James Morton, Manager, Mackenzie Cundill Recovery Fund, and Mackenzie Cundill Emerging Markets Value Class, has spent years travelling the world looking for value. A decade ago, the Recovery Fund invested in battered companies located primarily in emerging markets. The Fund was closed in 2006 when opportunities to invest became scarce. The Fund was reopened in March 2008, and with companies around the world caught in the ongoing financial crisis, Morton is again finding quality companies trading at a deep discount to their net asset value. In the commentary below he discusses his strategy and where he’s finding value today.

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5
James Morton, Manager, Mackenzie Cundill Recovery Fund, and Mackenzie Cundill
Emerging Markets Value Class, has spent years travelling the world looking for value.
A decade ago, the Recovery Fund invested in battered companies located primarily in
emerging markets. The Fund was closed in 2006 when opportunities to invest became
scarce. The Fund was reopened in March 2008, and with companies around the world
caught in the ongoing financial crisis, Morton is again finding quality companies
trading at a deep discount to their net asset value. In the commentary below he
discusses his strategy and where he’s finding value today.
The financial environment is far different today than it was when the Mackenzie Cundill
Recovery Fund was launched more than ten years ago. Over that time recessions have
affected different parts of the world and sectors of the economy – but the current crisis is
of a magnitude and breadth that’s completely different.
I’d like to start by discussing “recovery” as a strategy. As you know, the Mackenzie
Cundill Recovery Fund was created to invest in companies that had suffered a setback,
like those caught in the Asian currency washout in 1997. But our approach is not based
on prevailing economic conditions; it’s about the situation a specific company finds itself
in. We’re looking for shares that are off at least 50% from their 10-year high. As well, we
want the structure of a company’s operations, the nature of the business and management
decisions to add value for shareholders. These things are not independent of the economic
and financial environment, but they are not necessarily dependent on them either.

2. Now, the first part of this equation (finding discounted share prices) is as easy as it’s ever
been, which of course is both good and bad with almost every share around the world
trading in a range that makes it eligible to be included in our recovery strategy. In fact, in
the past I focused on particular areas or industries, because that’s where we found
recovery-type stocks – today I can look almost anywhere. The bad news is that it requires
even more discipline to use our most precious resource (our analytical time) in the most
effective way.
Recession has gripped most countries in the world with one or two exceptions (China
being the most important), but it is not a barrier to investing in what we think are quality
value stocks within the recovery mandate. In fact, the quality of companies that we can
now place in the recovery category is better than ever, and that’s why we reopened the
Fund. We’d had to close it because there weren’t stocks available with the right liquidity
– now we can find all sorts of high-quality, large-cap liquid stocks to look at. The issue
for us now is one of timing.
H o w F a r H a ve C e rta in S to c k s F a lle n in th is
C ris is ?
2 0 0 7 /0 8 2 0 0 8 L ow C u rre n t P ric e P e a k to Bounce
Peak tro u g h (% )
C re d it C ris is
N e w D ra go n A sia 3 0 .3 0 5 .0 8 7 .0 0 -8 3 ?
C o rp .
S ino L a nd 2 9 .3 5 5 .7 0 6 .9 7 -8 1 ?
G re a t E a gle H ld gs L td . 3 3 .8 5 6 .9 0 9 .0 8 -8 0 ?
K e rry P ro pe rtie s L td . 7 3 .1 5 1 5 .1 8 1 5 .1 8 -7 9 ?
W ha rf 4 6 .9 0 1 1 .9 0 1 7 .0 0 -7 5 ?
H e nd e rso n L a nd 7 8 .4 0 2 2 .8 0 3 0 .0 0 -7 1 ?
Sun H ung Kai 1 7 2 .8 0 5 6 .0 5 6 9 .0 0 -6 8 ?
P ro pe rtie s
H a n g L u n g P ro p 3 9 .1 5 1 3 .8 8 1 7 .4 4 -6 5 ?
C he u n g K o n g H ld gs 1 5 8 .5 0 6 0 .0 0 7 9 .2 0 -6 2 ?
L td .
H o n gK o n g L a nd 5 .2 0 2 .2 5 2 .5 7 -5 7 ?
H ysa n D e v e lo p m e nts 2 5 .7 0 1 1 .3 0 1 3 .1 4 -5 6 ?
C o . L td .
N ov e m b e r 20 08
45
To underscore this point, let’s look at some critical market-valuation multiples. They’re
all at least one standard deviation below the ten-year average and they’re all pretty much
at ten-year lows. The MSCI Asia ex-Japan or the Hang Seng – whatever index you
choose to look at, is at a very attractive valuation.
For example, if you look at the worst bear markets over the last 100 years this is the
second worst, surpassed only by the U.S. downturn from 1929 to 1932. And we’ve had
some markets such as Russia, and the Ukraine and sectors like Chinese real estate that
have come close to matching the 1929-1932 sell-off. At its low, MSCI Asia ex-Japan had

3. fallen about 65% – well below the bear markets of 1973, the tech crash and Asian
currency crisis of 1997.
C h in a : P ric e /E a rn in g s M u ltip le is A p p ro a c h in g
th e P re vio u s L o w s S e t in 2 0 0 2 & 1 9 9 8
5 7 .6 x
3 7 .6 x
1 7 .6 x
D e c ‘9 7 D e c ‘0 0 D e c ‘0 5
C S L A ev a lu @ to r
34
To some extent the markets have anticipated the economy on the way down. We know
from history that it usually anticipates the economy on the way back. But how far in
advance of a turnaround do we put money to work in these markets? In preparation,
we’ve been building up our cash position to take advantage of some of the bargains out
there – the best I’ve ever seen. We’ve started putting some of our cash to work in high-
yielding bonds, with yield-to-maturity in some cases in excess of 20%.
If you go back to 2002, we did have some distressed bonds (corporates and sovereigns) in
the Fund that did very well. But now I’m not focusing on them for total return as much as
I am for their relative low risk. In addition, we are buying low-risk high-yielding equities,
in particular Singapore and Hong Kong REITs, yielding up to 20%.
We’re using these as a cash equivalent because the cash position in the Fund did get up to
almost 35% last year and it’s been 25% recently. While we consider putting more money
to work, we will continue to build up the bond and high-yield equity part of the portfolio,
which now has about a 10% weighting and could reach 20%. So we’re keeping the
integrity of the recovery strategy but we’re taking advantage of that to maximize income.
And I think that will be very helpful in two ways: it’s a good defensive strategy with a
decent rate of return, even after hedging costs.

4. What’s next for emerging markets?
China and Asia are important to the Fund in many ways, even though Asian companies in
the Fund have been among its worst performers. We outperformed the local markets
elsewhere, but that’s not a huge victory in the sense that over the last 12 months Ukraine
was probably the worst performing equity market in the world, down over 90%. You’ve
got an environment now where there’s a real aversion to investing in Eastern Europe –
not just in Ukraine and Russia but all the related former CIS countries. Even Poland
through Romania and Bulgaria are being tarred more or less with the same brush. In
Ukraine and Russian the yield on some sovereign bonds is trading up around 30% yield-
to-maturity. And some corporate bonds are trading around 50% to 60% yield-to-maturity,
and actually these companies probably are not going to go bust.
I think people tend to stereotype these countries and foreign investors basically left those
markets to the locals. Normally this is a good sign if you’re a buyer, because the locals
sell at highs and buy at lows – foreign investors tend to do the reverse. We’re going to try
and position ourselves with the locals – that’s usually a more sensible way to approach
things because they actually know what the values are.
Credit Suisse has compiled a vulnerability scorecard for 2009, which is designed to show
which countries in the world are the riskiest from an investment standpoint. Iceland is the
worst, followed by Bulgaria, Lithuania, and Estonia. The point I’m making is that the
Ukraine is considered less risky than the United Kingdom and the United States. Russia
is also actually one of the less risky countries in the world. But looking at how investors
have been acting recently, I’d say a lot people are forgetting this.
Russia and Ukraine are countries that know how to handle adversity. Clearly their
currencies have suffered hugely from capital flight. They now seem to be stabilizing,
although I wouldn’t want to predict that they could not fall again. But remember, over the
last ten years – real GDP per capita has gone up ten times in Russia and about six times
in Ukraine. Russia’s foreign debt to GDP is at a very low ratio, and it is a significant net
foreign asset creditor, although you wouldn’t believe that from what you’ve read.
Both these economies are also more broadly based than you would believe, although
Russia is still primarily an oil-and-metals-based economy, but they are still producing
products that people need, they are still generating wealth for the local citizens and there
is a remarkably stable attitude in the streets of both Moscow and Kiev.
So this crisis is a financial crisis that has clearly contaminated the real economy and
damaged the values of companies, but it’s also created some attractive opportunities. For
example, we purchased Russia’s Kazan Helicopter at 21 cents a share and the last
reported trade on the main Russian exchange was 96 cents.
Kazan’s parent company was buying these shares in the market 12 months ago at $1.35,
so you might think that the company is in worse shape today than it was a year ago. Not
so. The order book is better, and its margins have improved significantly. I met with

5. management and we went through the cost structure. About 38% of their costs are in
rubles, which was helpful because over 90% of their sales are in U.S. dollars. At 21 cents
this company is valued at about $34 million. Well, it should make that in EBIT (earnings
before interest and taxes) this year. So it’s on our books at one-times EBIT. Clearly the
position has shrunk, but Kazan will be important to the Fund in future, and its stock could
easily be $1.50 as it picks up business.
So it does seem very gloomy, particularly when you have limited data, but things aren’t
nearly as bad on the ground. And the same is true of the other big area of the Fund, which
was affected by this downdraft: the Chinese real estate market. It’s interesting to note in
February 2009 that residential sales in China were up nearly 30% year-on-year from 2008
and 20% over January. But with one or two exceptions, such as Shenzhen, the property
market is responding to the Chinese stimulation package.
China is in a great position to actually apply sensible stimulation, because it has huge
surpluses, both domestic and foreign – over $2 trillion in fact. In addition, since 2006 the
Chinese government depressed the housing market, but is no longer doing so. Now with
the greater liquidity that has been injected into the banking system through reducing
reserve requirements, plus incentives from local government and lower interest rates,
home affordability between September and January went up by 35%. So you can see why
this might have brought people back to the sector.
So these are the areas where we’re seeing some signs of life again. We hold 7% to 8%
positions, which is obviously much reduced from where they were before the crisis,
which was over 15% – and the potential to bounce back is what really excites me.
The margin of safety has rarely been better
In 2003, the Recovery Fund was coming out of a very difficult market, and the price to
the net asset value (NAV) mark-to-market of the Fund at that time was about 0.9. Then in
April 2006, which is when we closed the Fund, it had risen to about 1.3, which was
somewhat expensive. Today I think it’s about 0.35. Obviously this is a historic number in
the sense that it’s driven by 2008 year-end data and it is clear that asset values are coming
down in a lot of areas, particularly property-related assets. At the end of 2009 we would
expect the NAVs to be lower than at the end of 2008.
But 0.35 is staggeringly low and much lower than it’s ever been, and even if we assume
significant asset erosion it’s hard to see how it goes above 0.5, which is a huge margin of
safety. It means we really are buying good assets at 50 cents on the dollar under some
pretty depressed valuation scenarios.
Going back to 2003 the price-to-earnings ratio in the Fund was about 6.5. In April 2006,
again when we closed the Fund, the PE had risen to over 11. Today we think it’s just over
5, which is as cheap as it has ever been. Now again, earnings in 2009 are probably going
to be lower than 2008, but even if they’re off 30%, you can see that the PE even under
that scenario is less than 7. Which is not expensive.

6. We don’t have the same history for the Mackenzie Emerging Markets Value Class but the
numbers are pretty similar. On a NAV to mark-to-market basis they’re almost identical at
0.35 with the Recovery Fund and the PE ratio is 4.7 compared to 5.1 in Recovery. The
point is: it’s such a huge margin of safety that it doesn’t matter if we’re 20% wrong or
not.
I’d also like to talk about yield. As I mentioned earlier we are buying some bonds and
high-yielding shares as a preventative measure. In both Recovery and Emerging Markets
the running yield is about 6%. One or two companies will probably lower their dividends
because they think the yield is too high and inevitably one or two will slip. But again we
think the financial metrics overall for the portfolios are extraordinarily attractive.
To address NAV impairment, let’s look at Kazan Helicopters again, which is a perfect
example of why the current pricing of some of these securities is hugely different than
their intrinsic value. If you can buy things at one-times EBIT it’s hard to see how you’d
go wrong. But inevitably this sort of environment uncovers weak and corrupt
management and mistakes have been made.
We haven’t suffered too much from that but we had an agricultural company where
management went crazy with the money they’d raised. They acquired far too much land,
and when banks were no longer willing to lend, they really didn't have sufficient funds to
carry out their program and couldn’t plant as big a crop this year. So they aren’t able to
actually farm all the land, and because the company must raise some more capital, it will
be very dilutive.
What we’re looking at is a situation where the market has indiscriminately taken down
both good and bad businesses. But we can therefore expect some very significant
rebounds when the market starts to discriminate again and be more of an analytical
market rather than the trading momentum and technical market that we have now.
Cash levels in the Recovery Fund are still high
Until recently we were about 25% in cash and that’s one of the things that prompted me
to get more invested. If you go back to 2003 some Asian markets were off nearly 40%
and then we had the SARS outbreak and restaurants emptied, planes stopped flying and
people literally stayed home. That was a terrible time and yet things didn’t really look
that bad. It was a temporary issue. We went down to 1% cash in the Recovery Fund, and
it was absolutely the right thing to do.
Again in 2008 we were active sellers and then the Recovery Fund was reopened and the
cash position built up – at one point it touched 38% because we were preparing a war
chest to take advantage of the sorts of situations, which I was expecting to find in 2009,
although I wasn’t expecting them to affect some of our own holdings as much as it did.
Unfortunately our currency-hedging program has kind of taken a chunk out of that. It’s
there to protect clients and introduce stability with volatile exchange rates. But when the

7. Canadian dollar is weak there’s a huge cash drain from the Fund, and that happened at
the end of last year.
We’ve a decent cash position now, and I’m really looking for several things. I think we
need to see and identify some improvement in the area where all the problems began.
And you can lose sight of this a bit sometimes because there is so much going on and so
much going wrong. But it all started in the U.S. housing market, and then obviously it
moved into the subprime and financial instruments associated with that. Home prices in
California were up over two standard deviations above where they should be on the
affordability index. You could get a mortgage with no questions being asked. This was
insane. Now this was devastating for the U.S. economy in the sense that something like
50% of job creation in the U.S. in the last decade came in the housing industry and
associated trades.
So take that out and the whole job machine goes into reverse. And we continue to see that
impact in the real economy as the situation in housing gets worse. I don’t think you can
really get a turnaround in the economy without stabilizing the housing market and getting
job creation back into the sector. And none of the plans that we’ve seen so far from any
of the political leadership actually deal with this issue properly.
Copper prices are also an important leading indicator. If we can see leading indicators
improve then we can get confidence that what we’re seeing today in the stock market
isn’t just a blip or a bear market rally, but is something more sustainable.
The copper price made an important bottom and has started to come back, but I think it
probably comes down to Chinese buying, which is not sustained, in the sense that the
Chinese ran their reserves down to very low levels last year, partly because they believed
the price would come down (and they were correct of course) and that would be a
negotiating tool for some of their larger contracts. I suspect that process is nearing
completion and then copper will probably move lower again. But I’m not a commodities
expert, but I do think the Chinese are the swing buyer and have disproportionate
influence. So what we need to see is more sustained general buying and a clearer,
stronger bottom in copper.
I’d also like to see treasury rates start to bottom – in fact this ever-decreasing interest rate
environment is a sign of weakness, not a sign of strength.
On the other hand valuations, even if you assume asset write-downs and earnings
declines, are still attractive today. So some of the conditions are falling into place and
selectively we can find some really super stocks to buy. The only question that I have to
decide about is the compound annual rate of return – is it really too early, could I get
them a bit cheaper? But I know that I can buy plenty of stocks right now that are going to
look like absolutely steals in a few years. But how are they going to look in six months?
That’s trickier. But when I see the MSCI Asia ex-Japan ratios are actually the lowest in
recorded history of the index and a third of their highs in 2000, I have a great safety net
there and I know I can find a huge margin of safety in a lot of stocks.

8. It’s interesting also to note that a number of really great investors have started to turn
bullish. Now I think I have to treat some of this with a grain of salt, in particular, Warren
Buffett. I’m concerned that he’s being sort of dragged into politics and also patriotism
with some of his statements. The same could be said of Anthony Bolton in London, who
is the British equivalent of Peter Lynch. But then you get people like Templeton Asset
Management’s Mark Mobius, who has been very quiet but now believes emerging
markets are bottoming. He has more experience than anyone else I know and he doesn’t
like to be wrong. His reputation is entirely bound up with stocks.
And Jeremy Grantham, the founder of GMO, a privately-held global investment
management firm, who has been a bear for a long time, suddenly says it’s right to start
buying stocks in his newsletter. These are people who are in the market every day but
also have a great historical perspective and I think their pronouncements are worth
listening to. So we are starting to put a bit of cash to work, and the names we’ve bought
this year have made us money.
But we’re going to be pretty cautious because this correction is likely to leave markets in
a trading range. The range won’t be narrow, but there are opportunities to buy and sell
and we probably will have to trade a bit more actively to take advantage of those.
How do you see the geographic weight changing in the Recovery Fund?
Last year I expected to increase the weight in the U.S., and it hasn’t happened. Obviously
the U.S. is the most liquid market; lots of big companies and value was beginning to
emerge. One could also make the case that the U.S. – the first economy into recession –
would be the first out. All these things were driving me to consider the U.S.
But there are a few things that have gone rather wrong with this thesis. First, the
valuations aren’t as good as they look. U.S. companies have not been entirely aggressive
in clearing the decks and writing down assets. So we have a lot of balance sheets, which
look better than they really are in terms of their leverage and NAV per share. Also,
earnings are coming off in many areas quite rapidly, and this year in particular looks like
it’s going to be dreadful. And if you think back to the beginning of 2008, analysts’
forecasts for 2008 came down every month on average for the indices. I’m afraid we’re
going to see the same pattern this year.
The real problem for most of these companies excluding the financials, haven’t really
surfaced yet. There'll be a lot of one-offs, which distorts the picture. But if you create a
clean earnings profile for this year for the S&P, which is really partly a work of fact and
art, it doesn’t look actually nearly as good as the headline numbers. It could well be that
the S&P is actually on a current year multiple that’s really very high, at 10 or 11 times
earnings.
So it’s not clear that the values are as compelling as they first looked, in part because the
U.S. has not just a cyclical problem, which is why you would expect it to be first out of

9. recession, but some very deep structural problems, the size and dimension of which
continues to grow.
I’d like to switch back to Asia – a place I visited recently. Things weren’t that great in
most places, but they’re a heck of a lot better than where I sit in London and in New
York. You don’t have the sort of structural problems over there that we’ve got. And you
could say, “Well, doesn’t Asia depend on U.S. and Europe for exports?” And the answer
is “yes and no” in the sense that exports have certainly contributed to the ability of the
region to grow dramatically over the last ten years. But they’ve become decreasingly
important. That’s not to minimize them, and certainly the manufacturing sector of the
economy that’s geared to exports is very depressed, with many small companies closing
up.
But when you look at the balance sheet side of the picture, these countries are financially
very strong. Compared to Europe and the U.S. their banking system is robust, they’ve got
loads of liquidity. Their corporate sector is very strong with very little leverage, in fact
listed companies in Asia have the lowest level of leverage that they’ve had in years.
I think you have to go back to the 1980s to find something comparable. There’s very little
financial risk around. You’ve got a much more favourable profile in all the things that
drive economics like demographics and you’ve got no consumer debt to speak of,
massive savings rates and very low penetration of credit cards.
You do have one or two pockets of problems. Korea, for example, has some things called
KIKOs (knock-in knock-out currency options) and “snowballs” an even more speculative
currency option. And Hong Kong suffered also from some toxic financial products called
“accumulators,” which are effectively leveraged bets on rising markets, which went into
reverse. Of course, last October and November the same investment banks that were
peddling accumulators at the top of the market were peddling “decumulators” at the
bottom. So the financial system and the ability of investment banks to destroy their
clients’ wealth continue unchecked.
However, the general state of the wider Asian economy in the corporate sector and the
consumer sector is remarkably robust. And because there’s no structural problem the only
issue is cyclical. And the cyclical problems will pass and most of the governments,
particularly China, but also India, even Vietnam, have some firepower. Indonesia is still
growing its GDP in a positive sense.
So given that, I have actually had to reconsider. That plus the fact that valuations in Asia
have absolutely collapsed, even to a significantly greater extent than in the U.S., and
Europe, where economic and financial conditions are considerably worse. American
investors in particular have been selling their foreign assets to bring back capital to the
U.S. to cover their problems at home. That’s a big reason why the U.S. dollar has been so
strong – asset repatriation of overseas investments, a phase, which will draw to a
conclusion over the next three to six months.

10. So this all leads me to have had a fairly major rethink over the last three months or so and
realize that actually the best values for a recovery strategy are not in the U.S. They’re in
Asia. And so even though a year ago I was thinking we would be adding to our position
in the U.S. and Europe, and we did add a little bit with money taken from selling things
in Hong Kong and Korea and Indonesia – now we’ll probably redeploy most of it back
into Asia.
What sectors will rally as the global economic picture begins to improve?
I don’t think it’s going to be clear-cut, but let’s look at the example of the Hong Kong
property market. We did some analysis of what happened in 1998/1999 following the
1997 peak and most of the major property companies are still around. Between the 1997
peak and 1998 low, the average decline for these listed companies was about 80%. And
the average bounce in 1999 was about 212%. Which of course actually still left them
quite a bit off their peak but if you capture that sort of move on the way up, that’s pretty
interesting.
Well, at the end of 2008 from the highs of 2007 you have the same group of shares down
about 73%. Not quite as dramatic but pretty significant. And indeed we did buy one of
them, although in retrospect I wish I’d bought more in January, because those particular
shares are up about 70% so far this year. It’s a sector issue rather than a stock-picking
issue. And I think this is the point.
There are going to be pockets of huge, oversold shares and under most extreme scenarios,
assuming that office values in Hong Kong fall by 60% and retail property by 40% and so
you can still calculate some of these company’s NAVs out to the end of 2010, which is
probably the trough point for NAV calculations. Because they’re lagging indicators, even
if they are factored into the model you could buy these companies at 50% off a depressed
NAV. So they were clearly way oversold. And I think there are going to be more
opportunities like that. We need to perhaps be a little bit more confident in taking
advantage of them.
At the same time, we want to stay away from the manufacturing sector, where there’s
huge over-capacity, particularly in companies that sell machinery and other products into
the sector.
Infrastructure programs look promising. We really like high-yield shares, because they
have both defensive qualities and yet offer us upside when we get a recovery, which is
why we’ve been buying a lot of property REITs in Singapore in particular on these very
high yields at discounts to depressed asset values. I think the key is property here.

11. 1 9 9 8 A s ia n C ris is : H o w B ig w a s th e B o u n c e
F ro m th e B o tto m ?
1 9 98 A s ia n C ris is 9 7 P e ak 98 Low 9 9 H ig h P e a k to tro u g h 99 B ounce 9 9 H ig h V s . 9 7
(% ) (% ) H ig h (% )
K e rry P ro pe rtie s 2 1 .2 0 2 .5 3 1 2 .4 0 -8 8 391 -4 2
L td .
W ha rf 3 7 .0 7 5 .8 6 2 4 .0 7 -8 4 310 -3 5
Sun H ung Kai 1 0 6 .0 0 2 1 .6 0 8 8 .0 0 -8 0 307 -1 7
P ro pe rtie s
C he u n g K o n g 9 6 .7 5 2 8 .8 5 9 9 .5 0 -7 0 245 3
N e w D ra go n A sia 5 3 .3 0 7 .2 1 2 4 .4 0 -8 6 238 -5 4
C o rp .
G re a t E a gle H ld gs 3 6 .2 0 5 .3 5 1 6 .0 0 -8 5 199 -5 6
L td .
H ysa n D e v . C o . L td . 3 0 .3 0 4 .7 3 1 2 .9 0 -8 4 173 -5 7
S ino L a nd 9 .4 0 1 .9 1 5 .2 0 -8 0 172 -4 5
H e nd e rso n L a nd 7 7 .5 0 2 0 .3 0 5 2 .7 5 -7 4 160 -3 2
H a n g L u n g P ro p 1 1 .1 5 3 .1 3 8 .0 0 -7 2 156 -2 8
H o n gK o n g L a nd 3 .4 2 0 .8 0 1 .7 0 -7 7 113 -5 0
44
So service businesses and consumer non-durables are holding up much better and will be
beneficiaries of any kind of stimulation. And actually some Asian banks may be worth
looking at. Because, as I said earlier, the U.S. banking system has to be nationalized and
that’s probably true throughout Europe, but it’s not in Asia.
Asian banks have been much more cautious in lending standards and have very low
delinquency rates. With one or two exceptions they’ve managed to steer clear of all these
toxic assets. The liquidity is great, the situation is robust, and we have statements from
people like the Thai minister of finance saying that the problem with his banking system
is that it has too much liquidity and his banks are in great shape and he might consider
letting some more foreigners come and compete. So the Asian bank sector is an area that
we have actually been buying a little of recently.
Will Canadian markets benefit as natural resources are consumed to build
infrastructure material throughout China and elsewhere?
In January, the vice-premier of China said his country was going to grow its GDP at 8%
this year. It’s difficult to see how they will actually do that, but the Chinese have one of
the smartest governments in the world, and they have the firepower probably to do a lot
of this stuff this year and next, by accelerating infrastructure programs.
China has singled out railway construction; more than 40 airports are under construction
and roads need to be built and overhauled in the interior. As for the property market, as I
said earlier, the government was trying to depress it because there was too much of a
boom. But there was never really a bubble in the same way as there was in the U.S. and
the UK. So these are obviously the big users of certain types of commodities but not

12. others. But commodities, which are linked to infrastructure, are certainly going to have
more robust demand characteristics than those linked to the manufacturing industry.
And don’t forget the Chinese government can stimulate demand through central
command and control. When it tells the bank to lend for housing, it does. When it tells
them to stop, they stop. These factors will help certain commodities.
How seriously should be take the Chinese call for a new world currency?
We’ve had one in the past and it’s called gold. Obviously gold is impractical in the sense
that if we’d stuck with gold we could never have had the explosion of world trade,
because you can’t ship the amount of gold around the world that we’d need to have
created as a way of compensating for the huge U.S. trade deficits over the last ten years.
But I think the Chinese idea deserves a lot of exploration and consideration, because a lot
of the problems we’ve got right now are due to currency problems, which have
exacerbated real problems and made them much worse than they ever needed to be. And
you only have to think of the Asian crisis of 1997/1998 to see that.