just in in-tray, per GREED n fear, and i am 100% maximum enthusiastic to engage
· Investors are concerned about being too overweight in emerging markets and wondering, amidst the growing hopes of a normal recovery in the West, whether they should own more developed world stock markets and in particular Japan.
· With Western yield curves steepening, hopes of normal cyclical recoveries in the West are rising. This should lead to rising tightening expectations sooner rather than later. These rising cyclical hopes are bullish for equities and will continue to be so in the near term as New Year allocations go into stocks. GREED & fear still sticks with the 1200 target on the S&P500.
· Still, the very prospect of monetary tightening will subsequently send stock markets lower forcing investors to refocus on the fact that they do not really want to see monetary tightening because there remains no convincing evidence as yet that the West has escaped the risk of a deflationary liquidity trap. The realisation that short-term interest rates in the West are not rising will then force investors to refocus on the main beneficiaries of an extended period of ultra low interest rates in the West. That is domestic plays in Asia.
· Rising tightening expectations in the US based on cyclical recovery hopes, combined with headline inflation rates rising on the base effect, could easily lead to yet another phony inflation scare correction. In the context of Asia there is also the potential for another oil-driven food inflation scare. Such a scare will provide an opportunity for long-term investors in Asia to buy interest rate-sensitives on a correction.
· GREED & fear’s fundamental long-term view for 2010, as discussed in the new Asia Maxima, is that, while investors should be sensitive to the growing tactical focus on cyclical recovery in the West, they should also continue to position the core of their portfolios for the likelihood that Western monetary policy remains extremely easy to counter the continuing deflationary threat.
· Continuing easy monetary policy in the West will remain a perfect breeding ground for a domestic asset bubble in Asia, most particularly given Asian policymakers’ all-too-evident continuing preference for suppressing currency appreciation. Long-term investors’ Asian portfolios should remain concentrated in domestic sectors. The growing near term possibility of equity corrections caused by inflation scares and related fears of monetary tightening will turn out to be buying opportunities in Asia.
· Asia will face a policy challenge in a world where the American economy does not enjoy a healthy recovery and US policy remains ultra easy. The overwhelming likelihood is that Asia will engage only in incremental tightening, not aggressive pre-emptive tightening. This will at best extend the duration of the asset-bubble cycle rather than eliminate the risk altogether. But, ultimately, the probable continuing suppression of currency appreciation is likely to be reflected in upward pressure on Asian asset prices.
· A key investment conclusion of the new Asia Maxima is that the West simply cannot afford to tighten in any meaningful fashion, just as the still deflating Japan cannot. Market focus will remain fundamentally on those parts of the global economy that are enjoying healthy growth. That is Asia and emerging markets.
· The long-term performance of GREED & fear’s Asia ex-Japan thematic portfolio remains for now respectable. The portfolio has risen by 500% in US-dollar terms since inception at the end of 3Q02, compared with a 181% rise in the MSCI AC Asia ex-Japan Index and a 36.8% rise in the S&P500. The portfolio marginally outperformed the regional index last quarter rising by 6.9%, compared with a 6.4% gain in the regional index. The portfolio also outperformed in 2009 rising by 71.3% versus a 68.3% gain in the regional index.
· The recommended hedge for this portfolio, namely shorting Western financial stocks, has worked since it was introduced in mid-2007. The portfolio has risen by 3.5% in US dollar terms since 1 July 2007, while the S&P500 Financials Index, the Bloomberg European Financials Index and the MSCI Australia Financials Index are down 60%, 52% and 26%, respectively, over the same period. It also worked again last quarter with American, European and Australian financials falling by 3.7%, 8.7% and 1.2%.
· The absolute-return thematic portfolio for Japan, introduced on 17 March 2005, outperformed the Topix last quarter rising by 5.0% in yen terms compared with a 0.2% decline in the Topix. For the whole of 2009, it also outperformed rising by 7.9% compared with a 5.6% gain in the Topix. The portfolio is now down 8.4% in yen terms since inception, while the Topix has declined by 23.9% over the same period.
· There is room for a depressed Japan to keep outperforming so long as investors believe in a cyclical recovery in America and normalisation of US interest rates because this will mean a weaker yen against a stronger dollar. In this sense Japanese export stocks provide a useful hedge for investors whose portfolios are otherwise heavily exposed to Asian domestic sectors. But once these hopes are dashed the focus will return on Japan’s intensifying deflationary domestic downturn.
· The investment in Standard Chartered in the Asia ex-Japan thematic portfolio will be replaced by an investment in Gome of China, the home appliance retailer. In the Japan portfolio 1ppt each will also be added to Mitsubishi Heavy Industries and Nikon, with the money taken from the investment in Japan Prime Realty. And 1ppt will be added to Canon with the money taken from Japan Retail Fund.
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