Lessons from South Korea’s election and Asian markets
The election of south korea’s new President Moon Jae-in will not derail the stellar bullish momentum on the Kospi in 2017, up four per cent in last week alone. South Korea will improve relations with China, a potential ballast for tourism and auto stocks. President Moon has also promised to negotiate the anti Thaad missile defence system with the US, defuse geopolitical tensions with Pyongyang and reform the nation’s powerful but corruption-riddled chaebol conglomerates.
After the impeachment trauma, South Korea finally offers global investors the political visibility and reform agenda they crave. Awful corporate governance, notoriously low dividend payout ratios, an opaque boardroom culture and North Korea’s risk premium has ensured that South Korea trades at the cheapest valuations of any major Asian stock exchange. Will this change under President Moon? No.
I have heard bombast about chaebol reform all my adult life. In any case, South Korea has to contend with Washington’s protectionist policies, China’s liquidity squeeze and the nuclear armed Supreme Leader in North Korea. A centre-left government in Seoul will be bullish for South Korean banks, among the cheapest in Asia, notably KB Financial and Woori. If Beijing ends the boycott of South Korean cars, Kia Motors and Hyundai Motors will surge at least 20% per cent While I think the won is a tad toppy at 1,132, the Hermit Kingdom will remain a money making theme in 2017, with Moon in the Blue House. O blue moon!
The Asia ex-Japan index gave us its most profitable four months since 1991, when the regional stock exchanges skyrocketed after the liberation of Kuwait and the swift US victory over Saddam Hussein in the Gulf War. EPS growth can be at least 14-15 per cent in 2017 and valuations are not excessive on the Asia ex-Japan index at 13 times forward earnings and 1.45 times forward price to book value at a time when crude oil has slumped below $50 once again. The positioning data also suggests that global fund managers are still one sigma or 400-basis-point underweight emerging Asia while they are maximum overweight Dalal Street.
Summer is usually a somnolent period for Asian equities and I believe the easy money in the index has now been made, especially since China has once again begun to emit a deflation SOS. Note that Dalian iron ore is down 30 per cent and Shanghai copper (Dr Copper is as misleading an indicator of economic cycles in the Middle Kingdom as it is on Wall Street!) has slid down, as have Chinese A shares and Shenzhen shares. The MSCI Emerging Market Asia index fund is up an incredible 28 per cent since I began to go gaga over Asian equities in this column last April and May. The Pakistani and Indian midcap banks I recommended in 2016 are now up 40-50 per cent.
As the macro chill rises in both Washington and Beijing, I believe it is now time to book profits and wait for the political and financial storm clouds to pass. Emerging Asian equities cannot rise to new highs while the commodities complex gets skinned alive, US nuclear submarines prowl the coast of North Korea and the US President fires FBI Director Comey in the midst of a critical investigation. The moment the Volatility Index dips below 10, I believe it is prudent to buy dirt-cheap insurance to book profits in emerging Asia. No guts, no glory — no puts, no story! In any case, I doubt if the wild bull market in emerging Asia will survive the at least seven Fed rate hikes I expect in 2017 and 2018. China is at least 25 per cent of the emerging markets constellation, as the world learnt the hard way in August 2015 and January 2016.
From a strategy perspective, it is now evident that India’s Nifty index is the mother of all stock market bubbles at 9,300 or almost 20 times earnings. Almost nine out of ten midcap shares are above their 200 day moving averages and even the gloriously named Motilal Oswal (Yoda) Next Trillion Dollar Fund has stopped accepting new money. I expect the Nifty index to easily fall to 8,500 as Mr Marketji’s pendulum swings once again from greed to fear. Risk is a four-letter word. So is ruin.
Australian Treasurer Scott Morrison’s levy on the big banks on the eve of a housing peak also gives me a green light to short Aussie bank centre stocks. Drake and Skull’s restructuring? Skull and bones now. I do not seek to understand, change or explain the world, only to make money from its madness!