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Religare Golbal Strategy 16 June 2011

Religare Golbal Strategy 16 June 2011

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Published by: drakiko on Jun 18, 2011
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Established 1803Global Strategy
“Show me the
Jason Todd, CFAAishorjyo GhoshAnkush Agrawal
+852 3923 9509 (91-22) 6766 3452 (91-22) 6766 3454 Jason.todd@religare.com aishorjyo.ghosh@religare.com ankush.agrawal@religare.com
PPT Name xxx
Global Strategy
Tactically cautious -we remain sellers of any rally in equities and/or commodities. Bonds will rally further.
Cyclical resilience
 –markets are reacting “normally” to deteriorating growth data. Growth is self 
sustaining but not “V
.Growth risk bring other problems to back to light (overleveraged governments/consumers, weak labor markets and incomegrowth).
Markets are in a traditional post “financial” crisis world –
they will remain range bound for an extended period (aka 1968-1982)
Range bound markets are highly “growth” sensitive
momentum and direction matter.
QE3 will be a “candy” high for equities but a “”cavity” low for bonds (equities only see the pros, bonds only see the cons).
don’t think its coming soon. If it does, then the driver of a QE3 decision –
weaker data
will take equities lower and bonds higherin the interim period. 5 factors will make any QE3 decision tough: 1) political opposition/internal disagreement; 2) Core inflation ismoving higher; 3) belief economic weakness is transitory; 4) credit creation remains weak (low rates not enough); and 5) labormarket data is stronger. Alone, QE2 is not an end to risk asset performance but a growth rebalancing accelerant.
EM’’s are close to taking the mantle from DM’s –
but not yet. All risk assets are facing continued headwinds and we are notbuyers on valuation grounds. Equity performance is not about value but about growth and inflation clarity.
DM headwinds rising
weak data momentum, earnings risks rising, policy normalization already underway. Developed marketsare not in a sustained bull market despite performance from 2009 lows (structural problems have been papered over but notsolved).
EM headwinds are close to abating -Emerging markets did not break their structural uptrend, but we have been less bullishrelative to consensus. Expect EM equity correlations to continue to decline further. Fundamentals and position in inflation/growthcycle are vastly different. Country allocation will differentiate returns in 2011. Asia/EM flows susceptible to additional capital
controls as currency appreciation continues. EM’s still reliant on functioning DM capital markets.
Tactical Caution but Cyclical Resilience
PPT Name xxx
Global Strategy
Flows into EM’s/Asia driven by: 1) hunt for “yield”; 2) widening growth and rate differentials; and 3) underexposure to EM’s
(structurally). Risk of further capital controls as currency appreciation risk rises but potential for currency appreciation to be usedto offset rate tightening as CB policy tool.
Growth limits evident, inflation pressures becoming entrenched (China & India in particular), external demand slowing andpolicy still accommodative (real rates across the region negative and central banks are reluctant to over tighten given global
growth concerns). Expect further currency appreciation (a “softer” policy tool than rate hikes).Domestic demand remains solid and will reassert into late 2H and 2012, but a “shock” is needed to realign bullish portfolios
andlight turnover. Stay cautious but our preferred plays are China and Indonesia. We have become incrementally more positive onIndia (post our long standing sell). We are more positive on the backdrop for the inflation fighters (SE Asia) than the growth plays(NE Asia) over coming quarters as growth momentum weakness and inflation risks peak (base effects + declining commodityprices).
Developed markets
The US remains our favored pick over Europe. Equities should perform reasonably well despite risinggrowth concerns. Margin risks will pressure optimistic earnings expectations but the market is not expensive even if earningsarecut 5-10% from here. Japan is the value play but it has been for a decade and we are not convinced it has yet alleviatedgrowth/currency headwinds despite settling into a range 9400-10000 on the NKY.Europe remains a play on the North vs. the South but we are more cautious on Germany which has been the key driver ofEuropean performance. We are sellers of the developed market commodity markets
Australia / Canada on any near termstrength.
Market themes -
Previously what to Avoid (policy, margins, rates), Now what to Buy (lower inflation, domestic demand)
Capex(Tech/Industrial) + Commodities + Credit (Asian Banks/Insurance)
Asian domestic demand -China -Internet, Luxury Goods, Gaming, Mechanization, India -Healthcare & Staple
Large cap blue chips
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