How to Play the Asian Rally

07/30/2008 12:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of Silk Road Investor, says Asian stocks are rallying, and he thinks one Indian bank will prosper.

The Asian rally is under way. It started from depressed levels, particularly in comparison to other regions of the world. Furthermore, the current oil price weakness—if sustained—will act as a positive catalyst for Asian economies that are net oil importers.

Extreme selling conditions usually set the stage for a rally, which can be rather substantial when a lot of cash is on the sidelines, a lot of short positions need to be covered and marginally positive news emerges.

These three conditions are currently in place in Asia, as well as lower valuations and subdued inflationary pressures. The latter is quite important. In May, food inflation in particular was the main topic of discussion around the world.  

Now the chief concern is growth slowdown, which should be expected. But there’s a possibility that the fast-and-furious selloff is the market’s way of discounting that.

If this is true, the market has reached its lows for this cycle. And if this reporting season proves better than the disaster most investors expect, Asia will give us a strong bounce.

India has been among my favorites for a long time, but we’ve been generally absent from its market for two reasons. The first: we made a lot of money early and decided not to fight for more when new investor blood entered the market last year. The second: To a certain degree, the Indian economy is a victim of its own success. The market rallied hard as Indian entrepreneurs took their businesses to the next level.

Furthermore, explosive growth led to potential financial troubles such as high inflation, financial imbalances, and red-hot growth. The market reacted accordingly, and India has been one of the worst performing markets in Asia this year, along with the Philippines and Vietnam.

A bigger problem is the inability of the government to close the civilian nuclear deal with the US because of opposition coming from India’s political left. But the government has just won the trust vote in Parliament with 275 votes in favor and 256 against. This will allow the country to move ahead with the nuclear treaty, which will benefit the economy’s energy needs.

Theoretically, the government should have an easier time [initiating] market reforms [in the future]. The financial sector in particular will benefit from such a move, which is why the market has been gaining ground of late. 

The recent selloff is giving us the opportunity to add one more position to our India holdings: ICICI Bank (NYSE: IBN). I’ve recommended this company before, and I view it as one of the stronger private banks in India. It also offers decent insurance exposure, a sector that has strong, long-term potential in India because penetration rates remain low. Buy ICICI Bank at current prices. (The ADRs closed above $30 Tuesday—Editor.)

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