》 升市中三大風險與對策 (2010/10/11)
September’s strong equity performance was always going to be a hard act to follow. The MSCI World rose +9%, and a number of emerging markets are now skirting new highs. Emerging markets, including Brazil, the Philippines and Korea, have raised concerns about asset-price inflation as the ‘risk on’ green light has led to strong EM inflows, while the sharp rally in the AUD has led the RBA to postpone a well-telegraphed rate hike. So after the strongest September since WWII, what are the possible catalysts for further upwards momentum?
1. An aggressive move to revalue the RMB? Such a development would be a shot in the arm for risk assets everywhere. However, Beijing is showing few signs of veering from its gradualist path, even amidst rising political pressure from the US. For China, at this stage, the greater concern may be restraining speculative pressures in the local property market without destabilizing domestic growth. And the general rhetoric continues to be that a sharp RMB revaluation would only encourage capital inflows into local assets, hereby making a bad situation worse. As such, it makes more sense to expect a continued gradual appreciation in the RMB towards RMB6.5/US$.
2. Good news out of Europe? At this stage, the picture out of Europe seems pretty clear. As we tried to show in our last Quarterly, Northern Europe is booming while the South is hitting the skids. And, as of now, there are no reasons to expect this divergence in growth to come to an end. The bigger question is whether this will trigger greater dispersion within the equity markets?
3. QE from the US? The Fed’s new found dovishness was one of the main drivers of the September rally in risk assets (and the reason behind the US$ weakness). Today, most investors are expecting a new package of Fed easing, which is why the US$ has been tanking so hard.
4. QE from Japan? Interestingly, while all eyes have been on the Fed, the BoJ announced today a reasonably punchy easing package with: i) cuts in Japan’s policy rate from 0.10% to a range of zero to 0.10; ii) promises to buy JGBs and other assets through an expansion in balance sheet of at least JPY5trn fund to “boost liquidity”.
When we argued a constructive view for theUS economy over the summer we received a violent pushback from clients. Yet a return to risk assets is undeniably unfolding; albeit not without extraordinary help from monetary authorities in at least two of the three largest economies (Fed and BoJ). So with equity market valuations still very attractive, economic growth booming in the developing part of the world and stabilizing in the OECD, and central banks visibly committed to providing excess liquidity, the question confronting investors should now be: what could possibly go wrong (and how to hedge against it)?
Risk #1: With risk assets rallying hard, commodities making new highs and IPOs flying off the shelf, the Fed may adopt a ‘wait and see’ attitude and deliver a disappointingly light QE2. This could trigger a sharp US$ rally and a sell-off in bond markets. And with increased volatility in both the currency and fixed income markets, it is hard to believe that equity markets would not be affected. Fortunately, there are many ways to hedge this risk, from buying US$ calls, to buying volatility on Asian equity markets, to selling JGB’s short or going long Japanese banks and exporters.
Risk #2: With frustration against China’s exchange rate policy mounting by the day, a trade war could conceivably ensue. Having said that, I continue to believe that this threat is typically overplayed by a sensationalist media, and that the recent actions by the US Congress were mostly just posturing. Still, the way to hedge this risk is probably to stay short the US$ as the US$ is the currency of global trade. Should global trade collapse, as it did in 2008, the demand for US$ would collapse along with it (note once again that this is not a risk we view as likely). A more likely development is that RMB appreciation continues to pick up, thereby abating global deflationary pressures.
Risk #3: The upcoming 3Q US earnings season could disappoint, especially in light of the bellwether quarters we have recently experienced. This seems unlikely to us as US companies should have been sheltered by a relatively weak US$ and weak labor costs. In fact, as we highlighted in our latest Quarterly, the number of hours worked per employee in the US has not been this high since the early 1980s… It thus seems that companies are currently squeezing as much as possible out of their employees. Combine that with low financing costs, decently strong final demand (see A Misunderstood Quarter), and relatively low inventories, and it seems that the only factor which could really drag down profitability would be either the increases in wage costs in Asia (most notably in China), or rising commodity prices. As such, earnings disappointments are more likely to be on a case-by-case basis as opposed to a broad trend. And if this is the case, then we may finally start to see greater dispersion within equity markets than what we have witnessed over the past few years. This would be a welcome development for most equity long-short funds which have had to endure a market where returns depended solely on timing the risk-on/risk-off trades rather than stock-picking skills.
Putting it all together, it is my feeling that the greatest risk to the current optimism on equity markets is the first mentioned above—namely a potential sharp rally in the oversold, undervalued US$. As a result, I believe that it makes sense to lighten up on emerging market/commodities exposure and instead refocus towards developed markets, whether in the US, Japan, Korea, Germany or Sweden.