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Forced deleveraging now, but releveraging later. In the short term, there may not be enough capital available to fund the US economy's public and private sector borrowing requirements. Capital shortages may force further deleveraging. But in 2H2009, the capital constraint should ease as the US housing market stabilises and the supply of US dollar liquidity to foreigners (via the trade deficit) expands. Sustainable recovery in markets can only occur from this time onwards. Suggested portfolio positioning In the short term, we could see a bounce in risk appetite (a bear market rally). When risk appetite bounces, high-beta sectors (e.g. miners, banks and construction stocks) tend to outperform low-beta sectors (e.g. healthcare, utilities and consumer staples). Medium term, we prefer to remain overweight domestic defensives. We are only prepared to firmly overweight financials on hard evidence that capital shortages are easing (e.g. narrowing credit spreads). We also think that resources stocks could underperform because of US dollar strength and sluggish world growth. |
