Here are strategy ideas for dealing with Asian equities
India is the world's consensual overweight emerging market for good reason
The may payroll shock and Janet Yellen's tacit admission that there will be no rate hikes in 2016 are both bullish for emerging market equities, even though Brexit risk and the fall of the Chinese yuan to five year lows, Donald Trump and the fragile geopolitics of Ukraine, parts of the Middle East and the South China Sea are all evident macro risks. For now, my strategy is to accumulate Asian consumption-oriented oil importers that benefit most from no aggressive Fed rate hikes, a fall in Brent crude to $40, and the financial market's faith in the People's Bank of China's monetary stimulus. For now, this leads me to India, South Korea, the Philippines and Hong Kong 'H' shares.
India is the world's consensual overweight emerging market for good reason. GDP growth is 7.6 per cent. The Indian rupee has stabilised at 66-67. The BJP has consolidated its power in the Lok Sabha and the state assemblies. The monsoon in Kerala is optimistic for rural incomes and food inflation. The Union Budget has reassured global investors, as has the shrinkage in the fiscal and current account deficit. The RBI has slashed the repo rate to 6.5 per cent, implemented a credible inflation targeting regime, eased money market liquidity and led the Modi government's historic bank asset reform campaign. India is not cheap at 16.5 times forward earnings but growth stocks are never cheap. ICICI Bank, which I thought was grossly undervalued at Rs185 before the Union Budget, is now Rs250. The Bharat Mata carry trade, long rupee against the Singapore dollar, was also profitable. While I am still bullish Indian private banks, Maruthi Suzuki and Mahindra & Mahindra, beneficiaries of higher cyclical growth, rural incomes and civil servant wages. I expect the Sensex trading range will be between 24,000 and 29,000 in 2016.
Now that the Kospi has fallen to 1,960, I believe South Korean shares offer a compelling risk reward calculus at 10 times earnings, one times book value. South Korea has traded at a significant discount to other major Asian markets due to the constant geopolitical threat from a militarised, erratic, Stalinist North Korea that periodically launches long-range missiles and has tested hydrogen bombs. South Korean family-owned conglomerates (chaebols) were the architects of the late President Major General Park's "miracle on the Han River" but are notorious for poor corporate governance, with some of the lowest dividend yields and returns on equity in the Pacific Rim. Foreign fund managers have also been major sellers of Seoul equities in 2016. Of course, South Korea is an ex-Asia tiger since 2015 growth was only two per cent and deflation risk in China/Japan will hit exporter prospects. However, the surge in the Japanese yen to 104 is a positive macro ballast for South Korea. This might be the moment to accumulate the Republic of Samsung once again if it trades below 1.4 million won.
Despite China's economic growth decline, the rise of the affluent Chinese consumers offers money-making opportunities in Hong Kong's H Shares market, down 26 per cent in the past year. I saw fabulous long-term investing opportunities in China's Internet firms and healthcare operators, though only at the right price points. I would love to accumulate Baidu New York ADR in the 140-145 range, now possible since the rise in volatility has made put option premium generation strategies viable. The fall in operating margins and paid search placements for dodgy Chinese "miracle drug" cures have slammed the shares. It would be ideal to accumulate Baidu at 20 times earnings or near $125-$128, which can happen if Britain votes to leave the EU. After all, the Street expects 25 per cent earnings growth in this Middle Kingdom Google.
As I thought, the Philippines continues to make money under president-elect Rodrigo Duterte. This is another demographics/remittances ($30 billion) and BPO ($25 billion) emerging markets on a sovereign upgrade cycle. My recommended property developer Megaworld is now up 25 per cent since I published my "Thrilla in Manila" strategy column on the eve of the election!
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