Markets Bipolarity Heightened By Ease – Favor Quality and Financials still crucial

Intended or not, market bipolarity may be heightened by the massive concentrated quantitative ease by central banks as well as fiscal largesse. Instead of a middle way that allows fundamentals to flow, market bipolarity is currently present in the vehemence with which economic growth arguments and visions of Armageddon are expressed. Heightened volatility is likely but not necessarily at the levels of fear of last winter. Central banks have more than a passing responsibility for such. Investors need to likewise assess their policy efficacy not just in order of heft but also flexibility. Several from Norway and Australia overtly to India implicitly have tightened. At the other extreme with weak banks, the Bank of England faces a chorus for extended ease. It is in this context that the FOMC November 4 subtext will need to be assessed as will the ECB post November 5 with its middle ground policy mix.

Contrary to views of U.S. dollar weakness as benign, it has beggar-thy-neighbor risk injected to Europe to Asia to Latin America not just from the United States but also from fixed exchange rates in China with its manufacturing base and in oil exporters. Quantitative ease and currency debacle risk can no longer be treated with benign neglect by central banks nor segregated in portfolio considerations—we favor gold as hedge. With markets queasy about the strength of recovery, crucial is likely to be the quality of revenues with cost cutting for earnings beating consensus as likely overrated. The upcoming 2010s may or may not be an Asian decade but we certainly see it as favoring Asian values of quality of product/services as a value for money theme and also expect to be long-lasting the use of corporate resources to de-leverage, unlike the 1990s/2000s. For market direction, the financials will likely remain critical but recuperation is likely to be lengthy with more massive capital funding unveiled globally just this week. Our sector favor also lies with industrials, information technology and healthcare.

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