Making money in South Asian shares
Matein Khalid / 20 April 2015
However, amid the manic bull run in Hong Kong, I believe there are still great investment opportunities (and yes, significant) risks in South Asia.
The big money in Asia in 2015 has been made in Japan, China and Hong Kong H shares. A world in which Hong Kong exchanges and Clearing can rise 45 per cent in a mere five trading sessions is a world obsessed by Mainland Chinese capital flows into the Hang Seng Index. Trading volumes in Hong Kong have basically doubled and the Shanghai Connect schemes has come to life with a vengeance. However, amid the manic bull run in Hong Kong, I believe there are still great investment opportunities (and yes, significant) risks in South Asia. India, Pakistan, Sri Lanka and Malaysia are four markets I have tracked/invested in.
India’s $2 trillion economy got at least a $50 billion windfall from the crash in oil prices. Modi’s reform agenda has also captured the imagination of the world and led to a cyclical uptick in GDP growth. India has emerged from the 2009-13 stagflation, currency debasement and systemic corruption quagmire bequeathed by Congress misrule and set for the seven per cent GDP growth rate promised by Modinomics. The fall in oil prices (and the current account deficit) narrows rupee risk even though relative inflation rates argue a depreciation to 65 against the US dollar. There could be at least another 25 basis point repo rate cut by the RBI this summer. India also has the highest expected EPS growth rates in Asia at 15-16 per cent. This supports the premium valuation of Indian equities, with the Nifty now at 18 times forward earnings. At a lunch event with the BJP Minister of State for Finance, Sinha quipped “the real finance minister of India is ultimately the monsoon!” Sad but true.
I see no reason to buy Malaysian shares. Kuala Lumpur earnings growth will be gutted by the fall in tin, LNG, crude oil, copper and palm oil prices at a time when it is expensive at almost 16 times earnings. Prime Minister Rajib Razzak’s government is mired in political and corruption crises. Fitch has questioned Malaysia’s single-A sovereign credit rating and a credit downgrade would be catastrophic for Malaysian equities.
The Malaysian ringgit is down six per cent against the US dollar in 2015 alone, making it the weakest currency in Southeast Asia. I believe a long India, short Malaysia, expressed via country index funds, could be a 20 per cent total return trade.
Pakistan was one of Asia’s best-performing frontier markets in 2014, up 34 per cent in US dollar terms. This was despite the continuing war against the Taleban, periodic tensions between Prime Minister Nawaz Sharif and the military high command, an energy crisis and terrorism in Baluchistan. While the won, yen, Indian rupee, baht and rupiah fell against the dollar in 2014, the Pakistani rupee actually rose. Pakistan is still not expensive at nine times earnings and several blue chips offer eight per cent dividends and 15 per cent EPS growth. The privatisation of Habib Bank, the largest bank in Pakistan, was hugely successful. This was the biggest share floatation in the history of Pakistan at almost $1 billion. Habib Bank, which controls almost 20 per cent of retail deposits in a country of 200 million people, is valued at a mere $2.4 billion, not even one-tenth the value of ICICI Bank.
Sri Lanka, a country that has fascinated me since my teenage summer’s spent in Nuwara Eliya and Galle, has finally emerged from a ruinous civil war with the LTTE, the political repression of the Rajpaksa era and decades of economic crises. However, a new president also coincides with one of the South Asia’s true economic turnaround and equities bull markets since 2009, when the civil war ended. Colombo shares rose 90 per cent in 2010 and were up 25 per cent for a US dollar investor even in 2014.
Sri Lanka has been praised by the IMF for its economic policy making, particularly the improvement in the balance of payments, and fall in inflation rate. Colombo is one of the world’s great natural harbours, a future Indian Ocean trading hub, the ancient Serendip Sri Lanka is another long term winner from the crash in oil prices. Sri Lanka’s bank, cement, cable and construction companies could be long-term winners.