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Global market calls, risks and strategies.

The world will soon face a big chill from the financial market disaster in China.

"Life is a tale told by an idiot, full of sound and fury, signifying nothing."

Shakespeare could well be talking about the S&P 500 index in the first half of 2015, down a measly one per cent after multiple zig-zags. The only real money to be made was by picking stocks/sectors, not investing in the index. So we hit paydirt in US money centre banks, Goldman Sachs/Morgan Stanley but missed the big move in healthcare insurers/hospital after the Supreme Court approved Obamacare subsidies. In currencies, my recommendation to sell Canada was on the money, as the loonie collapsed from our 1.06 strategic sell level last year to 1.2550 now. The euro short trade, initiated at 1.3650 and reiterated at 1.14 continues to be a money gusher. The Taiwan dollar was the only emerging market currency that rose against King Dollar in 2015, up 3.5 per cent. The disaster was the Brazilian real, down 14 per cent. I went gaga on Taiwan and thumbed-down on Brazil back in 2013. I missed the big short in US Reits and utilities, both bond proxies. But I got the Indian rupee trading range at 61-64 right. All in all, some wicked global macro calls mixed with the inevitable lemons. Financial crystal-ball gazing, alas, forces me to sometime swallow crushed glass.

Now what? I think the S&P 500 is overvalued at 17 times forward earnings since EPS growth is mediocre at five per cent and King Dollar/China will wreck havoc on margins. So I expect the S&P 500 index to fall to 1,960 sometime this autumn. I remain bearish on gold even though my friends in the Gold Souk pooh-pooh my $800 target. Yet these were the same Goldbugjis who were bullish gold four years ago at 1,900 an ounce. A trapped bull on margin will snarl loudly but he will ultimately die, killed by the Market Matador.

I see Brent plunge to $40 as the Chinese economy implodes. Urge to bottom fish the bloodbath in Shanghai? Go to Jumeirah beach to gaze at the sunset, as I do, until the urge goes away. China has 90 million stock speculators but 87 million Communist Party members and the Chinese stock market just lost 28 per cent in the Great Chungwa Crash. This could mean 90 million enraged Chinese speculators on margin, a Great Leap Backward, to use the loony tune metaphors of Chairman Mao.

Stock markets discount the future, not price the past. The future is not sunny in this best of all Panglossian, post-Fed QE worlds. So I believe the Obama bull market (2009-15) is now over as valuations cannot rise when interest rates rise, margins fall and EPS growth decelerates. The King Dollar theme is a game-changer in global finance. So I stay short on Dr Copper as global growth tanks, with the Chinese construction market kaput. I see the Japanese yen in a 120-130 range. The euro will remain toast and fall below parity in early 2016. We will see the 10-year US Treasury note rise to three per cent and the German Bund at one per cent in the next six months. Steeper yield curves in the US, Britain and Japan make me positive on Citi, BankAm, Barclays, HSBC, Sumitomo Mitsui, Mizuho and Mitsubishi UFJ. The fall in Brent crude will goose the shares of Indian downstream refiners/chemical companies. US Big Pharma offers value though biotechs are vulnerable to the systemic rise in volatility and spasms of risk aversion this summer. Avoid energy and miners on Wall Street or, actually, anywhere else in the world.

The world will soon face a big chill from the financial market disaster in China. No less than 40 (no typo here; 40) countries worldwide depend on the Middle Kingdom as their largest export market. So what happens when Chinese GDP growth falls to two per cent? What happens to gold, copper, the Aussie dollar, Brazil real, iron ore, Malaysian ringgit, South Korean steel makers, Thai banks, Saudi petrochemicals, Singapore's Strait Times Index, Alibaba.com and Macau gamers? China is the world's second-largest economy, home to history's largest pool of ex-millionaires. (Short luxury goods). The Chinese financial elite is in a frenzy to flee China with their wealth. When has that ever been a bullish metric in human history?

Pakistan remains my favourite frontier market. Thailand, Indonesia and Malaysia are all shorts. Japan? Banzai Shareholder San. Best forex shorts? Turkish lira, (Turkish banks down 30 per cent year-to-date), South African rand, Indonesian rupiah. South Korea has broken my heart and wallet so many times that I should be forced to publicly prance Gangnam Style!

Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:9CHIN
Date:Jul 5, 2015
Words:831
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