Strategy comments
De-risking the equity portfolios as European debt crisis widens
The European sovereign debt crisis continued to escalate after the market was disappointed by the failure of the European Central Bank (ECB) to introduce new policy actions to stem global contagion risk from the Greek crisis. The Dow Jones Index once fell almost 1,000 points intraday before recovering partial losses to close at 10,520.32, down by 3.2%. The extraordinary intraday slump of the Dow was blamed on erroneous trades with the Nasdaq cancelling all trades executed between 2:40 pm to 3:00 pm New York time. Putting aside impact of the erroneous trades, investors were greatly disappointed by the statement of ECB President Jean-Claude Trichet that the 22-member Governing Council did not discuss about buying government bonds and added that Spain and Portugal did not face the same challenges as Greece. The inaction of the ECB quickly fuelled investor fears of global contagion risk from the Greek crisis. The VIX volatility index once spiked to above 40 before closing at 32.80.
With the global equity markets breaking key support levels, Credit Suisse Investment
Committee decided in a special meeting on 5 May to move the tactical (1-6 months) equity arrow to negative from neutral. We expect further de-risking of investment portfolios in the coming weeks and this will bring further downside in risky assets. Hit by the risk reduction trade and strengthening of the USD, Asian equity markets are expected to test their early February lows. Sharp resurgence in risk aversion will cause Asian equities to remain dominated by sentiment and headline risk, rather
than macro and corporate fundamentals, in the near term. Investors should closely
monitor key technical support and stop-loss levels.
With rising uncertainties over global contagion risk of the European sovereign debt
crisis, we recommend investors de-risk and lower beta of their equity portfolios to reduce investment risk. After our Global Commodities Team turned more cautious towards industrial metals and energy on a tactical time horizon, we decided to remove Jiangxi Copper (358 HK, BUY), CNOOC (883 HK, BUY) and *POSCO (005490 KS, BUY) from our APAC Long Term Focus List. We have removed Rio Tinto (RIO AU, BUY) from our Long Term Focus List earlier this week due to uncertainty over the Australian mining profit tax. We added Japan Tobacco (2914 JP, BUY) and CSL (CSL AU, BUY) to our Focus List due to their defensive merit. Investors should also take advantage of any short-term tactical rebound in the markets to cut exposure to our SELL-rated stocks, which are over-valued and fundamentally weak. Our top SELL calls are Murata Manufacturing (6981 JP, SELL, Price JPY 5290, TP JPY 3000, -43% downside), NEC (6701 JP, SELL, Price JPY 300, TP JPY 220, -27% downside), Sharp (6753 JP, SELL, Price JPY 1173, TP JPY 870, -26% downside), *State Bank of India ( SBIN IN, SELL, Price INR 2276.2, TP INR 1900, -17% downside), Brambles Limited (BXB AU, SELL, Price
AUD 7.13, TP AUD 6, -16% downside), Hong Kong & China Gas (3 HK, SELL, Price HKD 18.72, TP HKD 16.2, -13% downside), Hong Kong Exchanges & Clearing (388 HK, SELL, Price HKD 124.6, TP HKD 110, -12% downside), Greentown China (3900 HK, SELL, Price HKD 7.5, TP HKD 7, -7% downside), Guangzhou R&F Properties (2777 HK, SELL, Price HKD
9.42, TP HKD 9, -4% downside), ASX Limited (ASX AU, SELL, Price AUD 32.25, TP AUD 31, -3% downside) and Taiwan Cement (1101 TT, SELL, Price TWD 25.55, TP TWD 25, -2% downside)
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