CITI Citi Asia ex Japan equity strategy

Awakening Bull or Snoozing Bear?

Is the new bull market starting? We remain sceptical — No one knows if this is a bear or a new bull market but note that: 1) Markets did not reach the valuation lows
of 0.9x P/BV seen in the 1975 or 1982 recessions, 2) Central banks are implementing QE (Quantitative Easing), and 3) Keynes is back in policy circles.

Ask yourself, either the world is not ending, in which case QE and Keynes are not needed, or is the situation bad enough to warrant both, in which case 0.9x P/BV is where valuations would likely go.

Typical bear: What is running is what investors don't own — Korea and Taiwan are
investors’ favourite Underweights. Sadly, these are the bears favourite markets and the bear has been winning. Underweights are outperforming the Overweights, particularly in the case of Technology. While investors love to hate this sector, in our view it remains cheap, has realistic earnings forecasts, and is underowned.

How far can this rally go on MXASJ? — Resistance on the MXASJ is to be found at 300-305, implying a 1.4x P/BV, and then at 320-330. Support remains firmly intact at 223, the October 2008 low. Our preference remains an Overweight in Hong Kong, Korea and Taiwan, and an Underweight in China, India and ASEAN.

We are Overweight Banks, Technology and Telecoms. We suggest owning what others don’t, as that tends to be what rallies in a bear market.

The million dollar question is whether we are in an awakening bull or a snoozing bear market, although in the age of trillions what is a mere million! The MXASJ hit a YTD low of 244 on the 3 March, and has since moved higher to hit 277 at the close on Thursday 19 March, a 15.4% move. Unlike the previous rally back in October 2008, a 37% move from intra-day low to intraday high, or a 32% rally from the November low to the December high, the current rally has led to a much higher level of investor anxiety. Is this the point where a big recovery in growth will resume? Is this the beginning of a new bull market? How much further can this go? The questions are numerous and truth be told no-one knows for sure the answer to the question on everyone’s mind -

Is this the end of the pain and the beginning of the gain?
While we remain sceptical that this is the end of the pain, those willing to trade
it should continue to focus on countries and sectors which are underowned, countries like Korea or Taiwan and sectors such as Banks, Technology or Energy.