Global Investing: Ideas and strategies in emerging markets

Russia's rouble has surged against the US dollar.

Emerging-market equities have been hugely profitable in 2016 but picking the right country/sector for investing was critical. For instance, I thought the Russian rouble at 78 and the Russian equities index fund at 14 were grossly undervalued, despite the geopolitical risks of the Kremlin's intervention in Crimea, eastern Ukraine and Syria. The rouble has surged to 64 against the US dollar and the Russian stock market index fund is up 20 per cent in the last three months. My call to buy Indian banks before the Union Budget, the RBI repo rate cuts, Dr Rajan's banking reforms and a positively-sloped G-Sec rupee yield curve has produced a fabulous 25 per cent return in ICICI, India's largest private sector bank.
Pakistan's catalyst was its military's success against the Taleban, the $6.7 billion IMF loan, President Xi Jinping's state visit and the $46 billion (dream on) Economic Corridor, the MSCI upgrade from frontier to emerging markets and the fall in interest rates to 40-year lows with valuations at eight times earnings. This meant a 20 per cent return in Pakistani equities since March. I went gaga over President Macri's historical win over the Peronists who ruined Argentina since the time Juan Domingo and Evita ruled the roost in the Casa Rosada. Investors went gaga on Buenos Aires bank Banco Macro, which surged 60 per cent in its New York ADR. Emaar Properties rose from 4.5 after my recommendation to Dh6.8 three months later, a stellar 50 per cent return. Nothing beats a well timed emerging markets strategy idea!
Nobody can accuse me of being an emerging markets equities permabull. In fact, I have dissed this asset class since 2011, when it began to underperform US equities. The surge in the US dollar that began in April 2014 made it impossible to recommend emerging markets particularly geopolitical black swans like Russia's invasion of the Crimea, Brazil's mega Petrobras corruption scandal, the 70 per cent crash in crude oil prices, Malaysia's $6 billion state fund rip off and Turkey's renewed war with the Kurdish secessionist PKK is Southeast Anatolia and its bloody blowback on the streets of Istanbul, Izmir and Ankara. I often find my degrees in international relations from Penn help me make more money in emerging markets equities, currencies (the South African rand at 15, the Indian rupee against the Malaysian ringgit since India will be upgraded while Fraudiputra Central faces a sovereign downgrade!) and debt. (Argentina Treasury bills, long duration Indian G-Secs, rupiah bank debt). The macro omens now suggest a high-beta blitz across the emerging markets Maginot Line.
It helps that financial flows to emerging markets (ex-China) have finally turned positive for the first time since 2012. The aggregate emerging-market trade deficit (ex-China) has also turned positive. Chicago Fed Funds/Eurodollar futures markets price no aggressive Fed rate hikes this summer. Brent crude trades above $51 despite no Saudi Arabian agreement on output ceilings in Vienna and a surge in post-sanction Iran exports well beyond IEA forecasts. This macro scenario implies strength in some (but definitely not all) emerging markets currencies, which were devastated by the 2012-15 bear market.
Of course, it is suicidal to be Panglossian on emerging markets at all time, particularly the long-only, oil/retail money-dominated stock markets of the GCC, whose 50 per cent implied volatilities, low liquidity and lack of traded index options/risk insurance products make them some of the most riskiest financial markets on earth. Africa? Only Azania. Of course, China is the constant 800-pound gorilla in this asset class. With a debt load of 240 per cent of GDP, its trillion-dollar Ponzi "shadow banking system" and proven regulatory failures cast a malign shadow at a time when world trade/growth has slumped.
The tragic bomb blasts in Istanbul, near an area north of the Grand Bazaar I know well and a horrific war in the Qandil Mountains turns my thoughts to Turkish equities. The May jobs number was cheered on the Bosphorus as no aggressive Fed rate hikes means Turkey can continue to finance its current account deficit via offshore hot money investing in high-yield lira debt. Economic and earnings momentum has turned positive, despite the ware with the PKK and the Syrian horror story. True, Erdogan's policies have ruined relations with Berlin, Washington, Moscow, Cairo and elsewhere. The sacking of Prime Minister Ahmet Davutoglu was a blow to investor confidence. Still, the big money is made when things go from Godawful to just plain awful on the Potomac - and the Bosphorus!
The writer is a global equities strategist and fund manager.