just in in-tray, per greed n fear
· The risk of a “euro quake” continues to increase as the politicians continue to dither. While GREED and fear’s base case remains that Germany will end up footing the bill, along with the rest of the core, it seems increasingly likely that more market stress will be required to force Frau Merkel in this direction. The longer action is delayed the more expensive is likely to be the ultimate cost for the core.
· GREED & fear is still assuming that the way forward for Euroland will be for fiscal integration to follow monetary integration. Still no one should underestimate the potential for political backlash in the core, most particularly in Germany, should the damage done to the ECB’s balance sheet be exposed to ordinary public opinion.
· Investors should also keep an eye on the pending huge refinancing requirement facing European banks in terms of their bond refinancing agenda. This is the sort of pressure point capable of triggering a liquidity panic unless Euroland policymakers become much more pro-active. But it may take more market stress to force precisely this sort of policy response.
· GREED & fear continues to advise investors to bet on no rate hikes by the ECB as well as to bet on rising German, Spanish and French CDS spreads. GREED & fear also continues to advise investors in the Asia Pacific region to run a big underweight in Australia since this currency is as exposed as any globally to commodity weakness.
· There is a lot more noise in India than when GREED & fear last visited in November. That noise consists of continuing inflationary pressures and related worries about a sharp slowdown in infrastructure investment amidst the fallout from corruption scandals and higher interest rates.
· A slowdown in investment is happening in India. This is worrying since infrastructure development is the key macroeconomic variable in the Indian macroeconomic story. The risk is that this will trigger the long-feared supply bottlenecks in the economy and aggravate further current inflationary pressures. Still GREED & fear’s view is that the reality is likely to prove not so dire.
· There may have been a slowdown in new highway project awards in India in the second half of last fiscal year. But it hardly constitutes a collapse. The biggest negative for quoted companies geared to road construction has been less the lack of progress on new projects but rather that the margin on building roads has been coming down. Still the key point for GREED & fear is that the highway programme will continue.
· The risks to the Indian infrastructure story is already reflected in the sell-off in the infrastructure related plays and the banks in recent months. Still if the current slowdown is just a speed bump rather than the end of the story, as is GREED & fear’s base case, then these are the sectors which long-term investors should now be looking to buy into.
· The Congress Party has enjoyed political dividends from its rural income support policies. Rural India has been booming in recent years. Indeed rising purchasing power is one reason for the past year’s surge in inflationary pressures.
· In GREED & fear’s view the extent of further RBI monetary tightening to come will primarily depend on external factors. If risk aversion surges as a consequence of a renewed crisis in Euroland, the consequent likely sharp sell-off in commodities is likely to lead to a significant reduction in inflation concerns in India.
· The Indian stock market should not freak out about one-off hikes in inflation caused by the hoped for, and fiscally desirable, cuts in energy subsidies. But the best hope for declining inflation in India over the next nine months remains, as in China, the statistical base affect.
· GREED & fear’s base case is that the Indian stock market is likely to re-test the low seen in February even without a general surge in risk aversion. Still a “euro-quake” would likely trigger a break through this level.
· Still from a relative-return perspective, India would start to look much more attractive if there was a sudden mass exodus from the dollar funded carry trade, and a resulting sharp sell-off in risk assets like commodities. This would be the ideal time to add to the core plays on the long term Indian growth story which are banks, consumer plays and infrastructure plays.
· It remains remarkable how little foreign investors have sold Indian equities this year given the huge inflow last year and given the underperformance of the Indian market since October 2010 amidst the obvious inflation risk. GREED & fear can only attribute the resilience to investor belief in the Indian growth story, a belief GREED & fear shares.
· In the interest of hedging the growing risk of a Euroland-driven surge in risk aversion globally, GREED & fear will this week remove the leverage in the Japan long-only portfolio introduced following the sharp stock market sell off triggered by the earthquake in mid March. The investments in Tokio Marine, Dai-ichi Life and Sumitomo Realty will be removed.
· The investment in Axis Bank in the Asia ex-Japan long-only portfolio will be replaced by an investment in ICICI Bank.
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