Combined market cap of Wells Fargo and JP Morgan ($440bn) exceeds that of every Energy and Materials company in BRIC; Less than three years ago, those two banks were valued at less than half the market cap of the BRIC commodity sectors, indicating how quickly market leadership has rotated away from China to the US real estate story

How the mighty have fallen: EM edition

David Keohane

| Jul 18 11:03 | 2 comments | Share

Today, the combined market capitalization of Wells Fargo and JP Morgan ($440bn) exceeds that of every Energy and Materials company in Brazil, Russia, India and China ($420bn). Less than three years ago, those two banks were valued at less than half the market cap of the BRIC commodity sectors, indicating how quickly market leadership has rotated away from China to the US real estate story.That’s from BofAML Michael Hartnett’s latest Thundering Word which runs through the bull and bear case for EM. A taste of the bull case (with the bear resting on the idea that EM assets have only recently started to underperform, weaker China growth and a stronger dollar are not a good combo for EM and the EM “yield” argument is also reversing):

1. Secular downtrend in bond yields to continue

We believe the secular bull case for EM now rests on the ability of interest rates to continue their decline of the past 15 years from high double digits to single digits (chart 6). If economic weakness can force politicians in Emerging Markets to return to policies of disinflation, fiscal discipline and central bank independence, then the longer-term case for EM improves. After all, EM continues to have a substantial yield advantage relative to DM, and aging populations in the west will keep the need for income high.

2. The Chinese ease before the Americans taper

We believe the Emerging Market rally can have legs if over the next two to three quarters, the US economy stumbles, necessitating a bout of USD weakness, while simultaneously the Chinese ease and successfully boost economic growth. Put another way, if China eases and successfully makes 7.5% the floor for Chinese growth, while the delay of US tapering or rate hikes causes 3% to be the ceiling for the 10 year Treasury yield, EM assets will likely outperform.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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