Value ideas amid the carnage in Asian shares

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Value ideas amid the carnage in Asian shares
Pakistan is an Asian frontier market - to be upgraded by MSCI to emerging markets - that has compelling value at eight times forward earnings. Pakistani shares retuned 25 per cent per year for US dollar investors for five successive years.

Matein Khalid explains why the region's stock markets have not been spared by global cues causing volatility.

By Matein Khalid/Macro Ideas

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Published: Mon 5 Oct 2015, 12:00 AM

Last updated: Mon 5 Oct 2015, 9:55 AM

2015 has been a horror story for emerging markets and Asian shares have not escaped the fallout from the 40 per cent plunge in Shanghai/Shenzhen since June. Yet financial markets discount the future while UAE investors invariably extrapolate the recent past. So even while I resurrect the ghosts of 1998 when Suharto's regime fell amid anti-Chinese riots in Jakarta, South Korea was forced to accept a $57 billion IMF loan, Malaysia imposed capital controls, the Thai baht was in free-fall and India/Pakistan fought a hot war in Kargil, I search for value ideas in the unloved, unsettled Asian stock exchanges.
Sentiment and capital flows can devastate markets even when fundamentals are intact. I concede that this is not the case in certain Asian markets. Take Malaysia; my bearishness on the ringgit at 3.40 last spring has been vindicated with a vengeance, now that it has plunged to 4.45. South-east Asia's largest crude oil and LNG producer now faces a Moody's sovereign debt downgrade, a consumer debt crisis, a $12 billion sovereign wealth fund scandal and an open feud between Prime Minister Najib Razzak and the Malay political elite in Unmo. I would not be surprised to see the Malaysian ringgit test its 1998 lows at 4.80 and see no investment case to cover the strategic short on the Malaysia Fund. The Wall Street herds are negative on Malaysia and, in this case, I follow the hoofbeat of the herds.
Japan is a different story. At 17,000, the Nikkei Dow traded at 13 times forward earnings and 1.3 times forward book value, with half the companies in Section One of the Tokyo Stock Exchange trading below book value. Wall Street's risk spasm created safe-haven flows in the yen and the shock waves from the China bust was a disaster for Japan's commodities/trading firms, as the profit warnings from Kobe Steel and Mitsui demonstrate. There is justified scepticism about the third arrow of Abenomics (structural reform) but evidence of reflation is undeniable, from rising corporate profit margins, wage growth, land price rises and even rises in shareholder equity and dividend payouts. The only real arrow of Abenomics that matters is the Bank of Japan's monetary policy, the most aggressive quant easing program relative to GDP on the planet. I remember October 2015 when the Nikkei Dow was at 15,000 and Kuroda-san responded to deflation risk with a "shock and awe" QE that led to a plunge in the yen from 105 to 120 and a 40 per cent rally in the Nikkei Dow that I chronicled in this column. Japan has the strongest earnings momentum in the developed world. At 16,500-17,000, the yen hedged Wisdom Tree Japan fund is a no brainer as well as reflation beneficiaries such as property developer Mitsui Fudosan or megabanks Mitsubishi UFJ and Sumitomo Mitsui.
My certainty that monetary easing was imminent in India was also vindicated when the Reserve Bank of India cut its repo rate by 50 basis points. This makes the Indian rupee and G-Sec (government debt) market a safe haven at a time when Russian, Brazil, Chinese, Malaysian and Indonesian debt was leprosy. With consumer inflation at 3.7 per cent, 20 per cent retail loan growth, post Lehman lows in valuations, the highest profitability (RoE, RoA) metrics in international banking and a steeper rupee money market yield curve, I am bullish on private sector Indian banks such as HDFC, ICICI and Axis. I hear my friend Chris Wood, the strategist at CLSA, identified India and Japan as Asia's winner markets at his firm's annual conclave in Hong Kong. I agree.
I am still negative on the Asean due to political uncertainty in Thailand, the commodities price catastrophe in Malaysia and Indonesia and high valuations in the Philippines. South-east Asian currencies will be hugely vulnerable to a Federal Reserve monetary tightening cycle that begins in December. Even Singapore will slip into recession as world trade shrinks.
Pakistan is an Asian frontier market (to be upgraded by MSCI to emerging markets) that has compelling value at eight times forward earnings. Sure, the sovereign credit rating is a mere B, way below investment grade but Islamabad still managed to borrow $3 billion in Eurobonds/sukuk, thanks to financial lifelines from Washington, Riyadh and Beijing. Pakistani shares retuned 25 per cent per year for US dollar investors for five successive years. Proves the old Street cliche. The big money is made when things move from Godawful to just plain awful.


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