Speaking with the media at the first day of the 15th annual CLSA Forum yesterday, Wood said that Asia-Pacific financial institutions are insulated from their US and European counterparts and are considerably less leveraged. ôFrom a market point of view, the rally triggered by [the weekend announcement by US Treasury Secretary Henry Paulson], driven further by panic short covering of financial shares, provides an ideal opportunity for long-only investors to sell Western financial shares and buy in to Asia-Pacific Australian financial shares at a higher level than present.ö
Wood expects the current relief rally in the global equity markets to continue, at least for a couple of months. He is bullish on Chinese and Indian stocks, arguing that even if these giant Asian economies grow at a slower rate of say 9% and 7% respectively in 2009, this is still a positive outcome for regional stocks. WoodÆs bullishness on Asian financial stocks stems from a simple fact, that the books of Asian banks are healthier, without any toxic assets and that these financial firms have an adequate loan-to-deposit ratio.
A report by ratings agency Fitch released yesterday said that a review of the key trends for banks in Asia ex-Japan has found that they have remained generally good; for the most part, banks in Asia achieved good levels of profitability, stable or improving asset quality and adequate or strong capitalisation.
The CLSA Asia-Pacific Markets country asset allocation has 25% in China and 13% in India as of 18 September.
Wood also had some strong words to say about the restrictions on short-selling of financial shares implemented by US and UK regulators over the past week, calling it ôhighly irresponsible and ludicrousö. From a policy point of view, the two measures taken together mark a sad day for American capitalism and bring ever closer the demise of the US dollar paper standard, he points out. They also may mean the end of the American economy as a flexible dynamic model.
His views on the setting up of a Resolution Trust Corp-style (RTC) vehicle are also sharp. ôThe proposed RTC-type vehicle to buy the structured excreta will turn out in reality to be a gigantic warehouse," he says.
The original RTC, set-up in the 1980s to take over bad loans resulting from the savings and loan crisis, sold off the restructured loans as the market improved, rather than in a quick-fire sale, thus lessening the cost of the crisis to the US economy and to its taxpayers.
Wood says that one key difference between the 1980s S&L affair and today's financial crisis is that the US government had already taken over the insolvent banks by the time it created the RTC.
Details of the proposed RTC vehicle have still to be announced and Wood notes that a key issue is what price the trust will pay for the assets û will it be 67 US cents or 30 US cents to a dollar? Either level has long-term implications for the market. Buying at the real market price creates no incentives for the financial institutions to sell, unless the authorities threaten to cut off liquidity.
ôAnd that goes against all the liquidity supportive measures conjured up by the Fed,ö Wood points out. He proposes buying at the present market price but allowing the selling financial institution some carried interest in any future profit.