(MENAFN- Khaleej Times) The August payrolls data meant a soft US dollar, a rise in gold and, above all, strength in emerging market currencies. The Brazilian real has risen a fabulous 23 per cent this year and Sau Paulo is the world's hottest stock exchange.
The South Korean won is at 15 year high at 1100. Only the Mexican peso is in the dumps, thanks to Wall Street angst over President Trump even though the Banco de Mexico could well hike its policy rate in December and the Hacienda has posted a primary budget surplus (moral of the tale? Buy the Mexican peso on the risk aversion sell off!). The MSCI emerging markets index is up 14 per cent, but indices mean squat to me. While $60 billion in inflows have lifted many boats, it is time to be selective as Opec meets in Algeria, US electorate votes in November and the Federal Reserve could raise interest rates at any time. Dilma's impeachment in Brazil, India's GST tax, Turkey's failed coup attempt, the Hong Kong Shenzhen Connect Scheme and Saudi Arabia's Vision 2030, Pakistan and Colombia's geopolitical turnaround and Russia's rouble debt rerating provided us with strategic money making opportunities in 2016. What next? I believe the Hong Kong H share market rally will continue as the world is far too pessimistic on large cap, cyclical China. The Hang Seng China Enterprise Index (HKCEI) was up 8.9 per cent last month alone as two third of index companies blew apart profit indices. Though the H shares index bottomed in April at 6.4 times earnings, the HKCE is still inexpensive at 8.5 times earnings even though Beijing's monetary and fiscal stimulus has begun to goose profits in cyclicals. Rodrigo Duterte, a self-confessed killer, is a disgrace to the Philippines and the Manila stock market. His abusive language against President Obama has triggered foreign investor selling in Manila. Even though property developer Megaworld rose 25 per cent after I recommended it in this column, I believe Manila is now the most expensive stock market in Southeast Asia at a time of rising sovereign and financial risk. The next secular bull market is in Widodo's Jakarta, not Duterte's Manila. Indonesia has embraced reforms, contained inflation, attracted offshore wealth with its tax amnesty, anchored the rupiah with high real rates (a buy signal when the US economy goes Goldilocks, as it does now), Bank Negara's new monetary transmission regime and continued foreign inflows in Indonesia equities. Pakistani equities will continue to deliver fairy tale returns even though Karachi is the best performing stock market in Asia in 2016 and Pakistani equities have delivered 25 per cent annual returns in US dollars since 2011. Pakistan trades at 8.7 times forward earnings. The Habib Bank shares I recommended in April at Rs174 are now Rs230, up 35 per cent in five months! There are at least four double baggers in Pakistan even now. Will a Fed rate hike in December unnerve Karachi? Yes. A correction in the index to 34-35,000 will be the ideal entry point for new money. I was not surprised that Colombia was the world's best performing emerging market in August, up 10 per cent. This haunted land of Gabriel Garcia Marguez and Shakira and the late, unlamented Don Pablo Escobar of the Medellin cocaine cartel has had a tragic, violent past. Yet the Colombian government's peace deal with the Marxist guerillas of FARC ends a 50 year old civil war, Latin America's oldest. There are 7 million internal refugees in Colombia, more than in Iraq and Syria. The crash in crude oil and coal prices (60% of GDP), El Nino and an inflation spike had led a 20 per cent plunge in the Colombian peso in 2015. Yet the end of the civil war has triggered huge offshore buying interest in the Colombian peso, up 10 per cent in 2016. Bancolombia and Avianca New York ADR will remain white hot as long as Saudi Arabia, Iran, Iraq and Russia do not disappoint the world oil market in Algiers. Thanks to Argentina's spectacular $16 billion sovereign new issue, the rally in Russian Eurobonds and Indian rupee debt, this column caught three of the biggest macro trades in emerging markets. About $12 trillion in German/Swiss/Japanese debt with negative yields is a huge argument to invest in high yield sovereign debt. If my oil call is correct, it is time to load up on bombed out Angolan and Nigerian debt. The best turnaround stories in world finance? Pakistan, Argentina, Brazil, Peru and Colombia. Share
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