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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum
GLD 385.42-0.3%Dec 8 4:00 PM EST
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To: 2MAR$ who wrote (83300)11/17/2011 8:58:01 AM
From: TobagoJack  Read Replies (1) of 218269
 
Just in in-tray, greed n fear

· World stock markets clearly continue to want to go up since they continue to ignore the deteriorating action in the Eurozone credit markets. Still GREED & fear remains firmly of the view that it will pay to bet against risk if the S&P500 makes it temporarily above the 200-day moving average.

· GREED & fear continues to believe that the German quid pro quo for an increasingly likely move to full scale monetisation by the ECB will be a German dictated fiscal union complete with a European Treasury or fiscal authority with the power to raise taxes and issue joint and several eurobonds. Investors for now should assume a weakening in the euro and continue to keep a close eye on the French-German bond spread.

· The Indian stock market has underperformed this year as it has discounted Asia’s most aggressive monetary tightening cycle. There is still no concrete evidence that inflation has peaked, though the RBI has, for now at least, gone on hold. Inflationary pressures have proved much more intense in this cycle than either the central bank or private-sector economists were predicting.

· The best explanation for the stubborn inflation is “force-fed trickle down”. The trickle down refers to the fact that labour has found itself with much greater bargaining power in a country where unskilled workers have generally been viewed as having no pricing power whatsoever. The “force-fed” nature of the trickle down refers to the Congress-led government’s policies consciously seeking to redistribute income.

· Monetary tightening is a blunt tool in the current Indian macroeconomic context since it is more likely to hit investment than consumption, as is now happening. Yet investment is what is needed to deal with the supply constraints which remain the major impediment to Indian growth and which, incidentally, are also a contributor to inflationary pressures.

· The reality for now is that the RBI has gone on hold and is hoping that inflationary pressures will now subside as predicted. This is because it is increasingly mindful of growth issues, most particularly given the deteriorating external context.

· Another issue in the Indian growth story is the sharp slowdown in investment projects, most particularly in the infrastructure sector. The good news on the infrastructure issue is that the highway programme has picked up significantly in recent months. The bad news is the lack of progress so far on energy which poses a growing constraint on growth.

· The above issues are largely reflected in the stock market with consumption stocks performing dramatically better than the likes of bank stocks or infrastructure plays during the course of the monetary tightening cycle. GREED & fear would recommend a barbell strategy where positions are maintained in the highly rated consumption sector in Indiawhile building investments in the relatively depressed banking and infrastructure area.

· There is a risk of a sudden drop in the rupee beyond the 50 level should a renewed wave of Eurozone-triggered risk aversion lead to a deleveraging-driven US dollar surge. The potential for rupee weakness is also clearly driven by India’s perennial current account deficit. This will focus attention on corporates’ dollar borrowing.

· The investment-driven infrastructure story in India will kick in again, with the only question when. For this remains one of the world’s best growth stories on a 20-30 year view. It is so good precisely because India spent so little in infrastructure in the 50 years following independence.

· The stubborn inflationary pressures entrenched in India in the past two years are fundamentally a function of growth, and especially income growth. There is always the risk of an inflationary spiral, though GREED & fear finds this extremely unlikely in the Indian context given the relatively hawkish stance of the RBI.

· Bank Indonesia’s aggressive monetary easing reflects the lack of inflationary pressures this year, which is primarily the result of the strong rupiah. Still in GREED & fear’s view the long term investment case for Indonesia would be helped if the Indonesian central bank had displayed more caution.

· The overweight in India in the Asia Pacific ex-Japan relative-return portfolio will be reduced by two percentage points by increasing the weighting in China to an overweight.



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