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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum

GLD 366.07

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Nov 6 4:00 PM EST

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To: elmatador who wrote (51191)	6/11/2009 8:27:35 PM
From: TobagoJack	1 Recommendation Read Replies (1) of 217561

just in in-tray · It is becoming likelier that a cause of an equity sell-off later this summer may be prompted by premature fears of monetary tightening. In GREED & fear’s view any monetary tightening scare in coming weeks will be a fake out. The view here is that the Fed will not tighten in 2009 and the US Treasury bond now represents good value in the context of the continuing deflationary environment. · Any further back up in government bond yields further constrains the economy by putting upward pressure on mortgage rates. This is why the Fed is going to be under increased pressure to announce increased purchases of US Treasury bonds at the next FOMC meeting on 23-24 June. · China will continue to demonstrate command economy traction. The resilience of the China economy so far this year has further re-enforced the people’s confidence in the government in terms of the competency of its economic management. · In the context of continuing surging public sector fixed asset investment and continuing resilient consumption, it is possible that the China economy grows by nearly 9% in the second half of this year after likely growing by nearly 7% in the second quarter. The likely achievement of such a growth rate can only further fuel the incremental decoupling story. · One risk in China is that bank loan growth will inevitably slow from the first quarter’s hectic pace. Still even allowing for a dramatic decline in the rate of lending, bank lending is likely to end the year growing by 15-20% which is in the range viewed as acceptable by the authorities. · Another risk, looking further out to 2010, is whether private-sector investment will take over the lead from the command economy-driven surge in fixed asset investment this year. Encouragingly, private-sector investment growth is picking up fast. The best hope that private-sector investment will continue to pick up into next year is the remarkably rapid recovery in the residential property market seen so far in 2009. · Residential property remains absolutely critical in China because it is where the private sector meets the command economy. There is no doubt that there is fundamental demand for housing in China if the price is right. But there is also no doubt that government policy towards the sector is critical. · The surge in residential sales in China seen this spring must reflect in part the pent up demand. The rate of sales growth could well slow to a more normal 10-15% range which would be quite healthy and should still in due course lead to a clearing of the inventory and the commencement of a new property development cycle next year if not earlier. · The resilience of consumption has also been helped by other government measures, be it tax cuts and subsidies for car buyers or other government-support schemes to support rural incomes and rural sales. More such consumption boosting schemes should be expected by investors. The other reason that consumption has held up is the resilience of employment combined with the fact that prices have been falling. · GREED & fear’s guess is that the NPLs in China are only likely to show up in 2011, if not 2012. The biggest NPL risk down the road is probably not loans to consumers but rather to local government infrastructure projects. There is also a risk that GDP data is being artificially manipulated by local governments to meet central government targets. · Still in GREED & fear’s view the positive consequences of the clear direction of central government policy are a much greater plus than the possible negative influences from local government. What should be a greater concern for investors is the profit trend. Ultimately, how bad the profit squeeze becomes will depend on how much the private-sector investment cycle will pick up in a context where Western economic growth will remain anaemic. · From an overall stock market perspective, GREED & fear would expect the China story to tread water in coming months from a relative-return perspective. The A share market has reached a level where locals expect considerable resistance and a correction sooner or later. · The overweight in China in the relative-return portfolio will be reduced by 1ppt and the weighting in Korea by 2ppts with the money moved into Malaysia. This is primarily a tactical decision reflecting GREED & fear’s view that it makes sense now to start putting money back into a defensive market like Malaysia as equities have already rallied a long way towards GREED & fear’s 1,000-1,050 target range on the S&P500 for the present relief rally on Wall Street. · GREED & fear’s long held view is that Asia and emerging markets are in long-term secular bull markets that commenced at the bottom of the Asian Crisis in 1998; and that America and various other Western consumption-driven appendages are in secular bear markets. This view implies that sooner or later decoupling has to happen in the capital markets. · The tactical issue for oil and commodities is whether the market will take its signal from resilient emerging market growth or disappointing US growth. As oil moves higher towards GREED & fear’s guesstimated peak of US$80 to US$85 in this counter-trend move, the more vulnerable it becomes to disappointing news from the US and the West. · Investors also should not forget about the continuing structural problems in Europe where banks remain dramatically more leveraged than they do in the US. And the problems in Central and Eastern Europe are not over. Macro investors who are not yet in the trade should put on the PIIGS widening spread trade now. · Germany is the last place to worry about in the Western world since it has the least leveraged household sector. In a deflationary downturn what really matters is the health of the balance sheet and not the profit and loss account. · The investment in Suntech Power in the Asia ex-Japan absolute-return portfolio will be removed and replaced by ICBC. CLSA CLEAN & GREEN: Please consider our environment before printing this email. The content of this communication is subject to CLSA Legal and Regulatory Notices These can be viewed at clsa.com or sent to you upon request.

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