A further melt up remains the most likely end to 2009. The
equity markets’ resilience has been further demonstrated over the past
week with the mini panic over Dubai. The whole episode serves as a further
reminder of how investors are prone to panic when debts they presume are
government guaranteed are in fact not so. There is certainly no reason to
assume that Dubai World is government guaranteed.
· If the credit multiplier does pick up in America, then the trade
in Asia becomes to buy Asian exporters and in particular Japanese
exporters given that a healthy US economy means a fundamentally stronger
US dollar since the foreign exchange market will be quick to discount
higher US interest rates. Still GREED & fear’s base case remains to wait
for hard evidence that releveraging is occurring before assuming it will
happen and adjusting portfolios accordingly.
· It is certainly wrong to assume that all of the upside has been
discounted for Asia and emerging markets, however consensus has become the
view that Asia and emerging markets are the best place to be. Even after
the remarkable performance seen this year, most emerging markets remain
well below their pre financial crisis highs.
· GREED & fear’s view remains that emerging markets will surpass
their pre-crisis dollar highs sooner or later. But the guess is that one
big correction lies between then and now, and during that correction the
US dollar will rally on the deleveraging trade and the oil-led commodity
complex will correct.
· The best stress test for any potential Asian resilience remains
a S&P500 correction, in terms of how Asia performs in any such correction.
It remains much more likely in the short term that the S&P500 will correct
because of monetary tightening concerns than because of concerns about a
“liquidity trap”. A further spike in oil remains to GREED & fear the most
plausible near term catalyst for a correction.
· The intensifying deflationary pressures in Japan have now
finally triggered a reaction leading to this week’s emergency
“unscheduled” Bank of Japan monetary policy meeting. But the BoJ again
managed to disappoint expectations when the market probably wanted to see
a big increase announced in quantitative easing.
· What the BoJ really needs to do is to convince investors that
the yen should once again become the funding currency of choice for carry
traders and not the US dollar. For a weaker yen remains the most effective
way of combating the intensifying deflationary pressures quickly.
Unfortunately, the BoJ does not have the necessary skill set to achieve
this which is why the best hope for the Japanese stock market is that
monetary policy gets traction in America and US dollar short term interest
rates normalise.
· GREED & fear remains of the view that investors should
overweight both Chinese banks and property stocks. The bounce back in
China bank stocks this week after last week’s capital raising scare is a
positive. As regards property, real interest rates should decline next
year in China since the pick up in inflation is likely to be greater than
the pick up in nominal interest rates.
· It is most unlikely that the PRC will tighten aggressively
towards the property sector given that a new land development cycle is one
important way the Chinese government hopes to meet its 8% plus growth
target next year without too great a reliance on SOE fixed asset
investment.
· The obviously most vulnerable area where similar debt concerns
like Dubai could suddenly shock markets remains the fringe parts of
Europe. The PIIGS spread has begun rising again in recent weeks, while the
CDS spreads on the weak underbelly of Euroland have also been rising again
with Greece leading the march upwards.
· Fortress Euroland has so far withstood the pressures of last
year’s global financial crisis. But in GREED & fear’s view it is premature
to declare victory. The Baltic States remain a high stress zone going
through dramatic GDP contractions. While as with Abu Dhabi, it remains
unclear if Germany is really willing to bail out the PIIGS 100 percents on
the dollar if government debt concerns come to a head.
· The euro is now supremely overvalued to the benefit of Asian
exporters to the Euroland region. Clearly, the euro can get more
overvalued so long as the rally in risk assets continues funded by the US
dollar carry trade. That means mounting pressure which Euroland can do
little about given its complete lack of credibility at the political
level.
· With the Copenhagen climate summit pending, if Obama wants to
seize the initiative on the economy and create an unnecessary capex cycle,
he needs to demand that corporate America becomes carbon compliant!
equity markets’ resilience has been further demonstrated over the past
week with the mini panic over Dubai. The whole episode serves as a further
reminder of how investors are prone to panic when debts they presume are
government guaranteed are in fact not so. There is certainly no reason to
assume that Dubai World is government guaranteed.
· If the credit multiplier does pick up in America, then the trade
in Asia becomes to buy Asian exporters and in particular Japanese
exporters given that a healthy US economy means a fundamentally stronger
US dollar since the foreign exchange market will be quick to discount
higher US interest rates. Still GREED & fear’s base case remains to wait
for hard evidence that releveraging is occurring before assuming it will
happen and adjusting portfolios accordingly.
· It is certainly wrong to assume that all of the upside has been
discounted for Asia and emerging markets, however consensus has become the
view that Asia and emerging markets are the best place to be. Even after
the remarkable performance seen this year, most emerging markets remain
well below their pre financial crisis highs.
· GREED & fear’s view remains that emerging markets will surpass
their pre-crisis dollar highs sooner or later. But the guess is that one
big correction lies between then and now, and during that correction the
US dollar will rally on the deleveraging trade and the oil-led commodity
complex will correct.
· The best stress test for any potential Asian resilience remains
a S&P500 correction, in terms of how Asia performs in any such correction.
It remains much more likely in the short term that the S&P500 will correct
because of monetary tightening concerns than because of concerns about a
“liquidity trap”. A further spike in oil remains to GREED & fear the most
plausible near term catalyst for a correction.
· The intensifying deflationary pressures in Japan have now
finally triggered a reaction leading to this week’s emergency
“unscheduled” Bank of Japan monetary policy meeting. But the BoJ again
managed to disappoint expectations when the market probably wanted to see
a big increase announced in quantitative easing.
· What the BoJ really needs to do is to convince investors that
the yen should once again become the funding currency of choice for carry
traders and not the US dollar. For a weaker yen remains the most effective
way of combating the intensifying deflationary pressures quickly.
Unfortunately, the BoJ does not have the necessary skill set to achieve
this which is why the best hope for the Japanese stock market is that
monetary policy gets traction in America and US dollar short term interest
rates normalise.
· GREED & fear remains of the view that investors should
overweight both Chinese banks and property stocks. The bounce back in
China bank stocks this week after last week’s capital raising scare is a
positive. As regards property, real interest rates should decline next
year in China since the pick up in inflation is likely to be greater than
the pick up in nominal interest rates.
· It is most unlikely that the PRC will tighten aggressively
towards the property sector given that a new land development cycle is one
important way the Chinese government hopes to meet its 8% plus growth
target next year without too great a reliance on SOE fixed asset
investment.
· The obviously most vulnerable area where similar debt concerns
like Dubai could suddenly shock markets remains the fringe parts of
Europe. The PIIGS spread has begun rising again in recent weeks, while the
CDS spreads on the weak underbelly of Euroland have also been rising again
with Greece leading the march upwards.
· Fortress Euroland has so far withstood the pressures of last
year’s global financial crisis. But in GREED & fear’s view it is premature
to declare victory. The Baltic States remain a high stress zone going
through dramatic GDP contractions. While as with Abu Dhabi, it remains
unclear if Germany is really willing to bail out the PIIGS 100 percents on
the dollar if government debt concerns come to a head.
· The euro is now supremely overvalued to the benefit of Asian
exporters to the Euroland region. Clearly, the euro can get more
overvalued so long as the rally in risk assets continues funded by the US
dollar carry trade. That means mounting pressure which Euroland can do
little about given its complete lack of credibility at the political
level.
· With the Copenhagen climate summit pending, if Obama wants to
seize the initiative on the economy and create an unnecessary capex cycle,
he needs to demand that corporate America becomes carbon compliant!
CLSA REPORT- copied from clsa report....content is owned by CLSA Securities
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