Equity Strategy | Tracking the transition Long Term ASIA: OVERWEIGHT Author(s): Jason TODD, CFA, Chiou Yi CHANG Markets are in a transition phase where positioning, rather than any dramatic change in fundamentals, is becoming self-fulfilling in driving weakness. This adjustment will take time to clear, and unless markets become exceptionally undervalued (and they are not), clearer evidence that pressure points on capital flight are lessening will be necessary for the upswing to resume. On a positive note, higher yields have not driven broad cyclical sector underperformance. This is an encouraging sign that markets are not fretting about growth even as they weaken. However, Asia is not in sync with the US and outperformance by cyclicals over interest rate sensitives need Chinese growth momentum to bottom, and not just US growth momentum to improve. EM debt unwind hits home The first signs of a move higher in US bond yields have started a self-perpetuating selldown of EM debt and fx. This has been broad-based and the adjustment does not appear to be complete. The markets most vulnerable to further outflows and relative underperformance include those which have outperformed, have high foreign holdings (TIPs, Indonesia especially on current account and inflation risks), are commodity producers, are high- yielding markets that have seen strong inflows (Australia), and markets with still-weak fundamentals (India). Current selldown not so much growth related In the US, cyclicals now have leadership over defensives. In Asia, we have also seen a similar, although less emphatic, trend develop. This is positive for equities, Asia included. However, given the rising inter- dependence of the region on China, an improving US economy is not enough to drive a sustained rotation into cyclicals. Holding the course with minor allocation changes We continue to like the US export recovery trade; look to position on dips in “defensive growth” within ASEAN stocks (upcountry, government infrastructure-linked, healthcare) and remain cautious on commodities/ materials in Asia (although this could be the capitulation trade we have been waiting for). We are even more selective on yields and more cautious on financials. We now prefer Thailand to Indonesia within ASEAN, and still prefer China to South Korea. For stocks we would continue to avoid on three key criteria : 1.Lower Quality Yield Stocks Proxy : -PTBA -CPIN -ITMG 2.Vulnerable to Capital Flight : -TLKM 3.Vulnerable to Rising Cost of Capital High Gearing : -ASSA -BBKP -BBTN -ISAT -EXCL -TBIG me @ LOTS Trading Club (LTC)
Posted on: Thu, 13 Jun 2013 02:07:12 +0000
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