The good, the bad and the ugly in emerging markets

The rebuilt Royal Palace and the Market Place in the Old Town section of Warsaw. It's not surprising that Poland is 2017's winner emerging market; it is, after all, up 30 per cent year-to-date.

Like the old Clint Eastwood epic Spaghetti Western movie, investing in emerging markets in 2017 was a classic case of the good, the bad and the ugly - and downright fugly!
A few dramatic macro themes I have tried to grasp. One, the meteoric rise of the Chinese Internet and e-commerce. Alibaba ADR, profiled ad infinitum in this column since its New York IPO, is up a stunning 65 per cent in 2017 alone after the company raised revenue growth guidance to 45-49 per cent. Xie Xie (thanks!), Jacko Ma. You are the coolest thing to come out of Middle Kingdom since chicken chowmein. There is no other global business on this scale that can deliver revenue and EPS growth on this epic scale. This is the China I want to invest in, not the state-owned Ponzi schemes listed in Shanghai, Shenzhen and Hong Kong!
Two, emerging-market currencies can gut or groove a stock idea in the Third World. The Egyptian government was forced by a $12 billion IMF loan covenant to devalue the pound from its eight to 18, inflicting catastrophic losses on GCC investors who cannot even get their money back in hard currency. Yet even the tightening of post-Crimean, sanctions, the cyber-espionage scandal with the US and an oil crash did not prevent a rise in the Russian rouble from 61 to 58. The oil crash did take its toll on Moscow equities, the emerging-market Cinderella of 2017!
Three, Donald Trump's protectionism and the murderous Kim Jong Un missiles did everything possible to make South Korea an investment no-go zone in 2017. Even so, South Korea, a classic cyclical exporter, was among the three best performing emerging markets of 2017. In contrast, political shocks like the Gupta brothers corruption scandal and Jacob Zuma's decision to fire respected Finance Minister Pravin Gordhan led to havoc in the South African rand and the Johannesburg stock market. The resignation of President Dilma Rousseff led to epic rallies in the Brazilian real and the Bovespa, though the fairy tale has ended now that her successor is also mired in a sordid bribery scandal. Pakistan's Prime Minister Nawaz Sharif was found to have squirreled untold millions in Panama shell companies and Mayfair flats (who doesn't?) but this did not prevent Karachi from being the best performing stock market in Asia. When Narendra Modi won the UP state election, Indian equities and the rupee soared as financial markets immediately priced a Congress defeat in the 2019 general election. Politics is more critical than economics in emerging markets, even as the asset class' volatility tanks 60 per cent since its 2011 high.
I was not surprised that Poland is 2017's winner emerging market, up 30 per cent year-to-date. Poland is a leveraged proxy for the acceleration of German industrial exports, EU infrastructure largesse and its own property/banking asset revaluation, even though Warsaw is now governed by a populist political party. The Polish zloty has also risen from 4.2 in January to 3.71 against the US dollar now. As I expected, Prague property prices have risen 30 per cent since mid-2015, a lot more than Business Bay or Jumeirah Beach Residence, while the Czech kroner is the most undervalued currency in Europe.
The Turkish country index fund rose from 30 to 42 in 2017 despite multiple political and financial shocks since last summer's abortive military coup attempt against President Erdogan. The AKP government has purged 100,000 members of the Turkish elite, jailed hundreds of journalists, reopened a war against PKK Kurdish secessionists in Anatolia. Ankara has seen its diplomatic relations with Washington, Berlin and the EU plummet and endured multiple terrorist attacks. Despite these shocks 2017 was the year to go bottom fishing in Istanbul's Bhosporus!
South Korea's Kospi was often dissed as the cheapest stock market in Asia. No more. Not even Comrade Kim McDuck's ballistic missile tests or threats to incinerate Seoul, the election of the centre-left President Moon or the arrest of heir to the Samsung conglomerate (chaebol) could prevent a 25 per cent paydirt on the Hermit Kingdom's stock exchange. The markets expect a new paradigm of shareholder value and higher dividend payouts more than they fear Trump's tariffs and North Korean invasion!
A no-go market for me in Asia? The Philippines, as long as Rodrigo Duterte sits in Malacañang Palace. Thousands of dead drug dealers and criminals have not reduced the crime wave and the Makati business elite lives in fear. Brazil's Bovespa could also plummet to 48,000 as Michel Temer resigns and the far left seizes control of the Worker Party in the 2018 election. No lambada in Rio's summer of discontent.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.