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Different Sectors, Same Risk Factors

In hindsight the correlation between anything related to emerging markets/commodities has hurt me - leading to some small, but permenant, losses in capital in parts of the portfolio.

Asset managers (Ashmore) to industrials (NASDAQ:IMI) have been hit by the same sensitive risk factor of reducing fixed asset investment in China.

Though it started with commodity prices declining, which led to consequential damage to the miners (driven primarily by reduced marginal demand). Other external factors such as OPEC reaction/US overinvestment in shale resources (I see this as being quasi independent to China - but unfortunately happened at the same time) have created a temporary oversupply issue in the energy sector also leading to pricing pressure (driven primarily by increased marginal supply).

Both capital intensive sectors in trouble is leading to trouble for many industrials - which can then spread to other sectors as suddenly we have three sectors experiencing declining sales and margin pressure.

Arguments when discussing such matters often start with "it will be contained in the sector". however, depending on its scale it can traverse to other parts of the economy. We saw this very clearly with the sub prime crisis.

Though I have had a large cash position in the last 12/18 months, pressure to increase allocation to equities from taking profits had led me to satisfactory quality businesses that had suffered strong declines such as POSCO, Ashmore, Aberdeen, BP, National Oilwell Varco, Now, Halliburton. Though in different sectors from finance, energy, materials, industrials - there earning power are strongly correlated to similar risk factors!

The consequences of the MACRO factors that are driving these changes are leading to declining Y/Y EPS in the US for the first time since the last recession. A stronger USD, weaker EM currencies and demand will affect the earning power of international businesses. The question is will these negative trends for DM gain sufficient momentum to spillover into DM domestic economies through reduced spending or investment (i.e. through reduced confidence, redundancies, less lending). I am assuming this has a greater than 50% chance of happening.

MACRO FACTORS

1. Reduced China investment in fixed asset - continued transition to consumer orientated economy

Consequence is reduced demand in raw materials: putting pressure on pricing. Should be positive for consumers worldwide and in the long term positive for providers of products/services for consumers

2. Oversupply of energy as USA shale resources and now Iran resources are available to the global market. Countries that depend on energy for their budget and have low cost supplies are retaliating protecting their market share?

Problematic for energy focused economies: positive for consumers worldwide and for govts that subside energy

3. Temporary reduced demand for capex intensive industries can affect industrials - that can spillover the effects to other sectors via job losses, lost confidence, debt write downs etc

Disclosure: I am/we are long PKX, NOV, DNOW, HAL, AJMPF.