fear and GREED, just in in-tray
· The theme of the new quarterly Asia Maxima is limited relief. This refers to the potential for the current relief rally in global equities to run further before it fails. Such a rally was clearly overdue since the S&P500 had sunk to 36-40% below its 200-day moving average at its recent bottoms. This type of extremely oversold condition means the stockmarket can bounce a long way and still be in a bear market.
· It is also to be expected that in the current environment investors’ focus should remain on policy since they naturally want to believe in their less-rational moments that there is some short-term fix, or “magic bullet”, to escape from the present deflationary downturn.
· China policy is already beginning to gain some traction. The significant outperformance of China, Asia and emerging markets relative to the S&P500 since late October indicates that this asset class, and in particular China, will not be a completely correlated train wreck with the US consumer. Investors should remain for now Overweight China shares and stay tactically positive on the oil-led commodity complex.
· The risks to the China story will grow later this year if, by then, there is still no real sign of a pickup in the external sector because Western consumer demand remains depressed. This could then prompt concerns about a W-shaped outcome in China on the view that the effects of the steroid stimulus can only last so long.
· China is for now serving as a source of stability for global financial markets as Western governments increasingly bet their sovereign balance sheets to combat the deflationary menace. The command-economy aspects of China can continue to work as a buffer so long as the PRC has control over the system.
· The long-term performance of the Asia ex-Japan thematic portfolio remains respectable for now. Since its inception at the end of 3Q02, the portfolio has risen by 253% in US-dollar terms, compared with a 67.3% rise in the MSCI AC Asia ex-Japan index. The portfolio performed almost exactly in line with the regional index last quarter, rising by 0.7%. Owners of the portfolio should short European and Australian financial stocks as a necessary hedge given the continued collateral risk posed to Asian stocks by the unwinding of the credit bubble.
· The Japan thematic portfolio underperformed the Topix last quarter, declining by 13.5% in yen terms compared with a 10% fall in the Topix. The portfolio is down 26.6% in yen terms since inception on 17 March 2005, while the Topix has declined by 35.1% over the same period. Investors in Japan are advised again to assume significant further weakness in the yen and adjust their portfolios accordingly.
· GREED & fear remains underwhelmed about last week’s G20 summit. True, the US$500bn recapitalisation of the IMF is significant and reduces the likelihood of a full-scale blow up in the European periphery this year. But the headline-grabbing communiqués failed to deal with the key issue, which is how countries should deal with their broken banking systems.
· The Thai political situation is heating up again with the “red shirt” demonstrators gaining more momentum. Former Prime Minister Thaksin appears to be “going for broke”. The zero weight in Thailand in the relative-return portfolio will probably be maintained until the conflict comes to a defining climax. Capital has been flowing out of Thailand in recent times, a trend which can only be explained by the protracted political uncertainty caused by the fundamental divide in the country over the Thaksin issue.
· Transaction activity in Hong Kong’s residential property market has picked up of late. This has been fuelled by local banks’ renewed willingness to extend mortgage financing, combined with the growing popularity of Hibor mortgages. These are the main reasons why GREED & fear has increased the weighting in Hong Kong in the relative-return portfolio in late March. The Hong Kong residential property market is also the only one in Asia with a significant supply constraint.
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