The Canadian pension fund plans to increase its allocation to the region from 10% to 15% over the coming four years, even as its total assets under management rise.
How do you perceive the markets?
Tam: We see a lot of panic selling and ongoing deleveraging. It is difficult to quantify how much is panic selling and how much is mechanical unwinding due to the forces unleashed from the Lehman bankruptcy. However, we do see a lot of value out there in credit and some emerging opportunities in equities.
The big question is: How far along are we in this deleveraging process? No number sounds outrageous in answer to that anymore. Globally, we may have to deleverage by $5-$10 trillion.
With that amount of deleveraging to come, how accurately can one judge what æfair valueÆ is?
I think the deleveraging process is, to coin George SorosÆs term, reflexive, and it is interconnected with the real economy having an impact on the valuation of assets and securities. In the short-term IÆm trying to assess the bailout package from the US. It may not necessarily be enough medicine to slow, suspend or turn the momentum around. Maybe they should be using that money to recapitalise the institutions instead. That would cost less than buying all the assets. ThatÆs more of a philosophical point because that would mean nationalising their banking systems.
Even if they did go for the liabilities side of the balance sheet rather than the asset side, where would they rank? Pari passu with common equity, or ahead of them? Recently, weÆve seen the line being drawn at subordinated debt, the feeling being that if you do not make whole the bondholders, that will trigger a massive domino effect in the cash bond market and credit default swap markets. So people have sought to credit events as possible.
How will AsiaÆs banks be affected? Will they encounter asset quality problems?
The world is inter-connected, and regardless of what insulation you have there are going to be effects. Some are calling this a financial tsunami, and I suppose to counter that you have to build larger sea walls.
China could prove to be a strong defence for the world, by virtue of its $2 trillion foreign reserves.
Though if you are invested in China A-shares, you wouldnÆt feel very well defended this year.
I think the Chinese government has handled its domestic problems and the results itÆs encountered from this crisis quite well.
Because of its dependency on trade, and from the lessons learned from the dress rehearsal for this in our Asian crisis of 1997, the defences were built. Even in India, where the defences are not as strong as China, they have built up reserves to defend the currency, stock market or for fiscal stimulus.
The Chinese do have high savings rates: a Rmb13 trillion pool of savings against Rmb3 trillion of outstanding mortgages. With the reserves and savings, they have nearly one full year of GDP. They have been preemptive with interest rate policy, starting to raise rates in 2004.
It's unfortunate this year for A-share investors, but as we see in the west itÆs difficult for authorities to lay off and let the free market work û China has done that with its stock market and until recently not intervened at which point China did cut interest rates. It is tough love. Is it overvalued or undervalued there. I think itÆs probably close now to fair value there.
As a hedge fund manager, what is your reaction to the new restrictions to shorting?
Hong Kong seems to be remaining almost alone as a beacon of laissez faire hope. In 1998 it harmed its reputation by intervening, even though it was ultimately vindicated.
Hong Kong had the up-tick rule going into this crisis. So far Hong Kong has changed no shorting rules. I think you might see the up-tick rule being adopted in the US as a condition for shorting resuming there.
You can still use indices to short and ways of using swaps to achieve a short position. It's not really adequate though.
Talking around the market, hiding in cash may well be the best solution û but thatÆs not good, as market activity dwindles.
What are your gross and net positions?
WeÆre 1.1 to 1.2 net. We are still looking to deleverage a bit more. WeÆre long-term value in orientation and believe there will be an end to this storm, so we donÆt want to just dump our assets. We have been net short at times.
Is the system holding together?
So far this year, the financial system has just about held together. If youÆd bought massively on the darkest days û on the days before interventions took place, you would have made a lot of money in the rallies. As the credibility of the authorities has eroded, those bounces have become shorter and smaller. If you had gone short at the wrong time you would have been hurt badly if you hadnÆt bargained on those governments intervening.
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