JP Morgan Ox or Bull?

Ox or Bull? Perspectives and Portfolios

• In a month the MSCI Asia Pacific ex Japan index has moved from the low end to the high end of our 210-260 range. Should investors chase this move? Yes. We believe that the powerful economic tailwinds of low interest rates, pro-growth fiscal policy, improving terms of trade and selectively competitive currencies are generating a recovery in Asian economies led by China. This combined with the stabilization in US end-demand is the base of this rally, in our view. In this report we review the terms of trade benefit for Asian economies due to lower commodity and energy prices.
• At a portfolio level, we expect two key trends; the rotation from defensives into early cyclicals and the return of global/EAFE funds to emerging markets. In our view, investors need to move underweight defensives now (see page 11 for key defensive stocks in Asia – JPHAJDEF Index) and continue to accumulate early cyclicals (see ‘Slogdog’ Millionaires, Mowat et al, 5 March 2009). Global/EAFE
funds are likely to focus on large cap plays on Asia’s growth. Click here for our Key Trades Stock Picks spreadsheet.
• We are upgrading Taiwan to overweight, Indonesia to neutral and downgrading Singapore to underweight. Taiwan’s rally should broaden to non-tech driven by capital repatriation and reduction in international investors’ underweight positions to this market. Consistent with increased risk, we are now underweight all developed Asian markets. The economies of both Singapore and Hong Kong have the headwinds of financial sector downsizing, poor trade flows and a weak tourism/travel sector.
• The key risks to our view are China’s growth recovery fades and/or the last two months of stabilization in US retail sales proves temporary.