Worrying Signs For Emerging Markets Equities

Asian Crisis Part 2 Coming?

In the last three months, the nascent recovery of emerging market equities, namely Russia, China and Brazil has been smashed to smithereens. Commodity exporting countries like Malaysia, Indonesia, Brazil, Russia, Australia are hit by China's steep slowdown. China is wobbling on the back of mounting bad debts, property bubble and now stock bubble bursting. The Chinese economy is built on the back of infrastructure and government spending. I believe many projects in China incurred debt costs of 8 - 12% p.a. while the return on investment is around 4 - 8%. This means that the Chinese banks will definitely wobble under the weight of mounting NPLs.

A strengthening USD or CNY devaluation will trigger another round of devaluation of emerging currencies vs the USD. Many emerging countries' corporates that issued USD denominated debts to enjoy cheaper rates could face distress. 

State of the Stock Markets

My asset allocation is now down to 55% stocks, 45% bonds / cash. I am not adding too much risk even with this correction because there are few signs of a strong recovery. One particular data that troubled me was that revenue from US and EU listed companies have fallen yoy by 6%. This is an ominous sign that earnings may fall in future.

My model shows no more than 6.6% return for global stocks for the next 12 months. I can easily achieve this by buying a high yield bond. The S&P500 is a sell, with -0.3% expected return in a year.

European equities are expected to return 6.8%, slightly better than the US due to lower valuations.

Asia x Japan and Emerging Markets have between 11 and 12% return. But the technicals are a nightmare. So I'm staying out for now.

HSCEI is a BUY with 18% return but the technical trends have turned south. So I'm maintaining just a small weight.

Indian equities I have downgraded to NEUTRAL. it has been a great bet. I made 8.8% return but I decided to cut by half.

Brazil is a SELL because ROE has plunged. Russia is a BUY with 15.9% return but the technicals are are bad.

Japanese equities are a STRONG BUY. Average valuations but strong growth.

Mining and energy are SELL. ROE plunged.

I'm still very cautious on Shanghai. I'm at NEUTRAL. While I'm definitely bearish on Shenzhen due to valuation concerns.

Finally, I've downgraded Tech from STRONG BUY to NEUTRAL. I have cut my Henderson Global Tech by half. I made 20% in 8 months.