VW: POSITION FOR A V, HEDGE FOR A W
Investing during 2009 has been tough. Sentiment has changed
from extremely bearish, with worries about a second financial
tsunami, to signs of a global economic a recovery and questions
about how the G20’s exit strategy for quantitative easing and
when interest-rate hikes will start?
Our Global Economics Team has further raised its global
economic forecasts and shortened its previous expectation of the
US recession lasting five quarters to four (ending in 4Q09). As a
result, equities should continue to rally, supported by liquidity and
earnings improvement. However, some investors remain sceptical
about the recovery. Most economic statistics are heading towards
positive territory, but is the pace of recovery too good to be true?
We therefore believe that profit taking may occur on current
valuations.
We remain bullish over a 12-month horizon. Nevertheless, the
equities market has priced in plenty of positives. Towards the
year-end, risk appetite is falling. Investors can consider 1) cash
extraction to lock-in profits and switch to a call spread to keep
exposure on a possible year-end rally, or 2) keep their long
equities position but also to long a put to protect portfolios.
Liquidity remains favourable in Asia ex Japan due to the
extremely low interest rate environment. There is a continuous
shifting of funds from the money market to equities, with the
opportunity for more equity allocation ahead. If so, Asia ex Japan
will be a dominant region for allocation.
Under a global recovery assumption, investors should: 1)
Overweight equities and Underweight bonds/the money market;
2) Overweight emerging markets and Underweight developed
markets; 3) Overweight cyclicals and Underweight defensives; 4)
Overweight commodity and Underweight cash; 5) Long dividends
to capture earnings and dividend growth.
Key strategies that we recommended for 4Q09 includes:
1) Sector Strategy: Long cyclicals and Short defensives
over 12-mth horizon;
2) Upside Exposure: Long Dec-09 Call Spread or Knock-
Out Call; Long Jun-10 Worst-Of-Call;
3) Dividend: Buy 2010 and 2011 NKY and HSCEI
dividends;
4) Downside Protection: Long Dec-09 Put Spread or Knock-
Out Put;
5) Volatility Arbitrage: Long Dec-09 Var Swap on HSCEI
and Short Var Swap on SPX/TPX.