On Asia: Picking the renminbi winners

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The capital markets can calm down now for I can exclusively reveal the real winners from the renminbi revaluation: pulp and paper companies.

Surprised? You would not be if you could see my desk groaning under the weight of more than 120 pages of analyst notes on the move.

As Stora Enso and rivals profit from the reams of paper used to explain the renminbi question, they should spare a thought for the biggest losers from Thursday’s decision.

Foreign exchange speculators who spent the past two years pouring some $350bn of “hot money” into China have reaped a meagre reward: a 2.1 per cent increase in the renminbi/US dollar peg.

The new link to a mystery basket of currencies, which allows the peg to “crawl” upwards, is the forex gurus’ only hope of avoiding being remembered as the authors of one of the worst currency trades of all time.

Disappointingly, capital markets have chosen to ignore my call to buy forestry stocks and steer clear of forex hedge funds, preferring instead to focus on the blatantly obvious.

Asian currencies have risen, while US bonds – and the dollar – have weakened.

In equity markets the new “managed float” has favoured companies with dollar-denominated costs and debt, and renminbi revenues – mainly oil refiners, domestic airlines and property developers – at the expense of exporters.

These are understandable knee-jerk reactions but in the long-term investors will have to be more creative.

Take forex first. Investors piling into Asian currencies seem to be forgetting that, unlike the renminbi, they are not pegged to the dollar. As a result, many currencies have been rising for some time on expectations of a renminbi revaluation. The South Korean won has gained about 11 per cent on the dollar over the past year.

With exports driving economic growth, it is difficult to see the Korean authorities, and their regional colleagues, allowing currencies to strengthen further – a trend that is set to cap any future gains in Asia’s currencies. There have already been reports of intervention by Korean, Singaporean and Taiwanese central banks.

It is conceivable that currencies that had not appreciated against the dollar, such as the Indonesian rupiah and the Japanese yen, could rise. But their strength should be limited by internal factors, namely poor economic fundamentals and political risks.

This recurrent need for forex intervention is also the reason why Treasuries will not come under undue pressure: Asian central banks still have to buy US-denominated assets to stop their currencies from rising.

Fears that China will suddenly switch its reserves into non-US government paper to match the new currency basket are also greatly exaggerated.

As Jonathan Anderson at UBS points out, Beijing has been diversifying reserves for a long time and already holds euros.

Equity markets are more complicated. Sure, the higher renminbi will reduce sales of Asian exporters, but any negative effect will be partially offset by a corresponding rise in the dollar price of their goods.

But the crucial point being missed by the investor herd is that the revaluation has been so telegraphed that shares in many of the obvious beneficiaries have already risen substantially.

Merrill Lynch estimates that returns in stocks regarded as “RMB winners” have fallen with every bout of speculation. When talk of a renminbi move first surfaced in August 2003, those shares rose nearly 30 per cent. Last month, they rose less than 5 per cent.

Rather than sifting through the currency exposure of individual companies, investors should look at the bigger picture. In this context, the Hong Kong market is a decent two-way bet.

The territory’s status as Asia’s only country with a pegged currency should attract “hot money” capital inflows. At the same time, the high proportion of HK-listed companies with Chinese exposure – mainly in the property and tourism sectors – is a good way to profit from renminbi appreciation. Around the region, domestic plays such as banks, telecoms and media, should also be attractive.

Attractive, that is, for Asia. For those looking further afield, the lure of those Nordic paper companies might be difficult to resist.

■The revaluation has just made the funding of CNOOC’s $18.5bn bid for US group Unocal 2 per cent cheaper, but the Chinese oil group may not be pleased. In the hostile US political climate, it won’t be long before a senator lambasts the currency move as a cynical attempt to unfairly subsidise the takeover.

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