Bank-Bashing Chinese and US-Style

01/28/2010 11:54 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Suspicion between the US and China runs so deep, it’s nearly equal to each government’s mistrust of banks. Washington would like more credit extended; Beijing, less. But in the aftermath of the financial crisis, neither capital is willing to leave its financiers unattended.

Their coincidental campaigns to rein in risk have not so gently rocked the global equity markets. After racking up solid gains in the year’s first week, most bourses have rolled over into the red, many by a considerable margin. The MSCI China index is now down nearly 9% in 2010, after nine straight down days for Asian equities.

Europe’s had just as lousy a week, with Greece down 12% on the year, Spain 8% in the red, and Germany off 5%. Brazil's down 5% as well, while Taiwan and Peru have quickly racked up 7% deficits. (All figures are based on country MSCI indices, as of Wednesday.)

On the other side of the ledger, Japan’s up 4% and Denmark 2%, and that’s about all the good news from developed markets. Among emerging markets, Morocco (8%) and Egypt (5%) are proving that every dog has its month. (And perhaps its decade: Egypt’s returned 17% annualized over the last ten years, vs. -3% for the US, according to MSCI.) Chile has bucked Latin losses with a topside surge of 6%.

China’s clampdown on lending after last year’s splurge is expected to barely dampen the Chinese economy’s 10% growth pace. But it highlights the investing hazards as public policy around the globe pivots from encouraging risk-taking to restraining it.

It would be odd if markets didn’t quake a bit with the world’s top two economies looking to check financial excesses. And so what if China still means to expand credit this year? And never mind that the levies and restrictions proposed by President Obama on the banks concern only a miniscule share of the industry's revenue and profits. Most economies around the world have less margin for error than China or the US; plus, the ride often feels bumpier from the back seat.

Still, last year’s recovery trend has more or less held up. January saw a record spate of emerging-market initial public offerings, most of them in China. (Though the biggest of the lot, that of Russia’s aluminum maker RUSAL (HK: 0486), flopped 9% in its Hong Kong debut.)

The International Monetary Fund  has raised its estimate for global growth this year from 3.1% to 3.9%, mainly on the back of the rapidly reviving emerging economies. And as the crisis recedes, so does the solidarity it fostered.  Beyond the spat over Internet censorship, American corporate support for a laissez-faire China policy is drying up as Beijing favors homegrown champions in its fast-growing market for capital equipment.

The Chinese market for gold—both as jewelry and investment—has also grown rapidly, and Lawrence Roulston cites that as one of several long-term positives for the yellow metal despite the price consolidation now in progress. Meanwhile, Roger Conrad has revisited two of his best picks from last year, and finds reasons to keep collecting their generous distributions.

John Snowden, who’s hardly been a cheerleader for equities, sees solid value in IMI, a UK engineering group specializing in cooling and heating equipment as well as that for dispensing beverages. ISI has a beer tap that operates at three times the normal speed, plenty fast enough to drown investors’ recent sorrows. And when the gloom lifts, as it always does, the company will benefit from brisk Asian growth.   

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