My Diary 460 --- Why Asia got sold-off, Asset Allocation, Sector

After-Market Thought --- Why Asia got sold-off, Asset Allocation, Sector and Stock Picks

October 27, 2008

Sector Performance

ü This is how the sectors panned out today. The ‘HSI (11015) was down 12.7% and HSCEI (4990) -14%.

Best                           Worst

Restaurants       -7.1          Coal              -21.0

Leisure & Gaming  -8.2          Cement            -17.6

Telecom           -8.4         Shipping          -17.2

Consumer          -9.2        Insurance         -16.6

Food & Beverages  -9.3        Oil & Gas         -16.4

Autos             -9.4         Non-ferrous       -15.6

Steel             -9.8          CH Property       -15.6

Industrial Goods   -9.9          Air Transport     -15.5

HSBC              -10.3       CH Construction   -14.8

HK Banks          -10.7       Chemical          -14.1

HK/CH Property    -11.0        IT                -13.5

Paper & Forest    -11.7        Finance           -13.2

Retail            -11.7         Conglomerate      -13.1

CH Utilities      -12.0          Infrastructure       -13.0

CH Banks       -12.6          HK Property       -13.0

ü  The deep cyclicals bore the worst of it, but Chinese utilities and the property stocks were the worst performers in the morning session;

ü  China property had a frightful day due to concerns about R&F financial viability early on and reports that COLI is selling its Wharf JV in Chongqing below cost.

After Market Thoughts

After such a frightful session, all I can say is that we are now the furthest below the inflation adjusted trend as we have been since 1984. This market is priced for a deep recession.

However, while we are not at a full historical oversold extreme (It was 1989 TianAn Men Event), I think it is reasonable to expect government action within the next 1,000 points. I think we shall see coordinated central bank rate cuts before the end of the week. I think the Chinese will make some kind of stimulus announcement by the end of the week. I think this market is within several days of a major trading low.

Sector and Stock Picks

ü I'd be keen to roll into the IPPS with growth (CRP, Datang) and China Property (especially CRL and COLI);

ü At 1.5x book I think ICBC is an absolute steal;

ü I do also think these construction names are going to be a theme when this madness stops;

ü Oil & Gas has to be interesting here as well. CNPC has issued a bond to invest in PetroChina;

Regional and Cross-Asset Classes Watch

Overall, if we look around, then virtually every asset class, that's relied on either leverage or very cheap money to finance its growth over the past 5 years, is got killed. The sequence over the past 18 months is --- first we saw the sub-prime collapse, then credit, then commodities, then equities and now high yielding currencies and Emerging Markets this past week.

If we are looking for the last shoe to drop, it's probably property markets around the world. If property markets were liquid, regularly traded assets then they could easily be down 40-60% this year given that it's generally a high leverage asset. The only place that still remains a mystery to me is the London Property market. I wouldn't be surprised if it fall 50% peak to trough over the next few years.

The bad news is that global consumers are clearly going to be exhausted for many years to come. A new world order of a progressively higher savings rate is in its early stages.

The good news is that credit markets are utterly getting this new world order, and that equity markets are well on the way to "getting" it.

Asset Allocation:

ü In the near term, I think credits are a better buy;

ü Equities may be a better bet in 2009 if and when they overshoot;

ü On a relative value basis, property gets more expensive every day at the moment.