Global Market Thoughts (GMT)

The last post was a while ago, and the hols were fun, and likewise the golf; but it’s been 2 weeks back from hols, and been trading & watching the Markets “Party on Risk”! A friend reminded me yesterday that I was slacking off, so that’s the impetus for this post!!

EQUITIES:

To recap, some of the stock positions mentioned in previous blogs in December (that’s all that I posted) – long China/Infra plays (Anhui, West China, Agile) have been specially rocking! So have the sedate Cisco, Dell, Intel – all targets reached – Dell of course, flying on the privatization bid! Unicredito – take a look for yourself in the charts – been 25% over last few weeks - Goldies probably heard about this blog & added it to their “conviction buy list”, couple of days ago!!! Targets reached, but the party continues - and so the perennial question: continue to ride longer, or is it time to get off this race-horse? Esp. now that Goldies is calling for even more rallies... That’s just my cynical self!

Jokes aside, the question is ‘what will be the spoke in the wheel’?

     Europe – well, there’s the Italian election story & the perennial Greek issue... they will likely pass, but for a Berlusconi victory – that Beconi election may cause a minor tremor.  It’s good to know that Frau Merkel is getting better ratings in domestic polls – will make her confidant of standing by the ‘United Euro’ effort – if the need ever rose again (and it will). So this, in itself, is not a party spoiler YET.

     Central Banks – they have put themselves in a bind, by committing to keeping rates low for few more years, and until unemployment is decimated (almost) – either they keep promises or break them & start tightening to kill the ‘Irrational Exuberance’ – however, being the kindly folk they are, unlikely they will spoil the party – But the markets can smash bonds & steepen curves & cause havoc in rates-land thereby forcing the Equity Brethren to wake up & smell the coffee … somehow me thinks, this is unlikely to get the coffee hot, since BB is around with a fire-extinguisher mopping up all available bonds, to dump into his bottomless (balance sheet) pit! So this too is not a party spoiler YET.

     China, a party spoiler? Not after this leadership transition, and their  easy approach to stimulate growth – more FAI – keep it going at 20+%, as they have for the last decade … cannot see this kid being mean to markets.

     Other Party Spoilers - Japan, Aus, UK, Mid East Politics, North Korea? Of these, the MidEast does have potential to add fuel to fire ; and lotsa reserves of oil as well as flames of simmering discontent – so that would be a worry.

    Data – well the ultimate report card of the state of econ – now as far as US & China go, these have actually been a provider of support for the Party – so will take a few months for them to turn-over, but not happening in a hurry. Not a Party Spoiler YET.

   Ah, but the most interesting one of all is US budget debate (19/May deadline) – and while the senators may be ok about not getting paychecks after 15/April, the republicans will force a showdown this time on fiscal spending – and that my dear, will cause a 2% negative wobble on US GDP (me not being an academic economist can pull one number from the air; my econ friends would debate the decimals!) And, BB know this as well as the precise decimal, and so will just oil the party & do nothing... until May – then fireworks begin... its gonna be the old adage – sell in May & go away (esp. in 2013)!

Gosh, I worry more, when I find nothing to worry about. All this lack of worry is sure to spoil my next golf game! As they say, it all depends on how well you time the ball … and for now though, while hanging onto my cliff of worry (though the fiscal cliff is over & our conviction call on its resolution panned out ok, in the nick of time, thanx to Joe Biden), I’d stay with the momentum in equities , for now .. since all the smart folks sitting on the side-lines during the numerous worries of 2012 have just cast of their caution, and the chips are coming back to the table (weekly global equity flows topped 22b recently, just 2 to the 23 bio number in week of sept-2007 – that infamous year !). So stay on, but hold a tight leash to stop the horse & get off quickly!! I would not wait for May – probably another month or two, while watching & worrying.

CREDIT :

Given the above BB proclivities, and the Japanese friends adding more of the same, while Eurozone "Draghis" on the money-spinning machine (despite some paying back of the LTROs), think liquidity conditions globally will continue to remain flush. And some of that money (which is not going into equities), is finding a home in Credit land. Thus the flurry of issuances we’ve seen across the globe (incl Greek Telecom), and a whole host of Asian Names from China & India, as well as foreigners tapping the small, but cash rich, Singapore Dollar SGD pool of money.

Given the decent corporate bal sheets here in Asia, we continue to be positive this space – and hold onto our China Property/ Infra plays, and added onto some of the Indian names. Levered portfolios (with shorter duration of around  3 to 4 years) are the way to go ! However, equity like returns seen in this space last year, will not be repeated – but then, what’s wrong with a 9 – 10% return when my bank deposit pays nothing … and so, most of my money (70%),  is sitting here, in names mentioned previously (Evergrande, Longfor, Gemdale, West China, some Euro Financials, Indian Banks, and yes, the controversial and “muddied” Olam – got this during the unclear water saga, but after Temasek put a back-stop).

RATES / FX :

And what about global rates – cannot see big selloffs in UST from current 2% levels, so neutral here.

Asian Rates – well RBI has cut rates (and crr) in 2013 , and probably will again this year – but do not think of this as a major rate cutting cycle (since inflation will continue to cause concern, and Maharashtra has a severe drought fanning the food inflation flames); most other econs will be like Korea (easy rates) , incl Malaysia where an imminent election means all CB staff can go on holiday until end-June (the Greek CB can teach them how to take vacations), Indonesia where all they think about is FX, but given that what I heard was that there was more noise about Indo and its 250 mio people, than India (and its 1 Bio mass) in terms of FDI (50 bio number being thrown around into Indon it seems, vs. a measly 10-15 for India, I think Indo FX will do fine & CB will only tweak rates. This year it seems to me, will be a year of easy Asian Rates (until mid-13).

USD/JPY – well the Waves of Weakness mentioned in the last blog, panned out precisely – this trend continues with Abe’s blessings until the next BOJ Gov takes charge in March .. Asians are trying to be like the Koreans – gosh, cannot afford the runaway Yen to steal my Zen .. so if they depreciate, we do too – Trade Wars, Competitive Devals – those are harsh outcomes … unlikely that we get either, but Asian FX will me thinks have a weakening bias against USD. Am somewhat neutral here (position wise), except for going counter to this USD/INR down-move (initiated yesterday post RBI).

China is watching this JPY move, and monitoring that other useless piece of ‘rocky’ with keen interest – they must wonder how to ‘weaken’ CNY without getting into US political ‘bad mouthing’. So not very bullish CNY, as I used to be last year. Just staying neutral for now.

And likewise are the other Asians – esp. the Koreans .. while I have great respect for the Samsung’s achievements & sing its praises, they have been , in my view, hugely helped by the multi-year downdraft in krw-vs-jpy ! Let’s be honest, their innovative energies notwithstanding, competition is about making things cheaper for the buyer in his/her currency … And their Taiwan brethren also watching all this action in islands around them. And so, my feeling/thinking is that Asian FX for next few months will side-line or weaken.

The MYR is in election frenzy, but is the only one in my view which will be attractive to go long (maybe even start building possie slowly now), and likewise the THB and PHP (despite all kinds of political noises that have already started).

As for INR, cannot see the Current Account changing hugely (despite the Gold duties), and even worse, cannot see the fiscal side coming anywhere close to their targets (despite FM Chid’s promises) – and would be wary of a ‘ratings downgrade’ – something that will cause RBI tons of headaches.

What’s caught my attention is the smacking of the GBP & the strengthening of the EUR. While am not sure if DC finally agrees to a UK referendum if he gets “re-elected” (the impact on UK economy will be severely negative if they pull-out), but what I would hedge all the above ‘party atmosphere in equity/bond land’, is by looking at shorting EUR – haven’t done it yet. But thinking & worrying about it. And that’s sure to spoil my next ‘golf game’.

Party On – Let the Music Continue DJ Ben !