|By Matein Khalid|If Asia is a growth warrant on the global economy, the omens look awful as the IMF just warned the financial glitterati at Davos. Asian equities were the victims of the grim macro investment themes in 2018. Four Federal Reserve interest rate hikes forced Asian central banks to raise borrowing costs to protect embattled local currencies. The Trump White House’s game of chicken on trade and tariffs with China unnerved investor confidence across the Pacific Rim. King Dollar triggered an exodus of flight capital, as did the shadow banking crackdown, forced deleveraging and economic slowdown in the Middle Kingdom. MSCI’s bellwether Asia ex-Japan index plunged 18% in 2018, led by a 20% fall in MSCI China. In several Asian stock markets, I was stunned to see valuations a mere 8 – 10% above lows witnessed in the depths of the global financial crisis in December 2008.
Yet successful investing is not about good or bad but better or worse since a shift in the second derivative presages a turn in the financial markets. This is now happening in Asia. The Powell Fed has abandoned monetary hardball and the capital markets now expect only two Fed Funds hikes in 2019. The US dollar exhibits a loss of momentum in its bull uptrend. The smoke signals from Washington and Beijing suggest a negotiated deal to de-escalate trade tensions is imminent. The woes of the Apple iPhone suppliers and semiconductor/component vendors is priced into stock exchanges in Taiwan and South Korea. US interest rate sensitive but expensive Southeast Asian markets like Duterte’s Philippines and Jokowi’s Indonesia have lost their valuation froth.
While Chinese GDP growth fell to a 28 year lows at 6.6% in 2018, the Politburo and the People’s Bank of China have opted for monetary stimulus on the eve of the National Peoples Congress conclaves in March. Even President Xi Jinping has warned about black swans and “grey rhinos” (risks so obvious they are ignored). As a trader, I live life in the second derivative and the message from the markets is crystal clear. January 2019 is the time to go bottom fishing for value in the constellation of Asia ex-Japan equities. Where?
One, MSCI China has derated to a valuation of 10 times earnings even though earnings growth could well be 12% in 2019. The PBOC has slashed the reserve requirement ratio (RRR) for Chinese banks and thus injected monetary stimulus into the economy. The Politburo could well respond with fiscal stimulus and infrastructure spending to maintain a 6.5% GDP growth target. The sharp rise in the Chinese yuan to 6.75 as trade/tariffs threats eased in Washington seems a replay of the 2016 Shanghai accords. The time to buy China is when Beijing’s policy hits bottom – and this happened a month ago in China. Shanghai could well deliver 25% returns for US dollar investors in 2019.
Two, Thailand is my favourite stock market in Southeast Asia. Bangkok’s SET index trades at 14 times earnings and can well deliver 15% EPS growth as domestic demand/capex/FDI powers economic growth of at least 6% in GDP. The Kingdom of Siam boasts stellar macro metrics – a 9% current account surplus, the Thai baht is the most resilient Asian currency against King Dollar, rising FDI from Japan, the sheer potential of the Mekong Delta. I remember the Thai market returned a phenomenal 160% in 2003, when Thaksin’s Thai Rak Thai party first took power. Can Thailand be the money-making Goldilocks of Southeast Asia in 2019 if the military junta does not botch the election? Yes, the reason I love the major Thai banks as growth/consumption proxies.
The Nifty at 10900 leaves only modest upside for Indian equities at a time-valuations are high on MSCI India at 17.6 times earnings, a full 200 basis points above 10-year averages. It is absurd to forecast the precise result of the Indian general election, but a hung Lok Sabha seems a credible outcome. High valuations and political risk are not the only Achilles heels of the Indian stock market in 2019. There is increasing evidence in the macro data that private consumption and industrial output is decelerating and a new corporate capex cycle is iffy. Global investors are nervous after the BJP’s setbacks in the Rajasthan, Madhya Pradesh and Chhattisgarh state elections. I can envisage a Nifty correction to 9800 this spring. This could be an opportune moment to accumulate ICICI Bank (peak in non-performing loans, declines in funding costs) and Infosys, India’s preeminent IT services colossus that is beneficiary of a weaker rupee and the multiple digital transformations in Silicon Valley. May the ghost of E.M. Forster forgive me, but I expect 2019 to be a stormy passage to India.
Also published on Medium.
