Sunday, January 31, 2010

China Investment Perspectives

Strategy and Economics

Economics; Fear of Inflation to Intensify; Launching Inflation Tracker

As concerns about downside risks to the growth outlook appear to be easing, capital market participants have become increasingly sensitive to any sign of inflationary pressures,
especially given the very loose monetary policy stance in both China and other major economies in the last 12 months. Headline inflation indicators, such as the year-over-year CPI
and PPI, will likely register a rather rapid increase in 1Q10, which may intensify the fear of high inflation, despite the levels of actual inflation remaining relatively moderate. While
being keenly aware that the balance of inflation risk is likely tilted to the upside, we caution that extrapolating the inflation rates in the rest of the year from the potential trends for
inflation in 1Q10 could overestimate the risk of inflation. First up, a recap of our inflation call. We forecast average

US Credit Strategy Delivering on Deleveraging

Banks will likely be in deleveraging mode for some time. Financial issuance should remain subdued relative to history given increased regulation, reduced refinancing needs, and
economic uncertainty on the part of banks, consumers and corporates. This deleveraging serves as a positive technical key to our constructive call on financial credit.

Regarding the support for remaining long risk of financial credit through 2010, our thesis (and that of many in the marketplace, frankly) is that the financial sector – as the
‘problem’ sector in this crisis – would mimic the deleveraging, credit-quality curing and overall shrinking of investors’ portfolios that the TMT/utilities space experienced in the early
part of the decade. That translates into remaining overweight the sector generally through the course of 2010, as systemic healing would be supplemented by outright credit-quality
improvement. However, what feels like an onslaught of issuance by the financial sector (according to most investors we speak with) runs counter to that call. We have taken a
deeper dive into the financial sector and offer the following key points (with details following):


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