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The fallout from the UK election is self-evident Plus: the latest on investing in Singapore and the future of the US Dollar Index

The Macro View

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Like David Cameron’s Brexit referendum, Theresa May gambled her political career on her decision to hold a snap election to consolidate the Tory majority in the House of Commons. With 318 seats, Mrs May’s gamble backfired and the Tories are now forced to negotiate a coalition with the sectarian Irish Unionists (‘Ulster says no. Never, never, never!’) to cobble together the next British government. Mrs May remains Prime Minister for now, but her leadership is neither strong nor stable since the Tories do regicide with alarming ruthlessness – Mrs Thatcher, Edward Heath, William Hague, Iain Duncan Smith, Michael Howard were ousted in my own life. Mrs May will go down in history as the most inept Tory PM since Sir Anthony Eden (Suez) or even Lord North (who lost the American colonies for Mad King George).

The financial markets fallout from the UK election is self-evident. The risk premium on sterling rises and it would not surprise me to see cable fall back to April 8 levels of 1.25, when Mrs May called the election. Yet Labour’s surge (in Kensington and Chelsea – hello?) also shows that the electorate has rejected fiscal austerity. This means a steeper sterling yield curve and soft Brexit will be the twin macroeconomic scenarios this autumn.

This, ipso facto, is an argument for another major sterling rally sometime this autumn. I never trade binary geopolitical events and even decamped to Evelyn Waugh’s city of dreaming spires, Charles Ryder’s city of aquatint to monitor the election, barely escaping the horror of London Bridge and the Borough Market terrorist outrage last Saturday night. I will not take a long position in sterling just yet as the storm and fury in Westminster, Brussels and even Threadneedle Street will continue to pressure the quid. I also expect sterling to depreciate against the euro. I expect the gilt yield curve to steepen as long dated HM Treasury debt yields rise while market rates fall. The fall in sterling also increases the inflation risk premium on long gilts. A weaker sterling is bullish for FTSE100 exporters. The FTSE250, the sceptred isle’s domestic midcaps, will fall, with homebuilder shares the biggest losers. British consumer midcaps are a compelling short.

Emerging markets have been the winner asset class of 2017, up 17% on the MSCI EM index fund (EEM). The softness in the US Dollar Index, the fall in US Treasury yields, fund inflows into developing world bonds and cheap valuations (ex India and Mexico) have trumped America First protectionism, geopolitical trauma in Ukraine, North Korea and the Middle East. In essence, after five years of dismal underperformance relative to Wall Street or Japanese equities, emerging markets have rallied with a vengeance since last summer, reassured by the easy money policies by the Bank of Japan, ECB, the People’s Bank of China and Bank Rossiya. As asset volatility on Wall Street tanked, risk assets surged. If Morgan Stanley adds Chinese A shares to its indices, the Middle Kingdom could constitute almost 40% of the index fund EEM’s assets. Specific macro ideas? I believe the Chinese yuan is a buy at 6.85 for a 6.50 target as Xi Jinping’s Politburo no longer wants capital flight. Now that Russian consumer inflation has fallen to the Moscow central bank’s 4% target, a new round of rate cuts is inevitable, given rouble strength. This is an argument to buy long duration Russian Eurobond and Sberbank, Russia’s ‘too big to fail’ retail bank, founded in the reign of Tsar Alexander at a time when Abraham Lincoln lived in the White House.

I passionately believe in Japan’s Sony turnaround, mainly due to restructuring in its Hollywood studios and its exciting new ventures, in gaming, e-sports, music, video content and self-driving car Camera chips. I had gone gaga on Alibaba ADR in New York when the shares were 100. Now that the easy money in Jack Ma’s magic kingdom been made relative to my target, I would switch into Chinese financial shares, notably China Life and Hong Kong’s AIA, which is really emerging Asia’s insurance franchise. I am not interested in Latin American markets as valuations are now iffy at 14.6 times forward earnings (a 20% premium to emerging Asia and EMEA) in this province of MSCI emerging markets even as elections loom in Mexico, Chile, Columbia and Argentina (midterms). Mexico? Avoid since Trump will maul NAFTA. The Mexican dictator Porfirio Diaz was right when he lamented, “Pobre (poor) Mexico. So far from God, so close to the United States” – and to Donald J Trump, Big Boss of Gringolandia.

Stock Pick: the bullish case for Singapore and Indonesian banks

I have admired Singapore for its fairytale rise from a somnolent British colony on the southern tip of Malaya to its role as the financial, aviation, retail and technology hub of Southeast Asia. In the past decade, I have happily braved the perennial afternoon rain and monsoon humidity, the crowds at Changi and the retail razzmatazz on Orchard Road to invest in pre-IPO deals in Singapore industrial property and office REITs. With a per capita income of $50,000, an Anglo-Saxon legal pedigree, a famously uncorrupt government led by the son of the legendary Lee Kwan Yew, a magnet for the world’s smart money flows, minimal inflation, the most credible central bank (MAS) and currency (Sing dollar) in Southeast Asia, Singapore is the world’s most successful and best managed city-state, a AAA sovereign credit, a modern Titian’s Venice or Rembrandt’s Amsterdam (though we don’t do art, la!).

Singapore’s recent export surge mean the Lion City could well see 3% GDP growth in the next twelve months. The Singapore dollar is now once again undervalued as King Dollar swoons. Money supply and bank loan growth has accelerated, a bullish omen for the Straits Times index. Banking profits and net interest margins have begun to rise. China and India’s stellar growth has powered an uptick in Asian trade volumes, whose leveraged proxy is the Straits Times index even as its market breath and momentum rises.

Singapore’s Straits Times index and country index fund (symbol EWS) has risen 14% in 2017 as the Monetary Authority of Singapore (MAS) has opted for easy money to combat deflation risk and boost economic growth. The MAS also tracks central bank easing in China, Indonesia, Taiwan and even India in the past twelve months.

DBS Group, the flagship Temasek owned bank that is the largest financial institution in Southeast Asia, has been my favourite Singapore money center bank investment since July 2016. Piyush Gupta has transformed DBS’s bottom line via cost cutting as net interest margins and loan yields fatten. DBS and United Overseas Bank (UOB) are both ideal proxies for Singapore’s economic, earnings and stock buyback cycle. Singapore banks have also built large fee generating wealth management businesses and have largely written off busted oil, gas and commodities loans. A steeper US Treasury yield curve will be bullish for net interest margins and EPS growth in DBS, UOB and OCBC, which has also bought its own undervalued shares. Singapore banks also offer some of Southeast Asia finance’s highest free cash flow yield, at 10–12%.

Indonesia’s reformist President Joko Widodo, the recent tax amnesty and surge in private wealth creation also makes me bullish on Indonesian banks. In 1998, Indonesia’s banking system was bankrupt as Jakarta was forced to negotiate an emergency lifeline from the IMF, mobs attacked Chinese owned businesses in Java and President Suharto’s 34-year-old kleptocratic dictatorship imploded. Now Indonesia is the world’s most robust Muslim majority parliamentary democracy, a colossus of 260 million people whose middle class will happily throng four star hotels of Makkah.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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