HomeFinancial InsightsCompelling brown jewels on sale

Compelling brown jewels on sale

Matein Khalid

If 2021 was an annus mirabilis for investors in US equities, Big Tech and REITs (we know who you are!). It was unquestionably an annus horribilis for China, the Big Daddy of emerging market (EM) equities. President Xi’s regulatory assault triggered a 40 to 50% blood bath in Chinese internet stocks (Didi, tera holder dewana. Hare Ram ye dictator ka zamana!) at a time when Chinese PMI/industrial production were in free fall and the PBOC’s monetary policy stands inexplicably too tight. No wonder the MSCI EM Index, dominated by the Chinese colossus has lost 9% while the S&P 500 is up 20% in 2021.

The MSCI EM Index was never my loadstar in emerging markets investing as I do my country/FX/sector/corporate analysis from the bottom up and in response to the macro zeitgeist du jour. For instance, the flagship Vietnamese equities fund I track has tripled in US dollars over the past eight years, a time of distress and losses for EM megacap index huggers.

Ken-san’s Vietnam Fund is up 17% in 2021 while a Jaipuri bro’s Nifty stock picks are up 300% in the past two years. You just got to know the guys with the right market intel in South Bombay and North Saigon.

I believe MSCI EM still has downside risk since my macro barometer in the Middle Kingdom is still bearish equities. Yet I cannot deny that there are some compelling crown jewels on sale in the dark alleys of the world at 6 to 7 times earnings where my risk/reward calculus suggests a 25% total return is a high probability outcome.

From Indian plywood to Russian banking, from Argentine e-commerce to Taiwanese computer components, there are tangible money making ideas in the Third World.

Shakespeare said that a rose by any other name, smells just as sweet. I say stagflation by any other name stinks just as sour. Weak August jobs report confirms that all is not well in the best of all Panglosian world even while the inflation metrics in the US go ballistic.

Uncle J is still in his spasm of macro denial but will have to begin the taper at the November FOMC or face a palace coup in the final vote. The hurricane damage and the delta variant virus are both hitting growth but stimulating the inflation djinns who haunt America. Inflation is about as “transitory” as the COVID virus and not to accept this existential fact is to live in cloud cuckoo land, even if you happen to be the most powerful central banker in the known universe.

Labor force participation is a miserable 61.7% even though 6 million Americans will lose their $300 a week dole cheque, an amount for which millions of labourers and maids toil 80 hours a week in the Gulf.

Wages spiked in August even though net-zero workers entered the labour force. I used to read the Harry Potter books for my twins and I was enthralled by Lord Voldemort, who evoked such fear that even his name could not be uttered. So Powell will never utter the word stagflation in public, yet Lord Voldemort is now among us.

Matein Khalid is Chief Investment Officer with Asas Capital

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