The Economy
The world economic growth is experiencing a so-called decoupling, with a tepid growth in the U.S. and Europe recovering from the financial crisis, but a higher growth in emerging countries, particularly India and China.
The inflation of the emerging market is picking up, for a complicated basket of reasons, including a closing output gap and increasing price of food, which is a good portion of consumption in the emerging world. For the developed world, the inflation is low, or too low in the U.S., considered by the Fed.
Fiscal deficits increased across the globe as a result of the stimulus packages. The Euro area shows a debt/GDP ratio of 80%, up from 65% at the beginning of 2008. Those of Greece, Ireland and Italy reached close to 100% of GDP, well above the 60% level commonly considered acceptable. Losses in the asset market deteriorated pension funds, further adding to the fiscal pressure.
Unemployment rate is sky-high, especially in the developed countries hit hard during the crisis. The reverse would take two years at least or longer given the lukewarm growth.
U.S. housing price stabilized at 25% below peak of Case-Shiller Index, a level that still makes default rational.
The U.S. private sector is deleveraging to repair the balance sheets. The U.S. household sector has reduced debt for 9 consecutive quarters—it never did since 1976 until this recession, having always growing at 5%-12% range annually. In amount, it was borrowing at $1 trillion annual rate from 2003 to 2007, now at $-300 billion.
Rates
Policy rates are at record low globally and going ZIRP at major economies.
We are in the phase II of QE, after the Fed, ECB, and other central banks have dramatically expanded their balance sheets during round one. BOJ just went out purchasing everything including even REITs. The Fed has already hinted and the market widely expects it to be the next, rolling out QE II in November. ECB seems would not join the action.
Currencies
USD has kept going down against other currencies, during the so-called currency war. In my opinion, the weakness of USD comes from low rates in the U.S., QE, and weak growth of the U.S. economy.
JPY has been surprisingly strong, due to weak USD, anecdotal pulling back of domestic investors, and diversification of Chinese foreign reserve. After a small-scale intervention to no avails, the Japanese authority is hoping the recent QE would ease the export pressure on the ailing economy.
EUR is strengthening, on the relative unwillingness of the ECB for another QE.
Emerging currency basket is going up against USD, mounting pressure on current accounts, inflation and growth.
Portfolio
Key Theme: EM growth, monetary expansion, weakening USD, if-slow recovery instead of double-dip
All stocks, since low 10Y rates everywhere, closing spreads, and no seen risks of a double-dip.
Buy Russia, for: good value/energy concentration; against: the reason for low valuation is unclear.
Buy India, for: long-term growth story; against: a possible rate hike to curb inflation?
Buy Peru, for: commodities, capital inflows; against: ?
Buy Korea, for: good value; against:?
Buy Malaysia, for: huge current account surplus, energy focus; against: ?
Buy oil stocks, commodity stocks, for: QE, weak USD, recovering IP; against: reversing USD, rate hikes, unfavorable economic data, historically high inventory
Buy gold stocks, for: QE and weak USD; against: reversing USD, rate hikes, market correction
Buy tech, auto, industrial, financial stocks, for: cyclical recovery; against: weak economy/housing
Watch Ireland, for: at trough, possible upside risks
Key Risks/Questions
What if the Fed’s QE is perceived to be of a lesser scale than expected, or economic data disappoints after QE II?
What if higher commodity prices add pressure to the inflation?
What if for some reason USD reverse course?
What if one of the EU countries defaults on its sovereign?
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