Here Come the Mongols

09/14/2009 9:22 am EST

Focus: GLOBAL

Gregory Weldon

President and CEO, Weldon Financial

Stock markets in Sri Lanka, Pakistan, Kazakhstan and, yes, Mongolia are staging breakouts behind India and China, writes Gregory Weldon of Weldon's Money Monitor.

The Shanghai Composite Index [is pushing] towards a fresh up side breakout. Leading the charge in Shanghai were the automakers, thanks to a fifth consecutive month of [auto] sales exceeding 800,000. [This] translates to a seasonally adjusted annualized rate of 10.3 million, exceeding the pace of sales in the US.

Of course, China continues to offer up side in vehicle sales, considering that a population-equivalent sales pace on par with per-capita consumption in the United States would imply [annual] sales of 35 million or … nearly three million per month and almost four times the current sales pace.
 
Note [last week's] upside breakout in [shares of] SAIC Motor Corporation, one of China’s Big Five and a strategic partner of Germany’s Volkswagen (Frankfurt: VOW) and US ‘red-chip’ General Motors. The decline in SAIC was shallow relative to the broader Shanghai market, and the medium-term trend defining 100-day exponential moving average provided strong underlying support.

[India's auto sales of 120,669 in August] posted their third largest single-month sales total. Indeed, since bottoming in December at 82,105 units, sales have soared at a 70.5% annualized rate in the year to date. The Indian stock market [broke out] to new bull move highs, fully supported by a bullish moving-average dynamic.

Meanwhile, two of India’s neighbors aside from China are outperforming, not only regionally, but also globally. We speak of little-watched Pakistan, and even less watched Sri Lanka. For sure, an end to [Sri Lanka's] two-decade civil war is helpful, as is data revealing a huge increase in tourist arrivals during July.

A team from the International Monetary Fund is currently visiting Sri Lanka to review their $2.6-billion loan agreement (i.e. bailout), which has helped boost official FX reserves to a new all-time high of nearly $4 billion, in line with a surge in foreign buying of rupee-denominated debt. A positive review by the IMF, in sync with a sovereign credit rating upgrade from Standard and Poor’s (to stable, from negative), opens the door for the sale of $500 million in new debt, with the proceeds to be utilized for housing development and postwar rebuilding of infrastructure.
 
And then there is India’s other neighbor, Pakistan, which [extended] the near-term upside breakout to a new bull move high. The real litmus test comes when (if) the market reaches 9200, the level at which trading was suspended during the height of market turbulence during the fourth quarter. A convincing move above this price level would strongly suggest that stale-stubborn long positions have finally been liquidated, providing a fresh upside impetus.

Moving north and west we finally come to Kazakhstan, and yet another stock market that is breaking out to the up side and reaching new bull move highs in the process. And last, but not least we note [Wednesday's] vociferous stock market rally in Mongolia, [whose] rise of 2% placed it behind only Sri Lanka and Pakistan, as the day’s top up side performers in Asia.

One thing that Sri Lanka, Pakistan, Kazakhstan, and Mongolia have in common (along with India and China, to a lesser extent) is a weak currency, not only relative to the US dollar, but thanks to dollar depreciation [against] most global currencies. Indeed, from tugriks to tenge and from the dollar to the euro the story is the same: gold appreciation and a continued monetary-fiscal debasement of currency-defined purchasing power, relative to bullion.
 
We remain bullish on gold, particularly in US dollar terms, but also relative to a lengthening list of global currencies.  We [are also] bullish on select emerging market/commodity-exporting equity indexes, including Brazil, Australia, Latin America, and Russia. And we remain bullish on select commodity markets, including sugar, silver, cotton and cocoa, [while] monitoring the energy markets and base metals in search of renewed bullish technical signals.

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