just in in-tray
· The air pocket in global economic data continues to be truly breathtaking. The collapse in US consumption is already occurring at a rate which, if projected forward, would imply the US personal savings rate surging from 2.4% in October to 10.4% in April 2009 and 20% by the end of next year. Now investors have also been gobsmacked by the collapse in intraregional trade within Asia.
· China is not just another capitalist economy. There remains a significant command economy element which in GREED & fear's view will provide a significant buffer in the current global downturn. The spectacular collapse in the export processing industry is forcing policymakers to think hard and fast about measures to promote consumption and not just investment.
· Urgent thought is now being given to provide retraining programmes on the "human investment" theme and improving the social security system. The word in Beijing is that the projected Rmb4tn fiscal stimulus will not just consist of the usual physical investment. Rather there will be a significant part of the money spent on so-called "people's well-being".
· If a W-shaped recovery is a possibility, GREED & fear would still favour the U-shaped outcome in China. For the view here is that the policy response will not just consist of a pure physical investment stimulus. But it will be a U and not a V because it is clear that more weakness is coming in the immediate months ahead before the policy response begins to get traction.
· GREED & fear's view is that the first sign of the physical infrastructure stimulus gaining traction is likely to come at the end of the first quarter or the beginning of the second quarter. The central government projects will start the process with local government projects following later since they will have to be subject to a centralised vetting process.
· There will be no problem funding the infrastructure programme since Chinese banks will be ordered to lend if there is any reluctance to do so. Still GREED & fear sees no reason why China's banking system should not want to fund infrastructure programmes.
· The Chinese government precipitated the downturn in residential property over the past year and more. But with government policy having now reversed, there is clearly every scope for the market to stabilise and then recover. Since there is excess inventory, this will probably require developers to cut prices at which point transactions should pick up allowing the market to clear. GREED & fear would expect this process to play out over the next nine months or so.
· If execution of the current policy response in China is successful, then it means that the present crisis in the export sector will have served in the longer term as a useful and indeed necessary catalyst to accelerate the transaction of the economy to a more domestic demand focus.
· From an overall China stock market point of view, the present crisis clearly amounts to a massive long-term buying opportunity. For if the China policy response does indeed gain some traction, that will mean that on a 2009 view China will prove that its economy can achieve a certain incremental decoupling.
· GREED & fear maintains the view that China and India will not be correlated train wrecks in the current US crisis. In China's case, the saving grace will be the ability of government policy to gain traction. In India's case it will be the fact that the economy remains dominated by domestic demand. Investors in Asian equities should maintain structural overweights in China and India in their portfolios.
· China's weighting in the relative-return portfolio will be raised by 3ppts to maintain an overweight, with the money taken from Malaysia (1ppt) and Thailand (2ppts). The weighting in Indonesia will also be reduced by 1ppt with the money added to Korea.
· As for the absolute-return portfolio, the investments in Bangkok Bank and Advanced Info Service will be removed while the investment in Indocement will be reduced by 3ppts. These investments will be replaced by Huaneng Power, Want Want and China Railway Group. Beijing Capital International Airport will also be added to the portfolio with the investment funded by shaving the weightings in Cairn India, China Resources Power and Standard Chartered by 1ppt each.
· GREED & fear's longstanding 2.5% US 10-year Treasury bond yield target was hit on 5 December. GREED & fear also expects a reduction in the federal funds rate from 1% to 50bps at next week's FOMC meeting. But after that the Fed's focus is likely to switch to the supply of money not the cost of it.
· The catalyst for the further relief rally in global equities that GREED & fear still anticipates will be policy initiatives from the incoming Obama administration, combined with ever greater Federal Reserve monetary activism. So long as this hoped for policy response is maintained the market can continue for now to shrug off bad news.
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