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Greed & Fear in Asia’s emerging bubble
Oct 05 11:41
by Gwen Robinson
The exuberant rally in China and other Bric markets since the Fed’s September 18 “panicky easing” has provided the clearest signal yet where the next bubble will form, given the total discrediting of structured finance, More…
The exuberant rally in China and other Bric markets since the Fed’s September 18 “panicky easing” has provided the clearest signal yet where the next bubble will form, given the total discrediting of structured finance, notes CLSA’s Christopher Wood in the latest issue of his Greed & Fear client newsletter.
Market dynamics are now set to benefit Asia in the medium term, however bad the news flow is from America. For the worse the US economy becomes, warns Wood, “the more aggressively the Fed will cut rates”.
This monetary easing will do little to persuade American consumers to borrow more after their recent shock, while banks will be constrained by the burdens they will have to take on to their balance sheets in coming months.
This is why, in Wood’s view, “sooner or later, America will have to embark on fiscal stimulus with an emphasis on badly needed infrastructure spending”. But Fed easing will further fuel asset reflation in Asia where investors, excluding for now the Japanese, are becoming increasingly willing to buy “risky” assets in their own market, be it equities or real estate.
This trend is most extreme with China shares where the top-10 stocks listed in Hong Kong now have a combined market capitalisation of US$895bn, notes Wood.
But the same trend is observable in many other countries in the region even if it is nothing like as dramatic as in China, which never suffered the psychological trauma of the Asian Crisis.
Rising local investor participation is what is needed to turn Asia from a fundamental-driven rerating story to a red-blooded bull market where greed increasingly drives sentiment, says Wood.
This “natural transitionary process” is now underway, led by China, he adds.
Fed easing now will provide a further reflationary stimulus for Asia even though no easing is needed from a domestic Asian inflation standpoint. Indeed, the easing will only serve to put further upward pressure on Asian currencies, necessitating increasing intervention, which it will become increasingly hard for regional central banks fully to sterilise.
The message is clear. It is a good time to be an Asian stockbroker, notes Wood.
Meanwhile, he advises, “investors should stay five times overweight Asia ex-Japan markets in a global equity portfolio, which now means that global equity investors should have at least 37 per cent of their global portfolio invested in Asia”.
Anyone who does not have such a weighting should use further “high-beta” corrections as an opportunity to add to positions in Asia, he adds.
But what about Japan? It is not geared directly into Asia’s “emerging bubble” story, given its vastly inferior lower trend growth rate, he notes. “But, nor does it face a potentially nasty deflationary deleveraging cycle, which remains the key risk facing America and other consumer-finance driven western economies like Britain”.
This is because Japan has already been through such a deflationary downturn, notes Wood. It is a defensive market on a relative basis, most particularly the domestic stocks, which investors would be advised to accumulate now. The fundamental situation in Japan is “nothing like as bad as reflected in the current sentiment of investors”, he says.
The Japanese stock market is “going nowhere” in the big picture unless bank stocks lead the rally as happened in the past few days. Therefore, says Wood, Bank of Japan governor Toshihiko Fukui should now show more courage and use the relative temporary calm in world credit markets to raise the overnight call rate at next week’s BoJ meeting.
In Wood’s view, global investors should fund an overweight in Japanese domestic stocks by remaining underweight western financial stocks.
And while the focus is on Asia, Wood turns his eye on destination of the week - Indonesia, which, he says, “has enjoyed its own boom in equity mutual funds as interest rates have collapsed in the past two years”.
The desire to invest in riskier assets is clear but there is still a lot more potential for money to flow into equities. The overall story on Indonesia remains a positive one, he says, noting that companies there continue to meet earnings expectations while forward earnings expectations “remain healthy”.
Greed & Fear in Asia’s emerging bubble
Oct 05 11:41
by Gwen Robinson
The exuberant rally in China and other Bric markets since the Fed’s September 18 “panicky easing” has provided the clearest signal yet where the next bubble will form, given the total discrediting of structured finance, More…
The exuberant rally in China and other Bric markets since the Fed’s September 18 “panicky easing” has provided the clearest signal yet where the next bubble will form, given the total discrediting of structured finance, notes CLSA’s Christopher Wood in the latest issue of his Greed & Fear client newsletter.
Market dynamics are now set to benefit Asia in the medium term, however bad the news flow is from America. For the worse the US economy becomes, warns Wood, “the more aggressively the Fed will cut rates”.
This monetary easing will do little to persuade American consumers to borrow more after their recent shock, while banks will be constrained by the burdens they will have to take on to their balance sheets in coming months.
This is why, in Wood’s view, “sooner or later, America will have to embark on fiscal stimulus with an emphasis on badly needed infrastructure spending”. But Fed easing will further fuel asset reflation in Asia where investors, excluding for now the Japanese, are becoming increasingly willing to buy “risky” assets in their own market, be it equities or real estate.
This trend is most extreme with China shares where the top-10 stocks listed in Hong Kong now have a combined market capitalisation of US$895bn, notes Wood.
But the same trend is observable in many other countries in the region even if it is nothing like as dramatic as in China, which never suffered the psychological trauma of the Asian Crisis.
Rising local investor participation is what is needed to turn Asia from a fundamental-driven rerating story to a red-blooded bull market where greed increasingly drives sentiment, says Wood.
This “natural transitionary process” is now underway, led by China, he adds.
Fed easing now will provide a further reflationary stimulus for Asia even though no easing is needed from a domestic Asian inflation standpoint. Indeed, the easing will only serve to put further upward pressure on Asian currencies, necessitating increasing intervention, which it will become increasingly hard for regional central banks fully to sterilise.
The message is clear. It is a good time to be an Asian stockbroker, notes Wood.
Meanwhile, he advises, “investors should stay five times overweight Asia ex-Japan markets in a global equity portfolio, which now means that global equity investors should have at least 37 per cent of their global portfolio invested in Asia”.
Anyone who does not have such a weighting should use further “high-beta” corrections as an opportunity to add to positions in Asia, he adds.
But what about Japan? It is not geared directly into Asia’s “emerging bubble” story, given its vastly inferior lower trend growth rate, he notes. “But, nor does it face a potentially nasty deflationary deleveraging cycle, which remains the key risk facing America and other consumer-finance driven western economies like Britain”.
This is because Japan has already been through such a deflationary downturn, notes Wood. It is a defensive market on a relative basis, most particularly the domestic stocks, which investors would be advised to accumulate now. The fundamental situation in Japan is “nothing like as bad as reflected in the current sentiment of investors”, he says.
The Japanese stock market is “going nowhere” in the big picture unless bank stocks lead the rally as happened in the past few days. Therefore, says Wood, Bank of Japan governor Toshihiko Fukui should now show more courage and use the relative temporary calm in world credit markets to raise the overnight call rate at next week’s BoJ meeting.
In Wood’s view, global investors should fund an overweight in Japanese domestic stocks by remaining underweight western financial stocks.
And while the focus is on Asia, Wood turns his eye on destination of the week - Indonesia, which, he says, “has enjoyed its own boom in equity mutual funds as interest rates have collapsed in the past two years”.
The desire to invest in riskier assets is clear but there is still a lot more potential for money to flow into equities. The overall story on Indonesia remains a positive one, he says, noting that companies there continue to meet earnings expectations while forward earnings expectations “remain healthy”.
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