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By Tim Seymour

We are talking about bank opportunities in the emerging markets this week on Trading the Globe. Obviously inflation and rate policy are key factors here.

Right now, global inflation concerns are higher than they have been in at least six years. While traders may debate on whether price pressures have peaked in the short term, this has still had a huge effect on fund flows out of emerging markets.

Until inflation peaks or China can manage an upside growth surprise, we do not believe emerging markets will see anything like the flood of inflows we saw last year.

This forces emerging markets investors to pick their positions a bit more carefully — with no "rising tide," the odds are no longer as good that all the "boats" will rise — and that leads us to the emerging banks.

Whichever way inflation goes, the biggest misperception out there may be the idea that these banks are going to suffer as inflation rises.

In fact, these stocks trade at superior valuations to developed banks and for a good reason: rising rates are not bad for these deposit-funded institutions. If anything, we should see their margins bottoming out soon.

And in the meantime, credit growth is accelerating. We are now looking at 15% to 20% credit expansion in the upcoming 12-month period, compared to just 12% to 15% last year.

This is not a fast burst of junk credit either. Asset quality is actually improving and the long-term prospects are for 15% to 20% compound annual growth for the sector.

The Best Opportunities:

HDFC Bank (NYSE:HDB) in India. This market has been down as much as 20% since November, but this stock still generates a 19% return on equity and at 2.1 times book value is cheap enough.

In Latin America, net interest margins are the best in the world and actually climbing. Brazilian banks have carved out a spectacular 7.1% margin compared to an average of around 3% in the developed world.

Banco Santander Brasil (NYSE:BSBR) is cheapest in terms of price-to-book, while Itau Unibanco Multiplo (NYSE:ITUB) is simply the best bank in the region. Bancocolombia (NYSE:CIB) provides exposure to Colombia.

Turkish banks are also fantastic, with Turkiye Garanti Bank (OTCPK:TKGBF) as one of the global best of breed.

Finally, in Russia, Sperbank (SBRBF) trades at a 25% discount even compared to other emerging banks and has been delivering a return on equity of around 27%.

Source: Global Trading: Emerging Market Banks and Inflation