(MENAFN- Khaleej Times) When Ben Bernanke uttered the word "taper" in May 2013, he triggered a bloodbath in emerging markets and a free fall in "fragile five" currencies that included the Indian rupee and the Indonesian rupiah. However, Asian equities markets, while not immune to a Fed rate hike, are far better positioned for higher US dollar interest rates than in 2013, let alone 2007 or 1998. The collapse in oil prices, the highest growth rates in emerging markets (India, Indonesia, Philippines), structural reforms and record current account deficits are all compelling arguments to invest in Asian equities.
This is not to deny that Asian markets face very real political and economic risks. Another devaluation of the Chinese yuan or a hard landing in the People's Republic could be catastrophic for Asian exporters. The systemic corruption in Malaysia, the power of the chaebols in South Korea, the military junta in Thailand, the banking crisis in India, terrorist outrages in Pakistan, the reform deficits of Abenomics, China's military buildup/epic credit bubble and North Korea's nuclear brinkmanship are all subliminal threats to the Asian bull markets. When the Federal Reserve yanks liquidity from global markets with global rate hikes, Asian markets will feel the pain, even if the pain is not on the scale of May 2013. The biggest threat to Asia is a protectionist backlash in Washington under Hillary Clinton or Donald Trump. The Federal Reserve will only raise interest rates after the US election in the December FOMC. The subsequent rise in the US dollar is a clear sword of Damocles for emerging markets, even in Asia's macro fortresses. This is the reason I favour "domestic" themed emerging markets with excellent demographics (Pakistan), markets leveraged to the Apple ecosystem/Silicon Valley (Taiwan) or markets with a reform momentum (Indonesia, India, Vietnam). The Philippines at 18 times forward earnings is the most expensive stock market in Asia and President Duterte's state sanctioned killing spree has unnerved global investors. While I am sceptical about local currency debt in most countries, there is clear value in India, Indonesia, Thailand and Taiwan bonds. Even though the Thai military junta that seized power in May 2014 has no plans to return to the barracks and has consolidated power with its referendum, Bangkok offers selective value at SET 1450. While government spending, not sluggish domestic demand or exports, has goosed Thai GDP growth above three per cent, the military coup has not solved the kingdom's red shirt/yellow shirt social schism or its structural economic woes. Thailand is the Detroit of Southeast Asia and is the gateway to the high growth Mekong Delta. As non-performing loans peak and valuations have fallen to book value, Thai banks offer some of the most compelling value in Southeast Asia. Bangkok Bank and Siam Commercial Bank are my two favourite Thailand banks. The Mainland regulator's decision to allow Chinese insurers to invest in Hong Kong equities has led to a fabulous rally in large cap colossi such as HSBC Holdings. The Hong Kong Shanghai/Shenzhen connect schemes have also boosted Chinese inflows into the former British Crown Colony. At 0.8 times price to book value, China's biggest commercial banks are some of the cheapest companies in Asia (with good reason), with five per cent plus dividend yields. Beijing is determined to maintain the solvency and liquidity of its Big Four bank. I believe the Wall Street hit has created value in the Chinese H share index in Hong Kong at 9400 or eight times earnings. Since the People's Bank of China will increase monetary stimulus, Ping An Insurance, CCB and the Bank of China will rock. The IPO of megabank Postal Savings Bank of China (PSBC) in Hong Kong will be hugely successful as the deal is presold and strategic investors include J.P. Morgan, Temasek, Alipay and Tencent. My favourite country pair trade in Asia? Buy the South Korean index fund against Singapore. Margins and earnings will rise in South Korea thanks to the won/yen cross rate and easy money from the Bank of Korea. The tyrant in Pyongyang will be contained by China and the nuclear test is not a prelude to war on the DMZ. The hottest money making market in Asia? Pakistan at 8.5 times forward earnings and a seven per cent dividend yield! Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. Share
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