Risk Lovers Flouting Quarantine

04/30/2009 11:21 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

The patient was running a high fever, to be sure-but well before the swine flu struck. Those watery eyes, that runny nose? They are—swear, officer—symptoms of nothing worse than a common cold, compounded by prolonged exposure to various toxic-asset cures.

The outbreak of the deadly and potentially pandemic virus this week quickly imposed a quarantine on the six-weeks-old global market rally. Commodity and airline stocks were slammed just in case the end is nigh. Thickly settled Europe and Hong Kong took the news harder than roomier regions. Meanwhile, some zealots caught the sillies: An Israeli minister found the "swine" designation offensive, though the people who've thus far borne the epidemic's brunt didn't think his "Mexican flu" suggestion kosher.

In any case, the financial fit proved to be a 48-hour sort of thing, because by Wednesday, money managers decided to stop malingering and proceed with month-end window-dressing purchases. After Monday's 3% decline, the Mexican stock market stabilized Tuesday and rallied the next day, buyers speed-dialing America Movil (NYSE: AMX).

Latin America's top wireless carrier scored an 11% one-day gain after reporting an unexpectedly robust $1.15-billion profit and a landmark ten-year, $1-billion loan from a Chinese bank. Revenue was up 15% as growth in Mexico and Brazil sped ahead, impervious to the pain in richer area codes.

China's economic offensive scored another and much more important coup this week with the signing of a deal with Taiwan legitimizing cross-border financial flows. The recent expansion of economic ties promises to bind the island to the mainland much more securely, in the long run, than what any invasion might accomplish.

As China raises its financial profile (it will shortly supplant Japan as the world's second-largest economy) what might be its contribution to the management canon? That remains to be seen. But it certainly has its share of Catberts.

A new propaganda campaign designed to "bolster confidence in vanquishing hardship" exhorts the masses to "profoundly grasp the incomparable superiority of socialism with Chinese characteristics." (Translation into Paulsenish: The economy's fundamentals remain sound.) The government also urged the Chinese people to "even more firmly defend social stability"—first and foremost by resisting the temptation to riot if they found themselves unpaid, unemployed, or otherwise aggrieved.

But then why riot when one can open a brokerage account instead? Baidu (Nasdaq: BIDU) shares are up 74% this year and 13% in nine days, helped by better-than-expected earnings in accordance with the recent global trend. And while Shanghai's stock market retrenched a bit after its exploits earlier this year, Bombay has picked up the pace, rallying nearly 4% Wednesday. India's Sensex index is up 40% since March 9th.

In the US, the renewed willingness to pursue risk, fostered by the Federal Reserve, has begun to percolate through the national psyche. Stock-market gains and a mortgage-refinancing boom helped consumer confidence rebound from historic lows. Some of the hardest hit housing markets are showing faint signs of life.

Elsewhere, South Korea's current account surplus has just hit a record and consumer confidence in already back to pre-crisis levels, Reuters reported. Corporate confidence is returning in dribs and drabs as well: Japan's Kirin brewery has offered to buy into the Australian beer duopoly by taking over Lion Nathan at a 50% market premium for US $2.5 billion. Kirin thus hopes to lock in a long-term carry trade matching cheap yen with Australia's famous and pricey yen for lager.

Expect the coming correction to validate the rally in emerging markets, but to test the smaller upturns by their developed-world counterparts, warns Eoin Treacy of Fullermoney in this week's Global Perspectives.

Meanwhile, official incentives to run risks are pointing investors toward opportunities in the Canadian oil sands, writes Gordon Pape of the Internet Wealth Builder, who remains bullish on Suncor (Toronto: SU.TO; NYSE: SU).

At the logical conclusion of that path lies a high-risk and potentially high-reward bet on an illiquid private-equity portfolio managed by the former Neuberger Berman partners, who left Lehman months before it went bust. Investment Trust Newsletter editor Andrew McHattie notes that equity in this closed-end trust is selling at a fraction of its book value.

Assets that are hard to value and harder to sell aren't everyone's idea of a sound investment. But at least one no longer has to assume the worst. And the fear of missing out on further gains seems to be growing.

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