Tuesday, November 11th, 2014

Around the World

For the time being bulls and bears of US equities have fought each other almost to a standstill. The dollar is strong and Thanksgiving is just around the corner. Everything in the USA seems very settled; so it is time to turn our attention to the rest of the world. The rest of this note is devoted to a discussion of what’s hot, and what’s not, in global equities outside the US.

Our top five countries are all in Asia: India; Thailand; Philippines; Hong Kong and China. In India (our top pick) we see renewed momentum behind the reform process, with Prime Minister Modi announcing more ministerial appointments over the weekend. There is still a lot of scepticism domestically about how much can be achieved, but the main areas targeted concern transport, land acquisition and business registration. The next key date is probably the annual budget in February. India offers a really valuable diversification opportunity for international investors because it is one of the few stories which is not dominated by a currency forecast.

The rest of the top five comprise two dollar-peg stories, China and Hong Kong, and two export-growth stories Thailand and Philippines. For the time being investors do not seem to be worried by the scale of the yen devaluation and the effect it may have on other Asian economies. This may change. In common with other investors we find it very difficult to gauge whether there really is a latent banking / real estate crisis in China. In the meantime there is steady progress towards the opening of its capital markets, the latest example of which is the link-up between the Hong Kong and Shanghai equity markets.

At the bottom of list are Russia and four European countries, Italy, France, Germany and Norway. Russia and Norway obviously share the same sensitivity to the oil price, but not a lot else. A combination of a collapsing currency, a chaotic budget outlook, international sanctions and war risk makes Russia about as unattractive as it possible for an equity market to be. And herein lies the danger. Let us assume that President Putin has given up on doing a deal in the Ukraine that is acceptable to the international community and the Russian people. He may feel that he has paid such a heavy price already that he may as well go for broke. Before he does that he needs to mitigate his economic losses (gas deal with China), provide a pretext for moving troops into Eastern Ukraine (last weekend’s “elections”) and wait for winter, the traditional time for Russia to go on the offensive.

The three main equity markets of the Eurozone, Germany, France and Italy have all shown evidence of bouncing – or at least not getting an worse on a risk-adjusted basis – in the wake of Mr Draghi’s promise to enlarge the ECB balance sheet by one trillion euros starting in December. The jury is still out on now effective this will be. Our point is simple; it was the crisis in the Ukraine which stopped the Eurozone recovery in its tracks in Q2 of this year. If it flares up again, it will severely curtail the animal spirits of many German exporters.

Conclusion: Asia over Europe, even if you do believe that the ECB will intervene in size next month.

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