What’s next for HK, S. Korea and India?
Nathan mayer rothschild’s pre-Waterloo advice to buy “when there is blood on the street” now unquestionably applies to South Korea equities. After a spectacular bull run in the first seven months of 2017, the Kospi fell victim to the escalation in geopolitical tensions between Washington and Pyongyang. It is so ironic that the Nuclear Age began in another August 72 years ago after the US dropped two atomic bombs code named Fat Man (Hiroshima) and Little Boy (Nagasaki). History was then tragedy and history now is farce as Fat Man and Little Boy exchanged nuclear threats. The Kospi now trades at 9.8 times earnings, a significant discount to MSCI Asia at 14 times earnings.
Since the nuclear Armageddon scenario on the 38th parallel is absurd, I believe South Korean equities are now the most compelling value trade in Asia. True, foreign investors have been panic selling in the Hermit Kingdom/Republic of Samsung (this megachaebol is 20 per cent of national GDP!). Yet the new centre-left Moon government will boost domestic spending, wage growth, health insurance coverage and deliver a pro-growth supplementary budget. The key electronics/IT sectors can well grow earnings by 40% in the next 12 months. This makes it attractive to accumulate South Korea’s tech bluechips, led by Samsung Electronics even though I doubt if chaebol corruption, low payouts, high accounting risk and the grotesque Kim regime in North Korea will allow a significant valuation rerating of the Kospi index. Yet South Korea’s battered tech/electronics sector and major banks now offer an irresistible risk/reward calculus to me. South Korea is a proxy for a warrant on global economic growth and electronics/ tech cycle. With the first synchronised global expansion since 2010 and Silicon Valley tech ecosystem in boom mode, South Korea exporters will remain no brainer buys in this correction.
The decline in Asia equities in an opportunity to accumulate bellwether shares in China and Hong Kong. President Xi Jinping will ensure economic growth remains stable and no credit shocks roil the financial markets in the run up to the Communist Party’s National People Congress. This means Beijing will attain in Politburo’s 6.5 per cent GDP growth target and the “One Belt, One Road” initiative could well mean $1 trillion in new infrastructure projects that could transform entire sectors of the Chinese economy, notably in the vast western province of Sinkiang. While I normally detest investing in state-owned companies and Orwellian Marxist-Leninist dictatorships, it is impossible to ignore the myriad macro data points in both Mainland China and Hong Kong.
Inflation adjusted interest rates in China are now zero. State reserves have now once again risen above $3 trillion. The People’s Bank of China and the Politburo have cracked down on rampant speculation in property, wealth management products and flight capital outside the Middle Kingdom.
This means Chinese shares traded in Hong Kong will once again attract a tsunami of Mainland domestic liquidity, the reason I believe the H share index could well rise to 12000. Both Mainland pension funds/insurance companies and global investors will accumulate Chinese H shares this autumn. Unlike 2015, there is no margin trading Frankenstein in Hong Kong, the Federal Reserve will not aggressively hike US dollar interest rates, Asia ex-Japan funds are still underweight Chinese H shares and Shanghai A shares are now included in the Morgan Stanley emerging market indices. Chinese H shares in Hong Kong trade at 6.9 times forward earnings, well below their 10-year average multiple of 8.9. Yummy, Comrade Chopsticks!
Indian shares trade at 19 times earnings, far above MSCI China and their own 10 year average multiple of 15.4 times earnings. India has been the crowded, consensus trade in the emerging markets, thanks to $30 billion in offshore debt and equity inflows into Dalal Street attracted by the BJP’s reformist agenda, the prospect of RBI rate cuts and lower inflation, the GST and the highest GDP and corporate earnings growth in Asia. The path to Nifty 10,000 included more than a dollop of “irrational exuberance”, notably in the IPO and small-cap sectors.
India no longer makes sense for a “beta trade” as earnings growth rates decelerates in 2018, possibly to 12 per cent. This means the current India bulls could be gored as the stock market trades one standard deviation above its valuation band. The real money in India will be made via stock selection (my picks are ICICI Bank, HDFC Bank, Cipla) and long duration G-Sec debt, thanks to the highest real interest rates in Asia on the prospect of at least two more RBI rate cuts.