Report: MidLincoln Emerging Markets Strategy Monthly Reminder
Utilities, Precious Metals, Real Estate, Canada, France are among the worst
You will be able to download all slides in power point for this reportand all data is available excel
Our flagship GEM strategy May document has been released from embargo for non premium clients after a month since its publication. Here it its for your consideration to join ML Premium and get the June document that will be released tomorrow.
This May may prove to be a test for global financial markets in general and DM in particular. Greek problems undermine the stability of the financial markets in Europe, US valuations are quite high while Asia is undergoing transformation caused by the liberalisation of China markets. Overall we maintain that China markets liberalisation is a milestone for global markets. However the notion that liberalisation would necessary cause strength of China currency versus the USD, and therefore massive dollar weakness and e.g strength of the commodities prices is now challenged given that the liberalisation is ongoing now, when China debt problems are so sizeable and acute. Still with more liberalisation of access to local bonds which essentially means partial liberalisation of yuan and with some access to A shares - China is really on the path of becoming a center of financial gravity for global financial markets, the stock market positive reaction just a function of that. Liberalisation of yuan probably means major dollar weakness in the medium term and hence very strong commodities prices in dollar terms, and probably quite a bit higher commodities prices in yuan terms as well. This math which also applies to gold as well as other commodities means that for China byung cheap commodities now while yuan is still cheap would be cheaper than to wait untill yuan strengthened and dollar commodity prices go through the roof. Elsewhere we still like India stocks. India has been a darling of investors for some 15 months or so, but is now essentially range bound since last December, trying to break above 30,000 on Sensex measure. The IMF has upped the 2015 growth forecast for India to some 7.4%, while lower gold imports and lower oil prices has helped to improve India’s net exports. However its probably not enough to buy India at this point on lower gold or oil price.The list of structural reforms and infrastructure spending for India is ambitious yet there is a just scepticism if much of it is doable. We still like India as an investment destination, however India can remain range bound for a while before next stage of the momentum sets it. Brazil stocks had a nice run in April with MSCI Brazil rising up by 15% or so. Still the market is small down YTD, and the economy is in the deep hole. Inflation has been a problem, growth was none, unemployment higher, exports were sluggish while rates have been steadily rising. Now with rates above 13% now the reais has been quite a bit stronger and inflation will be subduing, setting up conditions for special situations local reais bonds trade. Stocks are likely to follow as well, especially the banks and real estate. However Brazil is quite susceptible to negative effects of the rising global rates. Would there be significant move in DM rates, Brazil is likely to take another hit. Despite that the economy is in derail, sanctions are nowhere near end, banking sector at a halt and NPLs looming. Russia is in the midst of the speculative special situation ruble trade that might continue for a while. Investors are piling up to buy local debt on the back of strengthening currency, higher oil prices and lower rates. The whole thing has also been supported with some piece in eastern Ukraine. However in April the truce in Ukraine reached in February has been especially fragile and it looks like there is temptation by siloviki to use the improved monetary conditions to further advance in eastern Ukraine. With more liberalisation of access to local bonds which essentially means partial liberalisation of yuan and with some access to A shares - China is really on the path of becoming a center of financial gravity for global financial markets, the stock market positive reaction just a function of that. Liberalisation of yuan probably means major dollar weakness in the medium term and hence very strong commodities prices in dollar terms, and probably quite a bit higher commodities prices in yuan terms as well. This math which also applies to gold as well as other commodities means that for China byung cheap commodities now while yuan is still cheap would be cheaper than to wait untill yuan strengthened and dollar commodity prices go through the roof. Meanwhile there could be some profit taking in China stocks and some outflow from stocks into bonds on China markets. There could be also some outflow from global bond markets into China domestic bonds South African stocks are doing okay so far, slightly better than emerging markets average. Currency direction is probably an aiding factor for South Africa stocks. But the dollar strength and rand weakness effects offset each other. Therefore overall SA stocks are fairly stable. Communications and consumer stocks is a bet that don’t directly depends on commodities prices and dollar dynamics. As additional positive would our bet on yuan strength and dollar weakness prove right, gold price will be stronger and that will help SA stocks overall. Korean stocks did okay so far this year despite Korean political problems. Yet in the wake of China's domestic markets correction, Korea looks vulnerable. It could also be correcting on the back of higher oil prices and the trade out of importers into exports. And It could also be vulnerable to the profit taking in Korean debt as private debt vs. GDP is even bigger the Chinese. Turkey stock market is one of the few places on the emerging markets where the growth is stagnating this year. Proximity to IS, sluggish growth, capital flight as well as some possible refocus of investors on neighboring Iran causes Turkey sluggish performance this years. Cheaper oil prices period also did not help much to Turkey. But if risk appetite improves further on the emerging markets Turkey will most likely be strongly supported as an underperformer.