Europe is smartly reversing its underperformance vs. the US from the early part of the year. Since May it is outperforming the US by 7% in local currency and 13% in common. We think there is more to go as:
1 - The sovereign stress is steadily diminishing.
2 - European activity remains very resilient.
3 - European financials are starting to outperform.
4 - European equities are cheap on 10.7x Fwd P/E.
We reiterate our recent re-entry into EM exposure and expect EM growth/inflation tradeoff to improve in H2. We think the first signs of a turn in Chinese policy stance towards being more market friendly are here. The 7-day repo rate has halved to 1.65% following RMB 915bn liquidity injection since May. We continue to see Metals&Mining as the main beneficiary of a lift in sentiment toward EM.
My take: if Mislav's scenario plays-out, the key picks for Indonesia outside of banks & consumer space would be
(1) Aneka Tambang
(2) Medco Energi
(3) London Sumatera
(4) Indika Energi
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