The BIG PICTURE In March 2006
Give Me A Reason To Stick Around

Well, I have to say that I am generally still bullish on Asian equities for 2006. The present humdrum days make almost everyone to question their investment outlook. Let's look at some interesting pointers:

1) The second year of a US presidency usually is bad news for US stocks. Yes, 2006 is the second year for Bush.

2) The US dollar seems to be losing ground. It seems that the authorities are allowing the dollar to slide to try and address the trade imbalances. If China won't revalue, we will devalue the dollar (albeit gently).

3) Recent weeks (days actually) saw a lot of speculative investors selling out of emerging markets' assets such as currencies like Polish zloty, Hungarian forint, Turkish lira and even Icelandic krona. The selldown was exemplified in the stockmarkets of Karachi and Mumbai, Argentina's Merval, Brazil's Bovespa, Hungary's Buz, Morocco's MASI, etc... The main reason for the selldown in emerging markets' assets is the fear that Federal Reserve will push interest rates above 5% later on.

4) This fear has been reflected in the US Treasuries with the yield on 10-year widening to 4.8%. European bond yields have also widened in anticipation that the European Central Bank will tighten along with the Federal Reserve.

5) All that is happening around Bank of Japan, which is about to announce that they will start raising interest rates. This BOJ move is widely anticipated and is necessary as the liquidity in the system is too strong. This announcement will NOT deter the rise of Japanese stocks in 2006, mark my words. This time around, the gains are genuine and there is sufficient gas to propel the rally into 2007. Ample liquidity, increased foreign participation, better restructuring, genuine turnarounds - the rate increase announcement is just a reflection of the underlying strength of the liquidity and not a sign to fear rise of inflation.

6) Oil is another factor here. OPEC just met in Vienna to keep production stable. US oil inventory has risen. The high price of oil now is a reflection of the fear of increased tensions between the US and Iran over the latter's nuclear programme. Again, based on fear rather than real fundamentals.

7) However, with all the inflationary fears and oil price spikes, gold prices have eased on profit taking. Surprising.

This is indicative of all markets that needs to find reasons to "take some profits", be it stocks, gold, oil prices, emerging markets - all have had excellent run-ups of late, and all are dying to find some reason to rest. Hence it is my belief that nothing much has changed, Asian equities still good. US equities, iffy. US junk bonds, very iffy, as their yields are too close to the Treasuries, too much bond money chasing after too few papers.

US dollar will weaken a bit more but the Fed is not going to ease the dollar and raise rates at the same time - defeats the purpose. Just have to keep a close eye on US consumer prices over the next few weeks and months.