Value strategies in Hong Kong and Indian equities

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Value strategies in Hong Kong and Indian equities
Hong Kong H shares 13 per cent worse in 2016.

Hong Kong H shares are down 13 per cent in 2016 amid the monetary neutron bomb explosion in Shanghai/Shenzhen.

By Matein Khalid/Market View

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Published: Mon 25 Jan 2016, 10:48 PM

Asian equities trade at fairy tale valuations though I know value traps and macro minefields can fleece poor leveraged lambs to the slaughter. Baa baa bankrupt sheep, have you any wool? Asia ex Japan trades at 1.2 times book value and 10.8 times earnings, valuation I last saw in 2002 (Hong Kong SARS), 2008 (Lehman) and 2001 (9/11, TMT bust). The 1998 Asian flu taught me there is nothing sacred about book value, especially in emerging markets where creative accounting would put fiction writers like Stephen King to shame. Nor do I think it is a good idea to go long Asian currencies against King Dollar. Not yet, in any case.
Hong Kong H shares are down 13 per cent in 2016 amid the monetary neutron bomb explosion in Shanghai/Shenzhen. Would I buy the Hang Seng China Enterprise Index? No. Index investing is an idiot's game as it overexposes a portfolio to companies/risks that I do not want. Not usually. Yet when Hong Kong H shares trade cheaper than shares in Pakistan and Oman (half Muscat shares trade below book value), it is time to review "one country, two systems, the Crown Colony that gave the world Bruce Lee, the Star Ferry, Wanchai Suzie Wong and CLSA. Hong Kong H shares now trade at six times earnings after the carnage. No type here. Six times earnings. This is the danse macabre of a wounded, dying El Torro, whose Relative Strength Index is now 23.
The cognoscenti in Dragon Mart advice me to embrace the Chinese consumer, to buy insurer China Life and Internet/auto shares while avoiding the banks/state metals dinosaurs like the plague. One exception: Bank of China at three times earnings (Value Baba, kiya!). This is what happens when a credit bubble goes bust even though Beijing's central banks tells us that non performing loans are only 1.5 per cent. Right - and I am the Emperor of Greenland and Graceland. China's property developers crashed 20 per cent in January 2016 alone, thanks to their US dollar debt load. Yet Vanke has hedged its US dollar/Hong Kong borrowings. The HSCEI traded at 15,000 last May. This puppy is just above 7900 now. Six times earnings, like Putin's Kremlin.
Even though the Sensex has fallen 4,000 points since my 18,000 Sensex call was published last spring, India still commands a valuation premium at 16.8 times earnings that I think is totally unjustified. Why? The RBI's new policy on provisions and the BJP's political witch-hunts against the Maharjahs of Black Money make it certain that India's credit goosed GDP growth rate will disappoint. As offshore funds free Dalal Street, the rupee gets slammed despite the $60 billion windfall of $28 Brent. The failure to pass the Goods and Services (GST) tax or the land acquisition bill, the shock political defeats in New Delhi and Bihar have taken the mickey out of Modinomics. The valuations of Indian banks and my own failed ICICI Bank trade (et tu, Chanda?) tell me that India is on the edge of a systemic banking credit crisis as Oligarch Wallah's billions in offshore borrowing sprees come home to roost. This means the Indian rupee plummets to 72-74 by year end if Dr Rajan gets it right and 80-82 if the Tamil Milton Friedman gets it wrong. Yet can Modi and Chicago School monetarism coexist? No.
So Aisa ex Japan's consensus darling trades at three times book value. As Jeeves might observe poppycock Bertie. This is hunky dory if earnings growth was on a roll but this is not so, thanks to the grim realities of global growth, world trade, the China shock, fiscal austerity and PPI deflation. I worry about capital flight and Dr Rajan flight (back to the non-ivy cloisters of Chicago's South Side) on the Indian rupee. So I love the Infosys ADR, a tad expensive at 18 times earnings but a play on a lower rupee, Big Data, cloud and app development. India was the Jewel in Crown of both the British Empire and the Morgan Stanley emerging markets index. But all good things come to an end. The great Indian bull market has now turned as lethal as the bite of a Raja Naga-Cobra.


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