(MENAFN- Khaleej Times) Investors, like pre-war French generals, always fight the last war. I am surprised to see so many family offices in the Gulf still hugely overweight emerging markets equities, despite the assets class' dismal performance relative to Wall Street and Japan since 2012. The dramatic fall in crude, gold, iron ore and copper, the surge in the US dollar, Abenomics, the Chinese economic growth decline, the Ukraine war, the failure of Brazil's governance model are only some of the reasons why emerging markets equities have been such a disappointment. Of course, there have been hugely-profitable macro trades that made serious money in 2013-14, such as India, Indonesia, Thailand, the UAE and Saudi Arabia.
The US dollar's rise will soon be reinforced by higher US interest rates, which means a liquidity squeeze in emerging markets. Note that despite the BJP's decisive wins in the general election, Maharashtra and Haryana, $30 billion inflows into Dalal Street, the Indian rupee is still weak against the US dollar at 61-62. Funding risk countries such as Turkey, South Africa, Brazil, Egypt and Indonesia are all at grave risk as currencies depreciate when the current account hemorrhages. Nor do most emerging markets, (unlike my favourite Taiwan) export anything of any real value to the US economy. There is no doubt in my mind that the Yellen Fed will be forced to hike rates if US economic momentum continues and will precipitate a second, uglier May/June 2013-style "taper tantrum" in emerging markets. As if the macro case for emerging markets equities was not awful enough, micro/corporate profits have also disappointed since 2010, mainly due to dismal economic growth, bear markets in commodities, devalued currencies and old fashioned government/corporate mismanagement. Of course, there are huge macro/micro, valuation, positioning and economic difference among emerging markets. Taiwan is not Brazil. Thailand is not Turkey. India is not Russia. The reason I was so bullish on Taiwan, the Philippines, India, Indonesia in the past few years but bearish Brazil, Turkey and Chile was not just due to global macro but vastly divergent trends in EPS growth and margins.
The cheapest major emerging market in the world is now Russia, now trading at 3.8 times earnings, 0.7 times book value and 4.5 per cent dividend yield. Yet cheap is not exactly value. Russia's geopolitics are awful. Putin will not back down in Ukraine and has opted for confrontation with Washington and Berlin, so sanctions remain. The outlook for Urals crude and metals is still bearish. Capital flight is accelerating. The rouble has collapsed. Recession means sharp fall in earnings growth. While I will avoid Russia, I am tracking the Yandex ADR (though not investing yet), looking for levels below 20. Time heals all wounds, even in Russia.
Taiwan trades at 13 times earnings, 1.9 times book value, a dividend yield of three per cent and earnings growth in the 16-to-18 per cent range. I love Taiwan due to its minimal currency risk (11 per cent current account surplus, 1.8 per cent inflation rate) huge leverage to US economic growth and world-class high-tech corporate icons (Acer, Taiwan Semiconductor, Hon Hai, Apple suppliers).
India's Nifty is now 8,300. This is far too expensive for me at near 17 times earnings and three times book value. The strategy in India is to track individual companies and sectors, especially in healthcare/pharma, software and banking. India is a de facto classic "growth stock" that will trade at a premium to emerging market indices.
The violent protest in Mexico against the killing of students by drug cartels in Iguala and a corruption scandal related to a Chinese bullet train consortium tender has hit President Peña Nieto's political credibility. Mexico is far too expensive at 18 times earnings despite leverage to the US growth momentum. Political risk and a collapse in oil price make Mexican equities and the peso unattractive to me.
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