Christopher Wood

christopher.wood@clsa.com

+852 2600 8516

Bye bye Ben

Geneva
Billyboy Ben has vacated the Federal Reserve for the Brookings Institution, the natural home of the liberal Washington intellectual establishment, even though Bernanke remains a registered Republican. History will note that Bernanke commenced tapering before his departure. Still the interesting point to GREED & fear remains that the Treasury bond markets response to the initial reduction in Fed purchases of securities has so far been the same as the first two times the Fed stopped QE. That is that the Treasury bond has been rallying, as noted here last week (see GREED & fear Hong Kongs holding pattern, 30 January 2014). Thus, the 10-year Treasury bond yield has fallen by 23bp since the Fed first announced a US$10bn tapering on 18 December, and is now 37bp below its recent high reached at the end of 2013 (see Figure 1).
Figure 1

US 10-year Treasury bond yield

3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5

(%)

US 10Y Treasury bond yield

Sep 13

Jun 13

Jul 13

May 13

Nov 13

Aug 13

Dec 13

Mar 13

Oct 13

Jan 13

Feb 13

Apr 13

Jan 14

Source: Bloomberg

This is in direct contrast to the view of the consensus prevailing in the equity world, which is that bonds should sell off when quanto easing ends even though this is exactly what did not happen on the two previous occasions when QE ended; though clearly this time is a little different as so far markets are only focusing on tapering not the ending of QE. Still given the fact that the Fed bought one-third of the securities purchased under QE during 2013, a year when the glut of Fed watchers were talking about tapering, GREED & fear would advise investors not to underestimate the impact of any decline in securities purchased. On this point, the Feds holdings of securities have increased by US$3.3tn since the beginning of 2009 to US$3.8tn at the end of January, with US$1.1tn of that increase occurring in 2013. Now, clearly, if the American economy is really achieving escape velocity, then Treasury bonds should sell off as nominal GDP growth accelerates to a higher sustainable level than has so far prevailed since the recovery begun in 2009. But this is not GREED & fears view. In this respect, the latest GDP data is not quite as impressive as seen by the consensus. True, nominal GDP growth accelerated to 4.2%YoY in 4Q13, slightly above the annualised rate of 4% since the recovery began in 2H09. But excluding inventory, nominal final sales of domestic product rose by 3.3%YoY in 4Q13, up only from 3%YoY in 2Q13 (see Figure 2).

Thursday, 06 February 2014

Feb 14

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Christopher Wood
Figure 2

christopher.wood@clsa.com

+852 2600 8516

US nominal GDP growth and nominal final sales of domestic product

8 6 4 2 0 -2 -4

(%YoY)

US nominal GDP growth Nominal final sales of domestic product

Mar 03

Mar 04

Mar 05

Mar 06

Mar 07

Mar 08

Mar 09

Mar 10

Mar 11

Mar 12

Sep 03

Sep 04

Sep 05

Sep 06

Sep 07

Sep 08

Sep 09

Sep 10

Sep 11

Sep 12

Mar 13

Note: Final sales of domestic product = GDP excluding change in private inventories. Source: US Bureau of Economic Analysis

The more forward looking data, such as the pending home sales index and the ISM new orders index, are also clearly suggesting stalling momentum, if not worse. The pending home sales index, which measures housing contract activity and generally leads existing home sales by one to two months, has declined for seventh consecutive months, plunging by 8.7%MoM in December to the lowest level since October 2011 (see Figure 3). This index is now 17% below its recent high reached in May 2013. The Feds January Senior Loan Officer Opinion Survey released this week also indicated weaker demand in mortgages over the past quarter. Thus, a net 28.2% and 45.7% of banks reported weaker demand for prime and non-traditional residential mortgages, the worst data since April 2011 and January 2009 respectively (see Figure 4). Meanwhile, the ISM manufacturing new orders index fell by 13.2 points from 64.4 in December to 51.2 in January, the largest monthly decline since December 1980 (see Figure 5).
Figure 3

US pending home sales index and existing home sales

m units, saar 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0

US total existing home sales US pending home sales index (2-mth lead, RHS)

sea adj 130 120 110 100 90 80

3.5 70 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note: The pending home sales index measures housing contract activity based on signed contracts for existing home sales. It generally leads closed existing home sales by 1-2 months. Source: National Association of Realtors

Thursday, 06 February 2014

Sep 13

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Christopher Wood
Figure 4

christopher.wood@clsa.com

+852 2600 8516

Net percentage of US banks reporting stronger demand for residential mortgages

60 40 20 0 (20) (40) (60) (80)

(%)

Prime mortgages

Non-traditional mortgages

Jul 07

Jul 08

Jul 09

Jul 10

Jul 11

Jul 12

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jul 13

Apr 07

Apr 08

Apr 09

Apr 10

Apr 11

Apr 12

Apr 13

Oct 07

Oct 08

Oct 09

Oct 10

Oct 11

Oct 12

Source: Federal Reserve - Senior Loan Officer Opinion Survey on Bank Lending Practices
Figure 5

US ISM manufacturing new orders index

80 70 60 50 40 30 20
1979 1981 1983 1985 1987

US ISM manufacturing survey - New orders index

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Source: ISM

All this means that the US payroll data on Friday will be more important than normal given the overwhelming view in the market that December data was impacted by the weather, though it is also clearly the case that the weather has remained bad in January. It will certainly be watched closely by Fed Chairwoman Janet Yellen. Based on her public speeches, GREED & fear would suspect that she is rather nervous not only about tapering but also about the market consensus that tapering will be on an automatic US$10bn reduction at every FOMC meeting throughout the year. After all, inflation is still running at only 1.2%YoY based on the Feds favourite indicator, the price index of core personal consumption (see Figure 6), while Americas real unemployment rate is more likely in the range of 13%, based on the Bureau of Labour Statistics broadest measure of labour underutilisation which includes people who have given up looking for work or are working part time for economic reasons (see Figure 7). Certainly, continuing disappointing macro data will soon raise an important issue. This is whether the Fed has decided, as many investors seem to believe, to get out of QE regardless of the data or whether policy on QE remains data dependent, which has been the official line of both Yellen and Bernanke. For now GREED & fear has continued to take the Fed at face value (i.e. the policy is data dependent). This means that if data disappoints and market action turns sufficiently negative then the Fed will first end tapering and even accelerate QE.

Thursday, 06 February 2014

2013

Oct 13

Jan 14

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Christopher Wood
Figure 6

christopher.wood@clsa.com

+852 2600 8516

US core PCE price index growth

11 10 9 8 7 6 5 4 3 2 1 0 1960

(%YoY)

US core PCE price index growth

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: US Bureau of Economic Analysis

Figure 7

US measures of labour underutilisation

18 16 14 12 10 8 6 4 2 0 1948

(%) Broadest measure of labor underutilisation (U-6) US official unemployment rate

1957

1966

1975

1984

1993

2002

2011

Note: U-6 measure include unemployed persons, persons who have given up looking for work but indicate that they want and are available for a job, and those employed part time for economic reasons. Source: US Bureau of Labour Statistics

But when GREED & fear refers to negative market action from a growth perspective, GREED & fear refers primarily to market action in the US, be it falling share prices or declining Treasury bond yields. In this context, it would seem clear that the Fed is seeking to convey the message that it does not want to be panicked into renewed easing by the current so-called turmoil in emerging markets. As regards this turmoil, there are two interesting points to note. The first is that the negative market action in emerging market debt and currencies is now much more concentrated in those countries which have high US dollar indebtedness, and so should be vulnerable, such as Turkey and Ukraine, rather than the likes of Indonesia and the Philippines (see Figure 8). Second, the latest emerging market debt selloff has, interestingly, not been correlated to a selloff in the Treasury bond market but rather the reverse. This has, for now at least, broken the strong correlation that was in evidence last year. Thus, the EMBI+ emerging market sovereign bond yield has risen by 22bp since mid-January, while the 10-year US Treasury bond yield has fallen by 23bp over the same period (see Figure 9). As a consequence, the correlation between EMBI+ sovereign bond yield and the US 10-year Treasury bond yield is a negative 0.82 so far this year, compared with a positive 0.97 in 2013.

Thursday, 06 February 2014

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Christopher Wood
Figure 8

christopher.wood@clsa.com

+852 2600 8516

Emerging market currencies against the US dollar (Year to date 2014)

0% -2% -4% -6% -8% -10% -12% -14% -16% -18%

Bulgaria

South Africa

Korea

Brazil

Turkey

Philippines

Hungary

Indonesia

Source: Bloomberg
Figure 9

Emerging market sovereign bond yield and US 10-year Treasury bond yield

(%) 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0

EMBI+ emerging market sovereign bond yield US 10-year Treasury bond yield (RHS)

(%) 4.0 3.5 3.0 2.5 2.0 1.5 1.0

May 10

May 11

May 12

May 13

Sep 10

Sep 11

Sep 12

Nov 10

Nov 11

Nov 12

Sep 13

Jul 10

Jul 11

Jul 12

Mar 10

Mar 11

Mar 12

Mar 13

Jul 13

Nov 13

Jan 10

Jan 11

Jan 12

Jan 13

Source: Bloomberg, Datastream

Meanwhile, blanket generalisations about emerging markets ignore the reality that some countries have decent fundamentals and some do not. So for GREED & fear it is more a country specific issue than an asset class issue. Still where there is an asset class issue, as has been highlighted on several occasions by CLSAs legendary investment guru Russell Napier (see CLSA research Solid Ground How the yield bubble bursts, 3 December 2012), is the huge fund flows into the emerging market debt asset class since 2008, and not only into US dollar denominated debt but also local currency debt. Thus, the market value of two key JPMorgan indices tracking US-dollar (EMBI Global) and local-currency (GBI-EM Broad) denominated emerging market bonds have risen from US$205bn and US$799bn respectively in late 2008 to US$583bn and US$1.47tn (see Figure 10).

Thursday, 06 February 2014

Jan 14

Argentina

Romania

Taiwan

Thailand

Malaysia

Czech

China

India

Poland

Peru

Ukraine

Mexico

Colombia

Russia

Chile

Page 5
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Christopher Wood
Figure 10

christopher.wood@clsa.com

+852 2600 8516

Market value of JPMorgan Emerging Market US-dollar and local-currency debt indices

(US$bn) 600 500 400 300 200 100 0

2002 2003 2004

US-dollar debt

Local currency debt (RHS)

(US$tn) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

2005

2006

2007

2008

2009

2010

2011

2012

2013

Note: EMBI Global Index for US-dollar EM bonds, GBI-EM Broad Index for local-currency bonds. Source: Datastream

These huge fund flows have raised the risk of a redemption-driven liquidation which could trigger a selloff greater than warranted by the fundamentals; and it would be a selloff where the emerging equity asset class would to a certain extent inevitably be correlated; a correlation which would be made worse by the misplaced enthusiasm for investing in emerging markets in recent years via so-called ETFs, an issue that was discussed in a worthwhile article in the pinko paper this week (see Financial Times article Emerging markets are not being well served by ETFs, 3 February 2014 by John Authers).
Figure 11

iShares Emerging Market equity ETF and bond ETF

55 50 45 40 35 30 25 20 15
Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jul 13 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Jan 14

2014

130 120 110 100 90 iShares MSCI Emerging Markets equity ETF iShares JPMorgan USD EM bond ETF (RHS) 80 70 60

Source: Datastream

But if such a mass liquidation of emerging debt does occur, in line with the Napier theme, it will be important to note that the prime cause will not be the failure of emerging markets to address structural reform, contrary to the current conventional wisdom of the chattering classes. Rather it will be because five years and counting of ongoing QE caused a stampede into emerging market debt, be it US dollar or local currency denominated, as global fixed income investors sought to escape QE-distorted yield curves in those developed economies indulging in quanto easing. Even worse, the stampede was further encouraged by Billyboys extraordinarily irresponsible original forward guidance in early 2012 when he said he would not raise rates until at least late 2014, and the market believed him.

Thursday, 06 February 2014

Page 6
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Christopher Wood

christopher.wood@clsa.com

+852 2600 8516

If this is the causation, GREED & fears hope is that the liquidation of emerging market debt as a whole will not be as bad as argued by Napier because in GREED & fears view the compensating factor will be declining US Treasury bond yields against which emerging market debt is priced. Thus, the spread of the 10-year Indonesia US-dollar sovereign bond yield over the 10-year US Treasury bond yield has widened by 32bp to 276bp since the 10-year Treasury bond yield peaked at 3.03% at the end of 2013 (see Figure 12). GREED & fear also suspects that the damage will be mitigated by the fact that any extreme negative market action would sooner or later cause a Yellen-run Fed to reverse tapering which would put renewed downward pressure on the US dollar.
Figure 12

Spread between 10Y Indonesia bond yield and US 10Y Treasury yield

400 350 300 250 200 150 100 50 0

(bp)

Indonesia 10Y USD bond yield - US 10Y Treasury bond yield

Mar 10

Mar 11

Mar 12

May 10

May 11

May 12

Mar 13

May 13

Sep 10

Sep 11

Sep 12

Nov 10

Nov 11

Nov 12

Sep 13

Jul 10

Jul 11

Jul 12

Jul 13

Nov 13 Nov 13

Jan 10

Jan 11

Jan 12

Jan 13

Source: CLSA, Bloomberg

What about the Feds supposed hawks who seemingly want to end QE almost regardless of the data? The lesson from recent years is that they disappear down the proverbial plughole when market action turns sufficiently ugly. Meanwhile, the positive point for a country like Indonesia is that its currency already declined by 21% against the US dollar last year (see Figure 13). This to GREED & fear discounts a lot of the deterioration in the current account deficit in an economy which is now slowing. On this point, Indonesias trade balance swung into a US$2.3bn surplus in 4Q13, up from a US$3.1bn deficit in 3Q13 (see Figure 14).
Figure 13

Indonesian rupiah/US$ (inverted scale)

8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500 12,000 12,500
Mar 11 May 11

Indonesia rupiah/US$ (inverted scale)

Mar 12

May 12

Mar 13

May 13

Sep 11

Sep 12

Nov 11

Nov 12

Sep 13

Jul 11

Jul 12

Jan 11

Jan 12

Jan 13

Jul 13

Source: Bloomberg

Thursday, 06 February 2014

Jan 14

Jan 14

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Christopher Wood
Figure 14

christopher.wood@clsa.com

+852 2600 8516

Indonesia quarterly current account and trade balance

10 8 6 4 2 0 (2) (4) (6) (8)

(US$bn)

Currrent account balance

Trade balance

(10) 2008

2009

2010

2011

2012

2013

Source: CLSA, CEIC Data

Figure 15

Weekly net foreign buying of Japanese equities and the Topix

1600 1400 1200 1000 800 600 400 200 0 -200 -400 -600 -800 -1000

(Yen bn) Foreign net buying of Japanese equities Topix (RHS)

1300 1200 1100 1000 900 800 700

Mar-12 Mar-13

Jul-10

Jul-11

Sep-13

Sep-12

Sep-11

Dec-10

Dec-11

Dec-12

Source: Bloomberg

Elsewhere in Asia, Japan has succumbed to negative equity market action in line with other stock markets this year, with the biggest foreign selling of Japanese equities last week since June 2010 (see Figure 15). In this respect the Topix has maintained the pattern in place since the busting of the bubble in 1990; namely of being heavily correlated to the US 10-year Treasury bond yield (see Figure 16), which remains by the way the single most important market price for investors everywhere. To get really positive on Japan on a sustainable basis, it will be necessary to see Tokyo break this correlation. This will only likely happen if the Japan stock market can re-rate because of a sustainable move out of deflation. The jury remains out on this, which is why GREED & fear remains agonistic for now on the success, or otherwise, of Abenomics. Still it is worth noting that the latest inflation data was encouraging at the margin. Thus, CPI excluding food and energy rose by 0.7%YoY in December, up from 0.6%YoY in November, the biggest increase since August 1998 (see Figure 17).

Thursday, 06 February 2014

Dec-13

Jan-10

Oct-10

Apr-10

Apr-11

Jun-12

Jun-13

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Christopher Wood
Figure 16

christopher.wood@clsa.com

+852 2600 8516

Topix and US 10-year Treasury bond yield

3,000 2,500 2,000 1,500 1,000 500 0

1989 1990 1991 1992 1993

Topix

US 10-year Treasury bond yield (RHS)

(%)

10 9 8 7 6 5 4 3 2 1 0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Note: Correlation since 1990 = 0.80. Source: Bloomberg

Figure 17

Japan CPI inflation

4 3 2 1 0 (1) (2) (3) (4)

(%YoY)

Japan core CPI (excl. fresh food) CPI excl. food & energy Electricity prices (RHS)

(%YoY)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Statistics Bureau, Japan

Meanwhile, if the global market action is sufficiently deflationary, it will raise expectations that the Bank of Japan might start to reconsider its current stance; which is to wait and see how the economy responds to the April sales tax increase before deciding on another QE blast. The pressure point here is the yen. In GREED & fears view a break out of the Y95-105/US$ trading range, driven by yen strength, would be the sort of level to trigger such a policy response. This is why GREED & fear sees the current selloff as a buying opportunity into the asset reflation story which GREED & fear still believes in. But clearly the yen has not yet reached 95, which is why a correction to the June 2013 lows of 1033-1040 in the Topix is technically possible (see Figure 18).

Thursday, 06 February 2014

2014

2014

15 10 5 0 (5) (10) (15)

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Christopher Wood
Figure 18

christopher.wood@clsa.com

+852 2600 8516

Topix and Yen/US$

1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600
2004 2005 2006

Topix

Yen/US$ (RHS)

130 120 110 100 90 80 70

2007

2008

2009

2010

2011

2012

2013

Source: Bloomberg
Figure 19

Eurozone CPI inflation

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0)

(%YoY)

Eurozone CPI inflation

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 2014

Source: Eurostat

Back in Europe where GREED & fear has been talking to investors in Switzerland this week, the latest inflation data in the Eurozone has renewed market focus on the growing deflationary risk, a risk Flexible Mario has started to talk up in his public comments. Thus, Eurozone CPI inflation slowed from 0.8%YoY in December to a four-year low of 0.7%YoY in January (see Figure 19). The ever slick Flexible Mario has also started to prepare the ground, via cleverly managed press leaks, for a move towards unconventional easing. This can be seen in the form of press reports over the past week that the Bundesbank would not oppose a decision by the ECB to stop sterilising its Securities Markets Program (SMP) bond purchases (see The Wall Street Journal article Bundesbank Would Favor End of ECB Sterilization, 31 January 2014). It is also worth noting that the ECB has failed to sterilise the entire amount of its SMP bond purchases in six of the past 11 weeks (see Figure 20).

Thursday, 06 February 2014

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Christopher Wood
Figure 20

christopher.wood@clsa.com

+852 2600 8516

ECB SMP sterilisation

( bn)

SMP-sterilising operations (allotment) Liquidity intended to absorb

250 200 150 100 50 0

Nov-10

Nov-11

Nov-12

May-10

May-11

May-12

May-13

Nov-13
2013

Aug-10

Aug-11

Aug-12

Aug-13

Feb-11

Feb-12

Feb-13

Source: ECB

A decision to stop sterilising bond purchases would pave the way for ECB balance sheet expansion after the substantial shrinkage that has taken place over the past two years. Thus, ECB total assets peaked at 3.1tn in June 2012 and have since declined by 29% to 2.22tn at the end of January (see Figure 21). It is also likely to coincide with another ECB rate cut which in GREED & fears view is likely to happen next month. Another aspect to a move towards more unconventional ECB monetary policy which has begun to be discussed in the press, a discussion doubtless again encouraged by the ECB boss, is for the ECB to buy a basket of Eurozone government bonds with that basket weighted according to the relative size of Eurozone countries GDP.
Figure 21

ECB balance sheet

3,200 3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800

( bn)

ECB total assets

600 1999
Source: ECB

2001

2003

2005

2007

2009

2011

True, all such initiatives will require a German sign-off. Still in GREED & fears view investors should assume that the politically slick and financially astute ECB boss will be able to build the case for a more overt move to unconventional monetary policy sooner rather than later; though he would probably prefer to wait until after Germanys Constitutional Court ruling on the ECB's Outright Monetary Transactions (OMT) bond-buying program announced in August 2012. This ruling is now expected in April. GREED & fear is assuming this will prove to be a formality.

Thursday, 06 February 2014

Feb-14

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Christopher Wood
Figure 22

christopher.wood@clsa.com

+852 2600 8516

Germany CPI inflation

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0

(%YoY)

Germany CPI inflation

00 00 01 01 02 02

03 03 04 04 05 05 06 06 07 07 08 08 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul

Jan Jul Jan Jul Jan Jul

Source: CEIC Data, Federal Statistical Office

Meanwhile, the more the current emerging market debt angst feeds into Eastern and Central Europe, the more this will create the trigger or catalyst that can be used by Draghi to make the case for an earlier introduction of unconventional monetary policy. But to GREED & fear the strength of the euro and the related increasingly overt deflationary trend is already providing sufficient a catalyst. After all even in Germany consumer prices are only rising at a rate of 1.3%YoY (see Figure 22). With the ECB preparing to go unconventional, with the Bank of Japan contemplating sooner or later another QE blast and with uber-dove Chairwoman Janet Yellen having taken over at the Fed, unconventional monetary policy remains in GREED & fears view as entrenched as ever. In this respect, it is interesting to note that gold mining stocks have been outperforming gold bullion since early December (see Figure 23). It is early days. But this is an encouraging trend for those like GREED & fear who still own bullion and gold mining shares after the devastating losses last year. In this respect, CLSAs technical analyst Laurence Balanco noted in his latest weekly report (Price Action Derivatives - Global technical research, 5 February 2014) that the improving technicals on gold mean that a break above US$1270/oz would suggest a minimum upside target of US$1370/oz. Gold broke that level yesterday intraday though it closed back at US$1258/oz.
Figure 23

Gold mining stocks relative to gold bullion price

0.33 0.31 0.29 0.27 0.25 0.23 0.21 0.19 0.17 0.15

(x)

NYSE Arca Gold BUGS Index / Gold bullion price ratio

Sep-12

Sep-13

Jan-12

Jan-13

Mar-12

May-12

Mar-13

May-13

Nov-12

Source: CLSA, Bloomberg

Thursday, 06 February 2014

Nov-13

Jan-14

Jul-12

Jul-13

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan

09 09 10 10 11 11 12 12 13 13 14

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Christopher Wood

christopher.wood@clsa.com

+852 2600 8516

If this indeed proves to be the case, the action in the gold mining stocks is serving as a useful lead indicator for the price of bullion, with Newcrest Mining, for example, up 30% year to date. The gold mining stocks were certainly a lead indicator for the decline in the gold price last year. What is clear is that anyone who wanted to construct a truly contrarian portfolio, positioned the opposite to the consensus at the start of 2014, would have included a large weighting in gold mining shares, as well as a large weighting in the 30-year Treasury bond. So far at least such a strategy would have worked with the gold mining index up 7.9% in US dollar terms and the US 30-year Treasury bond price up 5.9% so far in 2014. What is also clear is that golds price action last year was amongst the weirdest GREED & fear has ever seen in the sense that gold bullion declined by 28% in a year when the Fed balance sheet expanded by US$1.1tn or 39% (see Figure 24). Remember in this context that the Fed increased its holdings of securities by US$1.1tn in 2013, a year when the glut of Fed watchers were talking non-stop about tapering, equivalent to half of the US$2.2tn of securities it purchased in the four previous years of quanto easing that preceded it.
Figure 24

Fed balance sheet and gold bullion price

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500

(US$bn)

Fed total assets Gold bullion price (RHS)

(US$/oz)

2,000 1,800 1,600 1,400 1,200 1,000 800 600

May 07

May 08

May 09

May 10

May 11

May 12

May 13

Sep 07

Sep 08

Sep 09

Sep 10

Sep 11

Sep 12

Sep 13

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Note: Weekly data. Source: CLSA, Federal Reserve, Bloomberg

Finally, GREED & fear is going to capitulate on Samsung Electronics in the Asia ex-Japan longonly portfolio, which has for now at least become a value trap. Nonetheless, the stock is up 141% in US dollar terms since inclusion in the portfolio in September 2008. A four percentage point investment in SK Hynix will be introduced (see Figure 25). The memory bandwagon is clearly already running. But the obsession with all things smart, and the related internet of things, is clearly a trend which has much further to run even if GREED & fear, at the personal level, will not be participating. A percentage point will also be added to the existing investment in Vipshop. Finally, a short update from CLSAs legendary investment guru Russell Napier on his financial course this year is shown on page 15.

Thursday, 06 February 2014

Jan 14

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Christopher Wood
Figure 25

christopher.wood@clsa.com

+852 2600 8516

Asia ex-Japan thematic equity portfolio for long-only absolute-return investors

Regional consumer Asean auto dealer Australia gold mining China internet hosting China internet search engine China online retailer China online-offline travel company Macau entertainment India consumer India banks India housing finance Korea electronics Philippines banks Philippines consumer Philippines media Singapore dividend plays Taiwan tech component makers Thailand property Thai telecoms 4% 3% 5% 3% 5% 5% 3% 4% 10% 7% 7% 4% 10% 5% 4% 8% 4% 4% 5% Samsonite Kolao Holdings Newcrest Mining 21Vianet Baidu Vipshop Ctrip Galaxy Titan Industries (3%), Godrej Consumer (4%), Nestle India (3%) HDFC Bank (4%), IndusInd Bank (3%) HDFC (4%), GRUH Finance (3%) SK Hynix Metrobank (5%), BPI (5%) Universal Robina ABS-CBN StarHub (3%), SATS (5%) MediaTek Land and Houses Intouch (Shin Corp)

Note: Readers should refer to the relevant CLSA research reports for detailed analysis & disclosures. Source: CLSA

Thursday, 06 February 2014

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Christopher Wood

christopher.wood@clsa.com

+852 2600 8516

Practical History of Financial Markets Dates 2014 Almost all kinds of useful knowledge would be learned through the reading of history. Benjamin Franklin Is this an Emerging Market crisis? Is this just an Eastern European crisis? Is this the beginning of a US consumption driven deflationary boom? Is this the beginning of a global deflation shock? What would Einstein say? If I had 60 minutes to solve a problem and my life depended on it, Id spend 55 minutes determining the right question to ask. Once I got the right question, I could easily answer it in 5 minutes. Are you asking the right questions or are you simply trying to answer the questions on the front page of the newspapers? The Practical History of Financial Markets course involves a two day intensive focus on financial history as a guide to asking the right questions. The course has been sold out since 2009 and we are now announcing the teaching dates for 2014London March 13th and 14th Edinburgh April 24th and 25th London October 2nd and 3rd Edinburgh November 13th and 14th Can you spare two days out of the investment trenches to make sure that you are using the right strategy and tactics to win the war for investment survival? The course costs GBP1,750 and more details can be found at www.didaskoeducation.org. This analyst has taken the course over thirty times and believes the right question to be Is this the beginning of a global deflation shock? If youd like to come along for two days and think about the right questions and study the history of the range of right answers then email Russell Napier at russell@sifeco.org.

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Prepared for: Bloomberg