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The best emerging markets in 2002
Favourite emerging markets this year are South Korea, Mexico, India and Russia
THE philosopher Santayana said that those who refuse to learn the lessons of history are doomed to repeat their mistakes. True enough in the world of emerging markets. So how about a quick history lesson? What were the similarities between 1992 and 1998 on Wall Street? The world economies were just coming out of recession and the Fed had cut dollar interest rates. There had been a series of traumatic geopolitical crises and financial panics.(eg. Iraqi invasion of Kuwait, the junk bond market collapse, the Russian debt default, the Asian currently meltdown, the LTCM hedge fund debacle) that traumatised investors and led to a surge in risk premiums. Yet what happened in the subsequent twelve months? Some emerging markets skyrocketed 100 per cent or more in dollar terms. Fast forward to 2002. The US economy is just coming out of recession. The September 11 terrror attacks traumatised the world. The Fed has cut interest rates to 40 year lows. Is the past prologue to the future in emerging markets investing ? I believe so. My favourite emerging markets in 2002 are South Korea, Mexico, India and Russia. Why?
The Kopsi was one of the world's best performing stock markets in 2001 but the bull market in Seoul will continue with a vengeance in 2002. Why? South Korea, despite its 40 per cent dollar run up since September, is cheap at 10 times earnings with an incredible 9.6 per cent earnings yield. The Olympics, the Asian Games and Presidential elections all suggest fiscal stimulus will be added to monetary easing in a country which is seeing its first single digit interest rates in a generation. Corporate governance and banking reforms have improved dramatically in Korea. It is no coincidence that foreigners control the bulk of the trading float in Seoul. There have been a wave of mergers in the DRAM, banking telecom, steel and securities sectors. The Hynix- Micron and Kookmin Bank-Goldman deals made interenational headlines.
South Korea is extremely leveraged to a revival in US economic growth and the global tech/chip cycle, with exports half of GDP. South Korea trades at its cheapest levels in a decade in won terms, let alone dollars. It has seven million broadband Internet subscribers. I believe certain South Korean bank, telecom and tech shares have the potential to double in 2002.
Vladimir Putin may go down in history as the most significant figure in Russia finance since Gorbachev. He has engineered a seismic shift in Russian international relations with his embrace of the White House after September 11. A new tax code, property rights, banking reform and restructured state monopolies have electrified international interest in Moscow stocks. No wonder Russian Eurobonds have risen 50 per cent in the past twelve months, suggesting that the Kremlin's sovereign risk is falling, a bullish signal for its extremely high beta stock market. Russian shares are also dirt cheap at a multiple of seven. Sure, a oil price crash could derail the bull run in Moscow but Russia is not just as petro economy as energy is only 13 per cent GDP, Vimpelcom with two million subscribers in a nation whose wireless teledensity is a mere 4.5 per cent is Europe's highest growth telecom play. I believe Vimpelcom could well double in the next twelve months.
Despite Argentina's woes, Mexican stocks and the peso actually rose in 2002. The S&P upgraded Mexican credits to investment grade and the Mexican economy is the best convergence play on the US, thanks to Bill Clinton's NAFTA. Citicorp's buyout of the Mexican bank Banacci is the tip of the iceberg of a takeover trend by North American buyers of local banks, telecoms, supermarket chains and media empires. In fact, despite the strong dollar and currency crises in Argentina, South Africa and Turkey, the reason the Mexican peso appreciated against the greenback was that no less than $20 billion in capital inflows were attracted into the country. Real interest rates have plunged in Mexico and the Afores pension funds, pools of institutional capital growing at $6 billion per annum, are dramatically underweight on the Borsa. A new law could end Pemex's monopoly in the huge energy sector, allowing billions in FDI from the Seven Sister oil multinationals in the US and Europe.
After all, the oil exploration infrastructure in the Gulf of Compeche, the lodestar of Mexican oil wealth, needs billions of dollars in capital in order to avoid technological obsolescence. My favourite growth stock in Mexico is America Movil, one of the world's most unique international wireless companies that trades at a 50 per cent discount to its American peer group. Telmex is another cheap cash cow telecom. In banking, there will be additional high profile takeover deals in 2002. So GF Norte at a multiple of six and Bancomer at a multiple of eight seem not just cheap but absurdly cheap. Mexico is no longer a pretty tourist destination of mariachis and tequila, even though I was a diehard fan of Cancun and Cozumel in my New York years a decade ago and know that Mexican tourism is a pure play on the US consumer. As long as Argentina does not descend into chaos and oil prices do not collapse to $12-13 per barrel, both unlikely scenarios, the Borsa offers one of the most attractive emerging market bull runs in the world.
Nuclear war is not exactly a good omen for stock market investing. While Pakistani-Indian tension over terrorism in Kashmir will continue, a nuclear war is unthinkable, short of a tragic miscalculation. In fact, Pakistan's crackdown on Kashmiri secessionist groups promises the best hope for peace in South Asia since the Benazir-Rajiv summit a decade ago. Indian shares are cheap at 11 times earnings far below their 17-18 five year historic valuation multiples. With a mere 10 per cent export to GDP ratio, India is a classic defensive emerging market.
The privatisation of VSNL, deregulation in oil refining and electricity, the Reserve Bank's major liquidity ease, the resolution of UTI 64 mutual fund crisis are all hugely positive for the Sensex in the months ahead. Sure, index giants like Hindustan Lever, ITC and Reliance may face VTI 64 related selling yet the valuations, macroeconomics and liquidity flows in the stock markets suggest that 3100-3200 on the Sensex makes a great entry point for at least a 30 per cent dollar turn in 2002 in selected Indian shares. Lower oil prices, innovations in stock market settlements and derivatives trading and the end of the spectacular bull market in Indian bonds, combined with exceptional profit growth in some sectors, lead me to believe that the Sensex could well rise to 4500 in 2002. My favourite stocks remain Dr Reddy and Rambaxy in pharmaceuticals, HDF in banking, Infosys in software, Zee TV in media.
The opinions expressed by the writer are his own and not endorsed by Press Release Network.
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