The Gospel According to Basel

09/16/2010 12:29 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Markets are used to good news out of Beijing, and so might well have taken the latest batch for granted. But it’s been quite some time since anyone’s drawn inspiration from Brussels or Basel, Switzerland. Pleasant surprises from these redoubts of European angst combined with go-go Chinese data to propel stocks higher.

The biggest deal of all was the international agreement on new capital requirements for banks, which will require little if any fundraising by major financial institutions in Asia or the Americas. The Basel III accord, as it is known, won’t go into full effect for eight years, giving the industry plenty of time to comply—or locate the inevitable loopholes.

Extra reserves the banks will have to set aside to meet the new requirements are vast, but not as vast as the rules’ presumed benefits.

Investors who feared Deutsche Bank’s (NYSE: DB) big share sale was just the first drop in a leaky bucket relaxed and bought bank stocks. The iShares MSCI Europe Financials Index ETF (Nasdaq: EUFN) has rallied a quick 10% so far in September. Spain’s largest bank, Santander (NYSE: STD), is so flush it’s just shelled out $3.7 billion for a Polish lender.

Meanwhile, the European Commission nearly doubled its estimate for European growth this year, mainly as a result of the export boom in Germany. Sweden’s economy has sped even further ahead. Sweden (alongside Finland and France) has been among developed-market leaders, with an 8% rise so far this month, returning 12% in dollar terms.

China produced a raft of rosy statistics over the weekend. Far from attempting the oft-mooted soft landing, the Chinese economy remains very much airborne. Yet the Shanghai Composite index has done little more than tread water amid an emerging markets rally. Stocks in Taiwan and India have been getting more love.

Lately, hot money has been especially keen on the Philippines, which has joined the Asian boom. The Philippine Stock Exchange index rode a nine-day win streak to a record earlier this week. It’s up 30% on the year and 11% in September.

The Philippine peso has been gaining on the greenback, alongside the Swedish krona, the Japanese yen, and, lately, the Chinese yuan. Wherever growth has gained currency, the local currency has gained investors’ favor.

Japan’s the exception, the yen’s gains driven by deflation fears and skepticism about Tokyo’s economic policies. The rapidly aging population makes it even harder to get excited about the Japanese stock market, writes Deborah Owen. She’s more upbeat on China, arguing that migrants from the countryside will stoke consumption for decades to come.

Among the biggest beneficiaries of this wealth shift, says Yiannis Mostrous, will be the leading Chinese supplier of packaged foods, such as instant noodles. Investors looking for a quicker payoff could do a lot worse than a Canadian gas pipeline operator that’s yielding 9%, and has been vetted and blessed by Gordon Pape.

A barbell strategy balancing Asian consumer stocks with Canadian and Australian income plays would have ridden out the ups and downs of 2010 extremely well. With the dollar acting poorly once again, it should continue paying dividends.  
      

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