eggs. Amazingly, many came out to support Xu’s choice on Weibo.

It is not surprising that China chose to end its one-child policy in hopes to alleviate some of its demographic challenges, which I wrote about in a previous post. Their population pressures come from the institution of the policy in 1980, which has caused a rapidly aging population, shrinking work force, falling birth rates and an extreme sex ratio imbalance – there are roughly 116 boys born for every 100 girls.

Many Chinese feminists have said that they don’t want to marry at all, but are still doing it because they want to have a child and the obstacles for single mothers are so insurmountable. Rather than giving women increased reproductive freedom, many feminists believe that the new “two-child policy” will actually put even more pressure on women through unforeseen ways. For example, there will be increased gender discrimination in hiring as employers factor in the time female job applicants take off from work to have two babies instead of one now.

It is very interesting that China is both forcing women not to have children, but also to have children at the same time – what is the right thing to do? How do you think that China can solve their demographic problem?

3 Reasons Why You Should Invest In Africa

“We are enjoying in Africa what I call the democracy dividend. The progress we are seeing, economic development are all part of the dividend of good governance, respect for human rights, rule of law. It has created an enabling environment that allows not only foreigners to come in and invest but for Ghanaians to invest. It has created an atmosphere for our young people to be creative, innovative…” – President John Mahama, Ghana

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China used to be where the big money was – low cost workers and huge factories were plentiful. Now, with the Chinese downturn there are new reconsiderations for future investments. One of them is the prospect of Africa. If you have not seen all of the signals that this is the new continent to invest in, here they are.

  1. Africa is growing fast

The World Bank released a report that 6 of the 12 fastest growing countries in the entire world are located in Sub-Saharan Africa. Half of the world’s population growth will be in Africa.

Africa has sure had its fair share of problems from physical geography (landlocked countries will disease-susceptible tropical climates) to manmade challenges such as corruption. However, when you view Africa as a long-term investment, the combination of demography and development make Africa a promising buy.

  1. China is already in Africa

For the past decade, China’s investments in infrastructure like mines, farms, roads, ports and railways have been the big story. However, they have also invested in energy to increase Africa’s raw materials like food, oil, diamonds and uranium.

Now, Africa is both a partner and rival to Chinese manufacturing of clothes, toys and electronics. Yes, right now Africans have to wait and see how much they will be affected by China’s economic slowdown. Most of the attention is focused on low commodity prices and possibly damaging capital flight.

  1. Western countries are absent

In ways of both governmental aid and private investment, the United States and European countries have been pretty minimal. Right now, western governments are cash strapped and have turned from public sector aid to more private sector investment as their global developmental strategy. However, this has not been working out well because the private sector is often deterred by the high risks involved in investing in Africa.

So, when you put these three factors altogether, it does look like the perfect time for American businesses to consider Africa for long-term growth possibilities. In the next 100 years, the consuming middle class African will be a huge driver of economic activity.

In major cities in big countries, the middle class demand is already very real. With better infrastructure, more efficiency, less corruption and more urbanization, investing in Africa will become the new source of wealth.

The Trend That Will Affect Us All

The future may be hard to predict and sometimes we guess wrong. However, there is one trend that will have a big impact on everyone’s business for not only the next few years, but possibly the coming decades. One thing that we cannot deny is that tomorrow, we will be older than we are today. Changes of demography can have very important political, economic and military consequences.

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Let’s take a look at Europe and Japan first. Recent statistics are showing that populations in these two countries are having fewer children – they are also facing a distressing level of youth unemployment. Some worrisome implications of this is a less experienced workforce that will need to financially support a larger elderly population. Meanwhile, Europe is having a huge migration crisis. Who will make it to Europe, where will they settle?

Competitiveness will be at a high in mature economies like Japan and the United States. The workforce will be older, healthcare costs will be higher and there will probably be less pension benefits.

I know what you’re thinking – “What about China?” Many analysts have been betting that China will take up the demographic slack and be the growth engine of the future, but that is not the case. Sure, right now Chinese citizens are relatively prosperous, but China’s one child policy is beginning to take its toll. The smaller number of the next generation is going to have to support a much larger pool of aging citizens, just how it is in developed countries. The Middle Kingdom still accounts for a large proportion of the world’s population and mainland China will still fuel world growth economically. However, the pace of this growth will vary province by province.

As you can already see, companies will need to be creative and find new innovative business models that can take advantage of the shifting demographics of their operating countries’ populations.

The growth in the world will come from countries like India and Africa – this is where the big opportunities lay. Over the next decade, African economies such as Ethiopia, Tanzania and Mozambique are predicted to grow as fast or even faster than some recent Asian countries. However, we must keep in mind that problems like corruption, political instability, poor education and lack of infrastructure could slow or limit growth.

Overall, these shifts in demography will not cause a decline by any means. There will be room for new business opportunities across industries, especially healthcare.

How Chinese Companies Win the Customer

China’s greatest success has been in industries that are very customer-focused such as household appliances (39 pdownloadercent global revenue), Internet software (15 percent) and smart phones (10 percent). In these sectors, the majority of the growth is from local market sales – the size of China makes domestic leaders, global leaders.

Based on the enormous size of the Chinese consumer market, appliance makers like Haier and Internet companies like Tencent, Alibaba and Baidu have grown to be world leaders. However, the Chinese consumer market is also quickly moving. The disposable income of its consumers has risen by 10 percent every year for over a decade and now 85 million households have joined the consuming class. In the Chinese market, innovations are rapidly scaled up and commercialized. So, Chinese companies have learned how to adapt global products by tweaking designs and better addressing the consumer needs. A new generation of Chinese entrepreneurs have been solving consumer problems in a unique way – the Chinese way.

China has a highly fragmented retail industry and this harshly limits decent choices for consumers if they are outside of major cities. However, Chinese entrepreneurs saw this as an opportunity and build a world-leading e-commerce industry, Alibaba. It has grown to be the world’s largest online market place based on the value of the merchandise sold – $349 billion last year. Further innovations by Alibaba is Alipay, a payments system and Ali Finance which helps to finance small scale suppliers that don’t have a traditional banking system.

Rethink Business Models

Chinese entrepreneurs greatest flair has been inventing business models. To understand, I’ll let you know that in most parts of the world, 60 to 90 percent of revenue for online businesses comes from advertising. In China, this is not the case; their advertising industry is actually only about a quarter the size of the US industry. Chinese companies needed to create new business models to monetize the web traffic. One company, Tencent generates 90 percent of its revenue from online games, sales of virtual items on social platforms and e-commerce. The result? The average revenue per use is $16 compared to Facebook’s $10.download (1)

Cheaper, but Better

China is known for creating products for about half of what other countries charged, but only at about 80 percent of the quality. With the rise of a wealthy class in China, now they have to create cheaper, but better products to win their consumers. A Beijing-based market phone maker, Ziaomi has become one of the world’s most successful startups. Xiaomi phones usually cost half of what top products of global brands cost for the same and even better hardware features. How do they do it? Ziaomi has achieved this by embracing business model innovations like online only sales and risk sharing with supplier. Now, Xiaomi is the largest smart phone player in China and is preparing to enter foreign markets.

No, U.S. Stocks Aren’t Going to Crash

There has been an image of the Wall Street’s iconic bull lying on its side floating around the Internet. However, this is actually far from the truth. U.S. stocks would need to diver down over 20% from peak levels and stay down for quite a while until considered a bear market. After the big stock market sell-off, the S&P 500 is only down 12.5% from its all-time high – that is not even enough for a 10% correction. It is easy for us to begin to worry when the majority of the trading screen is in red, but there is actually a strong case being made that stocks will only go up from here. Wall Street experts think that the S&P 500 will end around 2,100 – which is a lot higher from where the market currently is, but also means that stocks will have a small gain by the end of the year.

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There are a few reasons why U.S. stocks will remain bullish. Let me outline them.

Right now, the U.S. economy is in pretty good shape, not close to a recession, which is when bear markets usually occur. The U.S. economy should grow almost 2% this year and unemployment numbers are down below to prior the Great Recession.

Sure, China’s economic slowdown is a little frightful and many think it will create widespread effects. True, China is the center of this global sell off, but only 2% of U.S. revenue from the entire S&P 500 come from China – a tiny amount. So, there is no need to worry about China.

Corporate earnings may be a little ugly, but this is only the first time since 2008. The only real industry that is struggling is oil. The price of a barrel of oil has fallen from over $100 last year to under $40 this year. However, healthcare and technology industries are still going strong.

One fatal mistake that could be made that would definitely tank U.S. stocks is by raising interest rates too early. However, Federal chairwoman, Janet Yellen said that there do not plan to raise interest rates until the economy is strong enough. Will the raise happen in September? December? Or even 2016? We will have to see.

Some believe that even after the pullback, stocks are still too expensive. However, the S&P 500 is trader just over 16 times forward earnings and the average for the past decade has been around 14. So, it is a little high, but not where it was at 18.

When you take a look at all of this, you’ll see that this really isn’t a trigger for a major downturn in the U.S. stock market and in the long term, this correction is a good thing.

Bangkok Blast Suspect Identified

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Almost one week from today, on August 17, a bomb exploded inside of the Erawan Shrine at the Ratchaprasong intersection in Bangkok, Thailand. The blast killed 20 people and injured as many as 125 people. There is surveillance footage with a man leaving a backpack at the shrine just before the explosion. The Royal Thai Police have said that there was 3 kilograms of TNT was stuffed into a pipe and placed inside the backpack. They believe that an electronic circuit could have been used, which was found 30 meters away from the shrine. The suspect, Mohamad Museyin has not been arrested yet.

The man, who police say is a foreigner, was captured on security footage at the Erawan Shrine. Thai police are looking at budget Bangkok hotels on the Sathorn Road area, where he is believed to have stayed. Motorbikers and tuk-tuk drivers who may have picked up and dropped off the man have also been questioned.

Another suspicious surveillance video that was obtained by the Thai media shows a man in a blue shirt putting a bag on the ground and kicking it into the water some time just after the explosion that would have been several miles away at the Erawan Shrine.

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Pol Gen Somyo Pumpunmuang, the deputy national police chief said that they have found enough evidence to suggest that the bombing involved several people inspecting the site in advance, finding the components to make the bomb and plan an escape. The size of this team has been estimated to include 10 people.

There was also a second explosion the following day. On August 18th an explosive device was thrown from a bridge near the busy Sathon pier. Luckily, it did not cause any injuries because it did not explode until it was in the water. Police believe that it was a grenade that was thrown. If it had exploded before it hit the water, it would have caused injuries. It is still being investigated whether these two accounts are related to each other or carried out separately.

No terrorist group has claimed responsibility for either of the bombings. However, potential groups of suspicion are international jihadists, members of Thailand’s souther Malay-Muslim insurgency, China’s Uighur minority, militants on both sides of Thailand’s political divide, as well as just a group of individuals with a personal grudge.

The Thai police have promised to release information to the public once it does not need to be kept a secret – which they have kept their promise with us so far.