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The German question in world finance [CPI Financial](CPI Financial Via Acquire Media NewsEdge) Brandenburg-Prussia morphed into the German Empire under Otto Bismarck in 1870. The Prussian Army's cruel siege of Paris, the crowning of the Hohenzollern king as the German Emperor in Versailles, the humiliation and capture of Napoleon III and the loss of Alsace-Lorraine poisoned French-German relations for the next seventy five years. In 1914, Berlin's carte blanche to Austria-Hungary turned a local Balkan conflict in Serbia into the horrific Great War, with the loss of 10 million lives. In 1939, Hitler's invasion of Poland plunged Europe into history's bloodiest war and the division of Germany that lasted until the fall of Berlin Wall in 1989. Twenty years after the reunification of Germany under Chancellor Helmut Kohl, Berlin is the preeminent political and financial power broker of Europe. The postwar French diplomat who had quipped "I love Germany so much that I am glad there are two of them" would now find himself in a world where the Elysee Palace is the junior partner to the Reich Chancellor in Berlin. I do not blame the Germans for turning Eurosceptics after the financial debacles in Greece, Ireland, Spain, Italy and now Cyprus. A population that willingly bore the trillion mark cost of reunification, bailed out bankrupt East Germany's wildly overvalued Ostmark, bore a decade of wage restraints and economic recession to rebuild the GDR's Soviet traumatized economy, has no stomach for interminable bailouts and fiscal transfers. Mario Draghi was even called a "geld foreger" by a prominent SDU politician and the Bundesbank is publicly at odds with the ECB about the OMT. The German Wirtschaftswunder, the economic miracle of the 1950's and 1960's, was based on a powerful state, a social market economy, the welfare state, the rule of law and banking prowess. Above all, the Deutschemark and the Bundesbank defined West Germany. This hard money Weltanschauung also defines Chancellor Merkel's calls for "mehr Europe", greater integration. Yet will the German electorate agree to mehr Europe Gunter Grass once predicted that united Germany would become a "monster" and Norman Tebbit called the EU "a German racket to dominate Europe". Thankfully, Germany's politicians are neither rabid nationalists nor irredentists who lust for lost East Prussia, Alsace or the Sudetenland. Yet Germany is the paymaster of Europe, its industrial constellation and Mittelstand the greatest beneficiary of a devalued Euro. Ever since the Treaty of Rome was signed in 1958, West Germany's elite decided to subordinate their national interest to the European idea, in partnership with France. So Adenauer was a frequent guest de Gaulle at the Elysee and in Colombey-les-Deux-Églises. Germany also subordinated its interests to the US nuclear deterrent, dutifully sent troops to Kosovo, Bosnia and Afghanistan. However, the debt crisis in Europe has resurrected the German Question of the Bismarck era. Can the world once again accommodate the rising power of Germany as Europe's dominant state History repeats itself, as a German thinker assured us, first as tragedy, then as farce. Fascist parties like Greece's Golden Dawn have re-emerged in a continent that once witnessed the nightmarish reigns of the Fuhrer, the Duce, Franco, Salazar and the Greek Colonels. This is the reason why the survival of the EU is mission critical to German politics, given German memory. There is a German word "Geldentwertung" money losing value, that is rooted in the inflation trauma of the Weimar Republic. A precipitous fall in the Euro could well devastate the German electorate's appetite for the EU. The world should fear a German, not Greek, exit. Currencies - US growth and the dollar's smile! 2013 has seen a seismic shift in correlations in the global currency markets. For more than a decade, the US dollar was the ultimate counter-cyclical asset, negatively correlated to risk appetites/global growth (though a clear safe haven during times of financial stress, such as the post Lehman banking crisis in 2008 and the Greek sovereign debt debacle in 2010). Yet no more. The US dollar was positively leveraged to "irrational exuberance" on Wall Street last week as the Dow/S&P500 index hit successive highs. The past decade's core themes were the emergence of China as an economic superpower and an almost eightfold rise in crude oil prices. These were both negative for the dollar since US exports to China are minimal relative to GDP and oil prices were inflated by the easy money policies of the Greenspan/Bernanke Fed as well as the parabolic growth in Chinese energy demand. The wars in Afghanistan and Iraq were also a trillion dollar sword of Damocles on the US trade deficit and, ceteris paribus, a negative overhang on the US dollar. However, the world has changed in 2013, as it has a predictable tendency to do so ever since the beginning of recorded time. The correlation between oil prices and the dollar has fallen since 2008, a testament to the shale oil/fracturing revolution that finally promises US energy independence. Obama's entire foreign policy focus is to exit the protracted wars in Iraq and Afghanistan. China's Politburo has pledged to move its growth ballast from exports to domestic consumption. These three macro events, in my view, midwifed 2013's bull market in the greenback, though Abenomics, the Italian election, and the ECB/Bundesbank splits and the fact that US oil imports have fallen to 1992 levels were also all catalysts for the dollar bid. These macro themes will be a game changer in international finance in the next few years, with profound implications for both investment strategy and geopolitics. The dollars smirk is now a smile! The future of the US dollar could lie as much in the shale oil fields of North Dakota and Texas's Permian Basin than in the monetary conclaves of the Federal Reserve or the fiscal battles on Capitol Hill. Thanks to a surge in US natural gas/oil production, the US current account deficit is now 2.8%, its levels under the Clinton era (a time when the post-Gulf war Pentagon was also downsizing its global military empire). Wall Street's money centre banks are among the best capitalized in the world, as the recent Fed stress tests demonstrate. Europe's banking risk and petroleum trade deficit metrics are deteriorating dangerously fast relative to the US. Hence the paradoxical fall in the Euro even while LTRO replacements shrank the ECB balance sheet and Irish debt yields fell below Italy/Spain. Despite the CBO's estimate of a 0.5% fiscal drag due to the sequester, the black gold bonanza in the US means a boost to US economic growth, as the natural gas plunge is a steroid shot for US consumer spending, 70% of GDP. This, in turn, reduces the inflation risk premium in US assets since it raises the growth potential in the business cycle. If Obama and the Republicans finally agree on a budget deal, King Dollar has emerged as one of the world's best performing currencies in 2013. If my King Dollar thesis is right, the Singapore dollar's epic bull market (flagged here way back in 2005 when the Sing was 1.68) is now over, as its correlation with the yen and Chinese capital flows rises. The Euro-dollar has a lot more downside in the next two years and the Elysee Palace will get its wish, thanks to North Dakota, not Frankfurt! Macro Ideas - What next in Latin American equities Latin America is in the international news, with an Argentine Pope in the Vatican, a new Mexican President, the samba carnival in Rio de Janeiro and the death of Commandante Hugo Chavez. My thoughts, as usual, turn to the Latino currency, debt and stock markets. I had recommended the Mexican peso last June at 14 against the dollar as a strategic play on the return of the PRI to power under Enrique Pena Neto, the Banco de Mexico and the Hacienda's implicit blessing for a stronger peso, and the prospect of a Constitutional amendment (since the PRI political machine controls the states) of FDI in Pemex. The Mexican peso has been one of the best performing currencies against the US dollar, up a stellar 12.7% in the past ten months. At 12.30, I now believe the Mexican peso is fairly valued for now and I await black swans/volatility spikes to go long mariachi at 12.80. I was skeptical about Brazil's Bovespa (and the Real) last year and still believe there is little value for strategic investors in the current 57 – 58,000 range. The Dilma Rousseff government's price controls on gasoline, credit card charges and utilities are a deterrent to global investors. There is no real bullish case or Petrobras, Vale and Gafisa, though Banco Itau Unibanco has value. Brazil is no longer a Latino tiger now that its post Lula GDP growth rate has plummeted despite epic monetary/fiscal stimulus. The latest inflation data rules out any additional monetary easing by the central bank in Brasilia. There is an ugly name for the macro milieu in 2013 Brazil and it is called stagflation, not exactly consonant with an El Torro hunter in Dubai, compañeros! While I admit the Bovespa is not expensive, I do not see a catalyst for a valuation rerating, apart from some interesting opportunities in its banking sector. Mexico's Borsa and the peso (MXN) was the hot enchilada in stock markets south of the Rio Grande, the reason I profiled its macro case in successive columns in 2012. But all good things come to an end, I seriously would not invest new money in the Borsa (or any emerging market!) at forward price/earnings ratio of 18. Caramba, despite the lovely macro milieu, 18 times forward earnings is a nosebleed valuation. Great shorts America Movil, the flagship of billionaire Carlos Slim Helú (the richest El Turko or Latino Lebanese in the world!), where revenue growth has slowed while costs have risen even as stricter regulators in Columbia and Mexico pressure powerful incumbent market shares. This is the reason America Movil ADR's have fallen 20% since late December 2012. When the world's richest telecom network owner invests his free cash flow outside Latin America, I avoid/short the sector. The Chilean stock market is best avoided as long as the global copper price is under pressure and Colombia's valuation rerating is definitely over now that Bogota trades at a 25% premium. Latin America could well be the emerging markets (ex Hungary, South Africa, Egypt) Cinderella of 2013 since it trades at a 20% premium to the MSCI EM index. Money can be made in relative value sector trades, Latin debt and currencies (expect a column on the Mexican peso if it trades at 12.80!). I would short the silver/gold mines of the Inca Empire, now known as Peru. Banking is the secular growth story for Latin America in 2013, with its loan growth, low valuations and low mortgage/GDP ratios. Sad sack of Latin oil and gas shares Petrobras ADR, down 9% in 2013 even with a stronger Brazil Real! Stock Pick - Non-Index emerging markets growth shares The emerging markets index fund (EEM) has done squat in 2013. So my thoughts turn to my favourite domestic, non index EM companies. Turkcell, Turkey's leading mobile operator, trades as an ADR and in Istanbul (symbol TCELL TI). The regulator has appointed two independent regulators to end a boardroom spat. This increases the odds of a dividend in one of the world's most attractive high yield EM telecoms. I am a tad skeptical on the lira/Turkish banks (50% of the Istanbul index), Turkcell revenues are goosed by 45% top line growth in mobile broadband. At $16 on Turkcell, I would not be surprised if Turkcell generated a 20% total return for investors in 2013. While many emerging European investors gravitated to the Megafon IPO (a great idea, Harry Hindsightvich!). Turkcell EPS growth credibility can be in the 10 – 12% range in the next few years as its mobile penetration rate is significantly lower than Russia, Poland and the GCC. Muted capex means a 6.8% free cash flow. While Turk Telekom was the winner in 2012, I believe the governance baton will now pass to Turkcell. Hoffenlich, this will be the mother of all emerging mobile dividend shares in 2013. Yandex NV is the Russian Google (60% search market in the rodina, double the market share of Google, the crown jewel of private equity firm Baring Vostok Partners. A secondary placement by Barings Vostok and the founders that is 7.4% of the Russian Web search engine. Yandex ADR predictably fell to $23 a share in New York, where value is compelling. Why Revenue growth, while slowing, can well exceed 25% per annum in the next three years. Tiger Global and Barings Vostok still remain significant shareholders. This is Russia so governance audits are mission critical for survival, let alone success). Yandex has a $1 billion cash pile and the board authorized a $300 million buyback. The secondary placement reduces the overhang risk on Yandex as well as increases its free float to 58%. I cannot think of any other search engine anywhere in the world that has double the display ad market share of Google. Yandex trades at below 20 times forward earnings, not excessive for the dominant incumbent search engine in a nation with 140 million people, nine time zones, two million potential corporate/SME clients at an early stage in the Digital Media age with a 30% EPS compounded annual growth rate. Hong Kong's First Pacific is one of Asia's most undervalued conglomerates, trading at a 30% discount to NAV with stakes in Philippines Long Distance Telephone, Manila Electric, Philex Mining and Indonesia's Indofood. I believe asset values are inflated in Southeast Asia and can easily envisage First Pacific to trade down to HK$10. First Pacific fascinates me because it is investing in Burma, Vietnam and Thailand's power markets. If the Burmese military junta's reforms are for real, if Vietnam continues on its transformation plan, if PDLT wins two phone in Burma license (9% mobile penetration rate in a population of 64 million Growth potential Think MobiNil 1996), First Pacific could prove the world's most undervalued frontier markets/Asian utilities and consumer fund. First Pacific is the ultimate play on the fabulous domestic consumer, power, mining, mobile phone potential of Southeast Asia. Catalyst Higher payouts, buyback, acquisitions, free cash flow. This is the ideal value buy if Southeast Asia corrects. (c) 2013 CPI Financial. All rights reserved. Provided by Syndigate.info an Albawaba.com company |