Making - and losing - money in emerging markets
Either way, there are interesting trends across these areas globally
If ever there was a year to win or lose money big-time in emerging markets, 2016 was it. As an investor in the world's dark alleys (the Third World rebranded as EM!), I am forced to dissect geopolitical, government/monetary policy, foreign exchange, flows, positioning and current account, volatility and credit-cycle trends across emerging markets to develop money-making strategies. It helps that I am a news junkie, since market intelligence via Bloomberg, greed and fear, wars and rumours of wars, travels at the speed of light. So what next in 2016?
Brazil is the world's best-performing stock market in the Year of the Monkey, up 40 per cent for dollar investors, even though Latin America's largest economy suffers its worst recession since the Great Depression, a 10 per cent inflation rate and a sovereign credit downgrade spiral. Why? Regime change. The Dilma Rousseff era is over now that the senate voted for impeachment. Sayonara le bye-bye, Senhora Dilma, and the Workers Party, architects of the $100 billion Petrobras Lava Jato corruption scandal that gutted Brazil. A stronger real, Selic rate cuts, fiscal reforms under Michel Temer, lower inflation and fresh elections with (hopefully) my old Wharton thesis advisor Arminio Fraga as finance minister will take Brazil's Bovespa to 65,000. The real macro trade is in the debt swap market as a receiver of local rates EWZ at 29 is almost 50 per cent above my 20 recommended buy level just before the Rio Carnival. Obrigado, Brazil!
The two major emerging markets to short in 2016 were Poland and China. Andrzej Duda's Law and Justice party's bank tax was a disaster for Warsaw equities and S&P has cut Polska's sovereign rating to BBB+, the first downgrade in a decade. Shanghai was another disaster in 2016 and Xi Jinping should really be renamed Xi (money) Jinxing. China's macro data, epic debt, Ponzi "shadow banking system", corporate profit falls, political Maoist "Part discipline" (in America, you find a party, in China, the Party finds you!) have made investing in the Middle Kingdom impossible for me. It does not help that the only words in Chinese that excite me are chow mein, moo goo gai pai, dim sum and wonton. The China A shares index fund has lost 18 per cent in 2016. I see no reason to invest in a market that defines "irrational exuberance" and Maoism was never good for shareholder value. Only a fool bets against history.
Government policy shifts in 2016 cause me to focus on specific themes, like India's Union Budget/bankruptcy code and Dr Rajan RBI rate cuts on Indian bank shares. Another example is Saudi Arabia's Vision 2030 impact on four-star budget hotels in the holy city of Makkah now that the new royal decree's Ministry of Haj and Umrah will issue 15 million Umrah visas by 2020. This is investment nirvana for investors in Makkah four-star hotels.
It should not surprise any readers of this column that Pakistan is Asia's best-performing stock market for US dollar GCC investors in 2016. Habib Bank rose 20 per cent after I profiled it here as a buy at Rs172. My other favourite Asian market is South Korea, where forward valuations have dropped to 0.89 price/book value, one sigma down Gangnam-style, even though returns on equity have now risen to 8.2 per cent. As Bono's UB40, the best Irish thing to happen in my life since Joyce, Yeats and Oscar once warned me, wise men say only fools rush in but I can't help falling in love with you, you in this case being Seoul's Kospi index at 1,960 as earnings revisions rise even if export orders fall for a sixteenth successive month and Madame Park is nothing like her legendary father Major-General Park, who created the Miracle on the Han River.
Macro opportunity 101? Oil prices have soared 65 per cent, John Kerry has announced the end of Iran sanctions and a Yemen ceasefire could well end yet another tragic Arab civil war. So why has Oman's Bank Muscat fallen to 0.4 Omani riyals or 5.8 times earnings and 0.7 times price to book value when GCC banks trade at 13 times earnings and 1.3 times book value? My love for the Omani sultanate and its people often clouds my investing judgement though I will never forget the Galfar IPO as long as I live. True, Bank Muscat faces government austerity and a higher cost of risk as loan growth slows. Yet the bank's Basel Tier One is 13.8 per cent and capital adequacy ratio is 16 per cent. The divi is five per cent-plus. MSM trading volumes will recover. Project finance will be a windfall. Time to make money in Ruwi!
Matein Khalid is a global equities strategist and fund manager. He can be contacted at email@example.com.
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