just read, per greed n fear
· Financial markets remain crash prone. GREED & fear has seen nothing in the past week to suggest the European leadership is getting ahead of the problem. While an added negative is Congress reconsidering passing legislation on China’s alleged activity in manipulating its currency.
· GREED & fear continues to assume that QE3 is coming sooner or later, in the form of a further expansion of the Fed balance sheet. The obvious catalyst will be an intensification of the Euroland crisis, which will have the negative effect for the US of causing a further unwanted rally in the US dollar.
· A recent BIS study suggests that the Western world has now reached a point where further increases in total aggregate indebtedness are bad for growth even if it is assumed, optimistically, that the authorities are successful in triggering private-sector releveraging.
· Much of Asia appears for the most part still to be well below the debt/GDP thresholds identified by the BIS study as the inflection point where further increases in debt are bad for growth. While Asia in aggregate is lagging the advanced economies by at least two to three decades in terms of rising total dependency ratios. This is why the developed world’s structural problems are still not shared by Asia. Any near-team weakening in economic activity in the region is likely to prove only cyclical in nature.
· If and when a worsening Eurozone crisis causes perceptions on global growth to slow sharply in the coming months, as is very likely, the critical point to remember will be thatAsia has more room to ease. And unlike in the West, there is still good reason to expect that such an easing will gain traction from the point of view of both the economy and the stock market.
· The Korean stock market has been hit by risk-aversion last quarter while the won also depreciated sharply. There would seem to GREED & fear no logical reason for a repeat of the 2008/2009 rout of the won, since the dollar funding in the banking system is much less than it used to be.
· So far the critical export sector has held up remarkably well in Korea though there are signs of a slowdown. But if a global slowdown is coming it is again a major relative positive for Korea that the yen has remained so strong. The increased concerns about a global slowdown also mean that the Bank of Korea is most unlikely to tighten further.
· Korean stock market valuations are cheap on a price-to-book basis. Still, given the operating leverage of the Korean export sector, a small cut in revenue will hit profits badly. This is why there is always a tendency to underestimate the hit to profits in a downturn.
· The Korean domestic economy remains for now remarkably resilient. There is no doubt to GREED & fear that the domestic economy is more defensively positioned than it used to be because there has been a lack of credit excesses in recent years.
· If the external slowdown does hit, the Korean government has room to loosen its currently restrictive policy towards the residential-property market ahead of next year’s presidential election. The major reason for the restrictive policies is continuing official concern about the level of household debt. But the aggregate household-debt level should also be viewed in the context of the high level of household savings. The Korean economy does not have to go into recession even if the Western world does.
· Debt write offs are coming sooner or later in the Western world, as they should do. And the next time these occur real discipline will hopefully be imposed on the system, for example by not bailing out all senior bank bond holders. GREED & fear would advise investors to stay well away from areas like bank bonds and mortgage-backed securities.
· The Asia ex-Japan long-only portfolio only slightly outperformed the regional index in the past quarter declining by 20%, compared with a 21.6% decline in the MSCI AC Asia ex-Japan. The portfolio has risen by 541% (annualised 22.9%) in US-dollar terms since its inception at the end of 3Q02; compared with a 158% (11.1%) rise in the MSCI AC Asia ex-Japan and a 39% (3.7%) increase in the S&P500.
· The recommended hedge for the portfolio, namely shorting European financial stocks, continued to work last quarter with the portfolio declining by 20% and the European Financials and the Euro Stoxx Banks Index plummeting by an even worse 30.8% and 39.2%. This recommended hedge will be maintained.
· The Japanese thematic portfolio marginally outperformed the Topix in the past quarter, declining by 8.6% in yen terms compared with a 10.4% decrease in the Topix. The portfolio is now down 18.8% in yen terms since inception on 17 March 2005, while the Topix has declined by 36.2% over the same period.
· The attraction of dividend plays in the current global environment has been demonstrated by the dramatic outperformance of CLSA’s Singapore dividend-cocktail portfolio compared with the MSCI Singapore Index. The portfolio has outperformed the MSCI Singapore Index by 22.9% so far this year. The portfolio has also handsomely outperformed by 24.3% since its inception on 19 July 2010.
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