Greed & fear - Gangreen

The only interesting point about this week’s FOMC meeting is that Billyboy seems to be less worried about “deflation”. This is another contrarian reason to be constructive about government bonds. There is zero definitive evidence that housing is about to “bottom” in the US. While the American commercial real estate market continues to deteriorate.

· A stronger oil price continues to be a sign of rising risk tolerance and a falling oil price of rising risk aversion, with the US dollar trading inversely to that. As was the case this time last year, GREED & fear believes the oil price is now being pushed by financial players. While GREED & fear is as bullish as anyone on the structural story for emerging markets, the view here remains that the commodity complex is now vulnerable if there is renewed disappointment about Western growth prospects in coming months.

· “Global warming” maintains its status as the developed world’s new religion. This is why “climate change” seems almost as high on the list of the priorities of the Obama administration as “healthcare reform”.

· The arbitrary nature of “green” investment mandates is obviously irrational from an investment perspective. From a longer term perspective it is almost inevitable that the frenzy for green will attract to the area the usual mob of con men and spivs who jump on every bandwagon. There is also a more fundamental risk that government sponsorship of alternative energy leads to massive over investment in the area.

· Regardless of the fundamental merits or otherwise of the climate change story, alternative energy stocks will, for now, continue to trade as high beta proxies for the oil price. They, therefore, have no diversification merit.

· There is a very strong economic case for growing links between Malaysia and Singapore. Singapore needs land and space to grow into, in the sense that southern Johor could become the equivalent of what the Shenzhen special economic zone became for Hong Kong. Malaysia could also profit from Singapore’s skill sets and capital. Any such development would be a major positive for both stock markets.

· Lee Kuan Yew’s eight day visit to Malaysia is interesting since, in GREED & fear’s view, nothing significant is going to happen in terms of new bilateral agreements between Malaysia and Singapore unless it is approved by the “minister mentor”.

· Najib’s first three months in power since he took over from Badawi have at least seen some dilution of the New Economic Policy (NEP). Any dilution of the NEP should be viewed as a positive, even if investors should also remain fundamentally sceptical about whether UMNO is capable of wholesale reform of this outmoded policy.

· The Malaysia stock market has been relatively unexciting in the Asian equity context reflecting its by now well established low beta status. This means it underperforms the regional index in a rally and outperforms in a correction.

· The presidential election season is approaching in Indonesia with all the evidence suggesting a landslide victory for incumbent president Yudhoyono. The reasons why Yudhoyono looks an overwhelming favourite to win are his appealing acronym, his “clean” image and the relatively stable economy.

· The Indonesia economy has so far shown impressive resilience this year, because of its domestic demand orientation as well as its commodity gearing. This resilience also reflects the economy’s lack of corporate or consumer debt.

· Assuming a “SBY” victory, looking forward a critical issue from a macro economic perspective is domestic infrastructure where there has been a disappointing lack of progress in Yudhoyono’s first term despite an almost ridiculous amount of talk.

· Indonesia still offers a fundamentally exciting long term consumption story with a positive demographic. Another positive point is that Indonesia is now the marginal supplier of coal and palm oil to the resource deficient economies of China and India.

· Having fended off for now calls for the passage of a modern version of the Glass-Steagall Act, the vested interests behind securitisation are emerging from their caves to argue their case. But in GREED & fear’s view securitisation only makes sense in a “market” system where financial entities face the risk of going bust. America clearly does not have such a system.

· Agricultural machinery maker Kubota will be added to the Japanese thematic portfolio this week with an initial weighting of 3%. The investment will be paid for by removing Inpex. As for the Asia Pacific ex-Japan relative-return portfolio, the overweight in China will be increased by 1ppt will the money taken from Hong Kong.