>GREED & FEAR (CLSA)

BULLDOG

The current psychology in world stock markets is clear. A growing number of markets have returned to their pre-Lehman levels in mid September 2008, and those that have not have room for more “catch up” (see Figure 1). Such a psychology is what can continue to drive the S&P500 higher in the short term towards GREED & fear’s 1,000-1,050 bear market rally target, just as it can also drive stocks in Asia higher which are still below pre-Lehman levels.

Still at this point it also has to be noted that there is one macro risk which has emerged that potentially threatens stock markets in the short term. That is that the US dollar index is now around the same level where it found support in December last year (see Figure 2). The index fell to an intraday low of 78.3 on Tuesday and closed at 79.5 on Wednesday. If the index breaks this key technical level convincingly and its decline proceeds to accelerate, then a collapsing dollar could become a major negative for equities in stark contrast to the gently declining US dollar which has been a bullish driver for equities, particularly Asian equities, in recent months.

That said, GREED & fear still does not expect this full-scale dollar collapse to happen now. Rather the view here remains that the collapse comes later and that the recent dollar decline reflects renewed risk appetite causing the dollar to become the funding currency of choice for a new carry trade. This also suggests that the dollar will be due a decent rally when equities correct. Still the dollar collapse risk must be noted this week given the currency’s decline to a key technical level. A dramatic decline in the dollar, as opposed to a gradual depreciation, could in no way be viewed as positive for equities since it would signal a loss of independence for US monetary policy.


Originally scheduling a trip to India after the country’s general election seemed like a good idea to GREED & fear. But clearly in a certain respect the action has already happened. The Sensex is up 23% since the result of the poll was announced on 17 May while the benchmark index is now “only” 29% below its all-time high of 21,206 and 7% above the level reached prior to the Lehman collapse.

If this is the case, GREED & fear is fortunate in the sense that a reasonable overweight position in India was maintained in the relative-return portfolio prior to the election’s result while a 30% of the Asia long-only portfolio was also invested in India, which was subsequently raised to 34% after the result (see GREED & fear – flash, 18 May 2009). It is also the case that GREED & fear has seen nothing in India this week to cause a severe questioning of the long-held view here that a structural bullish position towards the market should be maintained by specialist emerging market investors and indeed by global investors in general.

Indeed, if there is a risk to the market it is probably in the short term. The Sensex has moved a long way in a hurry as sidelined foreign investors reacted to the surprisingly decisive election result. As a result, there is talk of US$15bn of equity issuance in the pipeline while hopes of positive reform initiatives are also high for the budget announcement due in early July. There is also the risk that, with crude at US$67/bbl, the oil does not have to move too much higher before it starts to influence sentiment negatively towards India.

To see full report: GREED & FEAR