The Financial Times, 14.09.2014, It is time to stop groupthink, sell momentum and buy value John Dizard It is not a good idea to wait around to see if the asset bubble can be blown just a little bigger, writes John Dizard ‘But it was all right, everything was all right, the struggle was finished. He had won the victory over himself. He loved Big Brother’ – George Orwell, 1984 If you have been an international investor over the past six months you had to love the developed world’s central bankers, particularly the Federal Reserve. As long as you owned the shares or bonds that benefited from their securities buying operations, or liquidity provision, you would have made money. No deviation from groupthink was required; just add your client’s chips to the “momentum” trades. What happens when the “liquidity” trade stops working, though? Securities dealers have much less ability to manage large sell orders than they did at the start of the last financial crisis. This is probably the time to sell momentum and buy value. It is not that hard to identify the momentum that should be sold. The Fed-driven relief rally in US Treasury prices since May of this year has disproportionately inflated the prices of equities in financially fragile emerging markets such as Brazil and Turkey. These have weak growth, large current account deficits, high inflation, and high short term interest rates. If the Fed had gone ahead with tapering its securities purchases this spring, they would have been in even more trouble. David Goldman, a strategist with Reorient in Hong Kong, has done some interesting statistical work on the EM equity bubble. “There seems to have been an inverse relationship between economic growth and equity price performance among the major emerging markets,” he writes. “Among the best performers during the past six months have been countries with low growth, big deficits, and high short-term interest rates.” It may be too early to sell emerging market ETFs or shares that are heavily weighted in EM indexes, but at least there are some buyers left to take the other side of the trade. It is probably not a good idea to wait around to see if the asset bubble can be blown just a little bigger. So if equities in large-cap, easily traded EM indexes are the momentum sells, where can one find the value buys? Well, if they were popular, the value would already be recognised. Consider looking for equities in countries with an image problem – Russia, Argentina or Kazakhstan. Harvey Sawikin, a lead portfolio manager for Firebird Republics Fund in New York, started investing in the former Soviet republics in April of 1997, and has earned high, though volatile, returns over the years. “Sentiment on Russia has become so negative it is hard not to add exposure,” he says. “Of course I do not like what they are doing in Ukraine, but they do have some great companies. And since they have not been getting the portfolio inflows during this period of central bank easing, they will not have the portfolio outflows when it ends.” He does not like Gazprom, the biggest Russian company “because it does not generate shareholder values. It is basically run for the strategic interests of the Russian state. Lukoil, on the other hand, is managed with shareholder interests in mind, and the two guys who run it continue to buy the stock,” he says. Kazakhstan, where Firebird also invests, has had a lot of bad press from corruption scandals along with litigation-intensive delays in getting its giant Kashagan oil project online. Mr Sawikin says: “Even without getting Kashagan finished until 2016, they are experiencing 5 per cent growth in their economy.” Mr Sawikin has played Kazakhstan through bank workouts, not a game for the faint of heart. Essentially, he has been watching to see what distressed bank paper the locals have been buying, analysing their possible motives, and then following their lead if it all makes sense. This means keeping track of former management’s extradition cases and current management’s over-provisioning for loan losses – but, as he says of Kazkommertsbank stock, it is “a complex but potentially lucrative opportunity”. For investors who prefer to stay within the (relatively) safe confines of the eurozone, Estonia has under-appreciated macro policy and undervalued equities. With a government debt to GDP ratio of about 10 per cent, along with corporate and household sectors that have already deleveraged their balance sheets, it does not need the ECB’s asset purchase programme to avoid another economic crisis. Perhaps because Estonia has insufficient debt to be “re-bubble-ised” by the ECB, the Tallinn Stock Exchange index has declined by more than 6 per cent this year, even though GDP is still growing. One of the larger components of the index, Tallink Grupp, which operates a ferry service on the Baltic, is selling for a bit more than half its book value and a dividend yield of 3 per cent. The apparent ease with which “liquid” EM index products can be bought and sold, for the moment, is deceptive. They are at risk of being frozen money in the next crisis. You are better off selling them and taking the trouble to do the securities analysis necessary to buy company specific value shares in smaller markets.
Posted on: Tue, 16 Sep 2014 08:37:14 +0000
Trending Topics
Recently Viewed Topics
© 2015