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Longs and shorts in Asian share indices

Even though Hong Kong has surged 22 per cent since August, the Hang Seng index still trades at 11.4 times earnings.

The currency peg, China capital inflows, the world’s most spectacular property bull market and HSBC’s valuation rerating under Stuart Gulliver have also contributed to Hong Kong’s bull run. The Hang Seng starts are no longer property developers but domestic China proxies, such as Geely, BYD (a Buffett/Berkshire Hathaway firm) and Dongfeng Motors (all up six to seven per cent last week) and Sands China/Wynn, insurer New China Life. Even a hint of a Fed QE exit or a Chinese reform/data setback could well mean a 1,000-point hit on the Hang Seng. However, the Hang Seng still has compelling value at 22,000.

My bearishness on the Sensex at 20,000 has been vindicated by the subsequent disappointing price action on Dalal Street. Earnings growth, apart from private banks, were a disappointment, despite the weaker rupee. The Sensex prices in 16 per cent earnings growth for 2013, a scenario simply not compatible with the dismal oil, inflation, growth and politics data points I track. India’s dramatic valuation rerating since last August is under threat. The political calendar prevents dramatic reform, FDI fiscal/monetary stimuli at a time when GDP growth falls to five per cent, the lowest in a decade. India is the beloved growth Goldilocks of so many emerging markets fund, a six-year overweight, at a time when the rising current account deficit is funded by offshore hot money. This is a recipe for macroeconomic disaster. I would short the rupee at 53 for a 55 target and reiterate my call for Sensex at 15,000 sometime before Diwali.

Thailand’s bull market since late 2011, just after the election of Yingluck Shinawatra and the floods tragedy, was amplified by the sustained rise in the baht against the dollar and yen. So it is no surprise that offshore funds bought 100 billion baht in Thai equities since November 2. However, foreigners have now sold 12 billion baht of share in Bangkok in February 2013. This is the reason the Thai baht has fallen to 29.85 against the dollar and the finance minister has publicly expressed concern about hot money inflows. It is also no coincidence that the yield on ten year Kingdom of Thailand sovereign baht debt has now risen to 3.65 per cent. The outperformance of smaller cap shares on the SET is also evidence of offshore selling. Margin loans on the SET have risen 25 per cent to 40 billion baht. After a 40 per cent plus return to dollar investors, I believe SET index correction down to 1,400 is highly probable, even imminent. At 1,400, Thailand would trade at 12 times earnings, a compelling re-entry level.

The rise in US Treasury bond yields above two per cent and the end of spread compression means it is unwise to expect much from debt laden utilities, airlines and telecom shares even in Asia. In fact, industrials/technology could be the best beneficiaries of a pro-cyclical tilt by global investors. This means Chinese shares will continue their dramatic rerating since November. It also means South Korea’s Kospi is Asia’s most compelling value buy at eight times forward earnings, a full standard deviation below its historic range. Of course, a view in Korean equities is an implicit view on the won/yen rate. A short term correction to 88-90 does not negate the larger term adjustment in hedge ratios by Japanese life insurers and pro-inflation targeting governors at the Bank of Japan. Can dollar/yen still head to 97 by late summer? Domo arigato, hai!