>OVERSEAS MARKET: Watch Out For Negative Surprises (CICC)

Highlights

European sovereign debt crisis not under the spotlight in the near term: The unexpected consensus reached during the recent Eurozone summit is a so-called “heart disease pill”. We believe any progress being made is of a two-steps-forwards-and-one-step-back kind, and market participants should not expect too much in the near term.

The global economic slowdown is now the biggest concern: Market participants have reached a consensus that the Eurozone has slipped back into a moderate recession, the US has seen mixed economic data recently, and emerging economies may suffer a further economic slowdown. Against the backdrop of the global economic slowdown, both developed and emerging economies have been sending signals of easing their monetary policies since April. However, global markets have not rebounded, but declined after such policies were unveiled, indicating investors expect something even worse to happen going forwards.

Watch out for negative surprises: 1) Corporate earnings are likely to slow at a sharper than expected pace in 2Q12, and the future earnings recovery may also be weaker-than-expected amid the global economic slowdown. That said, we can not get the big picture as the earnings season has just started; 2) Market concerns about the next year’s US “fiscal cliff” may come earlier than expected: It is almost certain that the US fiscal stimulus package may not be passed amid the political deadlock before the completion of the US presidential election. In addition, the US Fed has not decided whether it will embark on a third rebound of quantitative easing. The market hates uncertainty, and is worried that the economic growth will likely weaken in 2H12.

Maintain our view that the global markets may rebound in 3Q12, but watch out for negative surprises: Overall, the economic fundamentals stayed weak recently, but it is not significantly worse than previously expected. The actual performance of the economic surprise index suggests that the global markets have already started beating the market consensus, although the sustainability remains fragile and still needs to be monitored. On the other hand, the anemic economic data once again sparked market expectations for QE3. Some European Central Bank officials showed their support for a zero-interest rate policy, saying it is technically feasible for the ECB to lower its deposit facility rate to 0%. In addition, emerging economies have more room to maneuver. In the immediate future, corporate earnings may be the dominant force driving stock markets if economic data is mediocre. However, if the economic data is negative, it may help increase expectation for fresh stimulus policies, lending support to the stock markets. That said, investors should stay alert to the abovementioned three risks: a continued economic slowdown; earnings misses; and, earlier-than-expected “fiscal cliff” fears.

RISH TRADER