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What next for Indian and Hong Kong shares?

Dubai - Future interesting for these markets, writes Matein Khalid

My strategy idea to buy Indian bank shares ahead of the Union Budget and the RBI rate cut made serious money, with a 15 per cent surge in ICICI Bank. Yet Indian equities are not immune to global risk aversion and King Dollar, as the rupee's fall to 67.40 attests. Despite the BJP win in Assam, passing of the bankruptcy code and a "good" monsoon, India is expensive at 17.8 times earnings, a valuation that does not permit any new earnings disappointments, macro shocks or Wall Street black swans.
So I can easily envisage the rupee at 68 on the eve of the June FOMC and the Nifty can fall again to 7,600, another ideal short-term entry point. Positioning is ideal in Indian equities, as even NRI friends are skeptical about the prospects of Dalal Street. Sadly, too many of my NRI friends in Dubai dissed my pleas to short the rupee at 45 in July 2011, since the money supply surged 20 per cent due to then-finance minister Mukerjee and RBI governor Subbarao's ignorance of monetary economics and credible central bank policies. They were devastated in India when the rupee lost 45 per cent of its value in 2011-13 and thus unwilling to believe me when I went gaga on the Modi bandwagon in late summer 2013. I attended an Emirates Hills party where our Sindhi host gave us a "tip" that India's sovereign credit downgrade was imminent. The next evening, I immediately went long Indian ADRs in New York since nothing is so contrarian and persuasive as Emirates Hills "crowd consensus", both Amil and Bhaiban! Psss, wanna buy tip-top K12 British curriculum school baa?
India is a de facto growth stock - a money spinner but only at the right price. Volatility shocks is to Dalal Street what a cross of gold is to Count Dracula - and the vol index has risen to 17. Yet the macro data tracked by my Indian equities guru Himanshu Khandelwal at Asas Capital points to a cyclical growth uptick. Cement, power consumption, freight rates, steel usage, construction equipment and commercial vehicles sales all confirm Himanshu's sector call. The RBI's decision to lower cash maintenance limits on bank reserves have eased stresses on the interbank market and, with the repo rate at 6.5 per cent, the yield on the 10-year Indian G-sec is 7.5 per cent. Consensus earnings (as usual) is iffy at 17 per cent but Himanshu's proprietary models find us at least a dozen potential three baggers in the netherworld of the Nifty cosmos. I hear the monsoon came a week early in Kerala. I find it significant that Sensex volatility metrics are now lower than those in China, South Korea, Thailand and Malaysia. The cognoscenti whisper that Arun Jaitley will soon stun the world with a an Indian sovereign credit rate cut upgrade. Stay tuned!
Hong Kong's Hang Seng index has fallen 32 per cent since last summer in one of Asia's most brutal bear markets. The reasons? Beijing's crackdown on occupy Hong Kong and the media, the Macau anti-corruption crackdown, the ghastly derating of StanChart and HSBC, the 25 per cent King Dollar rally, a property crash in the Crown Colony-turned-SAR and successive meltdown in Mainland H shares due to regulatory/policy mismanagement. Of course, tourism arrivals from China have plunged, the reason for a 30 per cent fall in retail sales despite capital flight from the Middle Kingdom.
Even though Hong Kong is 1,000 Hang Seng points above its February 2016 lows, I would stay short its index fund. A Fed rate hike will lead to a capital exodus from Hong Kong, thanks to the dollar peg. I also cannot accept street consensus for seven per cent profit growth in Honkers large caps in the Hang Seng index. In fact, I believe earnings growth will be negative as the debt chickens from China's trillion-dollar Ponzi scheme (shadow banking system) come home to roost. If the biggest credit Frankenstein in history awakens, the South China Sea is ground zero. Hong Kong's equities and property market bubbles unravel whenever the US dollar surges. The currency peg hits retail, tourism, loan growth, the cost of bank risk, collateral values, funding costs and asset prices at the same time. Dozens of smaller Chinese banks and developers will not survive the property crash. I expect the Hang Seng index can fall to 17,000 by end of 2016.