Greed & Fear 30th Apr

Christopher Wood christopher.wood@clsa.
com (852) 26008516

Thursday, 26 April 2012 Page 1
The nature of Hollande
New York
Spain, in GREED & fears view, continues for now to be the critical fault line for risk aversion in
the Eurozone. That said, markets were made nervous this week by the first round of the
presidential election in France.
Still in GREED & fears view the second round, due to be held on 6 May, remains a close call.
This is because the 17.9% who voted for the National Fronts Marine Le Pen in the first round
are surely more likely to vote for Nicolas Sarkozy than Socialist Party candidate Francois
Hollande. The question is then how many of them will abstain. The other point is that, even if
Hollande is elected, it remains unlikely that he will push all the policies he is advocating, such
as demanding that the ECB buys government bonds at issuance. Such an approach would also
put Hollande in direct confrontation with Frau Merkel and risk undermining the proposed
ratification in Germany of Europes much-hyped fiscal pact. As an establishment Europhile,
and so a believer in a united Europe, GREED & fear doubts that Hollande would really want to
risk an open row with Germany. More likely is that the German establishment continues to
move incrementally towards the French view, as has been the case since the onset of the
Eurozone crisis. Flexible Mario also sought this week to push the debate in this direction with
his public comment about the need for a growth pact as well as a fiscal pact.
Figure 1
22 April French presidential election 1
st
round results
28.63
27.18
17.90
11.10
9.13
2.31
1.79
1.15
0.56 0.25
0
5
10
15
20
25
30
35
H
o
l
l
a
n
d
e
S
a
r
k
o
z
y
L
e

P
e
n
M
e
l
e
n
c
h
o
n
B
a
y
r
o
u
J
o
l
y
D
u
p
o
n
t
-
A
i
g
n
a
n
P
o
u
t
o
u
A
r
t
h
a
u
d
C
h
e
m
i
n
a
d
e
(%vote)
22-Apr-12 French presidential election 1st round results

Source: Ministry of Interior, France
That said, Bundesbank President Jens Weidmann continues to make speeches calling for a
tougher line. Thus, GREED & fear heard that he made a speech in New York this week where,
among other things, the Bundesbank head called for a supranational fiscal authority to enforce
fiscal discipline. This clearly makes sense if the Eurozone wants to move proactively to fiscal
union. But all the evidence is that it will continue to be forced in this direction primarily by
market pressures, and that when this becomes sufficiently intense the Germans will again roll
over just as happened with the LTROs, whatever the Bundesbank now says. If this is the case
then Weidmann is making these speeches because he wants to preserve the institutional
credibility of the Bundesbank in the history books and not because he hopes to change policy.
Meanwhile, returning to Spain, the potential positive development remains the Spanish coming
up with a credible bad bank approach towards their banking sector problem. There has been
some noise on this issue over the past week. Thus, it has been reported of late that Spain is
considering a bad bank. Yet the typical bad bank structure, where the government provides a
guarantee for the funding of the bad bank, has now reportedly been discarded and the Spanish
Prepared for - W: lesley.wong@clsa.com

Christopher Wood christopher.wood@clsa.com (852) 26008516

Government is seemingly exploring other routes, such as separating bad assets into vehicles
owned by the banks. Thus, on 21 April Spanish Economy Minister Luis de Guindos specifically
rejected the idea of a state-sponsored bad bank with the extraordinary comment that there
would not be the smallest bit of public money available, according to a Bloomberg report
(Spain wont create bad bank for real estate: De Guindos, 21 April 2012). Instead, the
minister said lenders should move real estate assets into separate entities or create
securitised assets for which they have already set aside provisions so that distressed
properties can be more easily valued and sold.
Figure 2
Spanish banks doubtful loans as % of total lending
0
1
2
3
4
5
6
7
8
9
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
(%)
Spanish banks' NPL ratio

Source: Bank of Spain
While GREED & fear is all in favour of private holders of bank equity and bonds taking a hit,
GREED & fear would be amazed if, sooner or later, the Spanish sovereign balance sheet does
not reflect a degree of socialisation of Spains bad debt problem. It is this Spanish banking
issue which in GREED & fears view remains the most likely trigger for the sort of risk aversion
in the Eurozone that would trigger renewed ECB sovereign debt buying and renewed LTROs. A
further obvious negative would be escalating deposit outflows from Spanish banks. Thus,
private deposits at Spanish banks, which exclude deposits by monetary financial institutions
and central government, fell by 5.1% from a peak of 1.74tn in June 2011 to 1.65tn at the
end of February, according to the ECB data (see Figure 3). The March deposit data will not be
available until 30 April.
Figure 3
Spanish banks private deposits
1,620
1,640
1,660
1,680
1,700
1,720
1,740
1,760
(6)
(4)
(2)
0
2
4
6
8
10
12
14
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
(%YoY) (Euro bn)
Deposit growth
Outstanding (RHS)

Note: Excluding deposits by monetary financial institutions and central government. Source: ECB


Meanwhile, amidst the current bearish focus, it is important to remember that the LTROs have
succeeded in kicking the can down the road in terms of allowing for a large part of the 2012
sovereign debt refinancing schedule to have already been refinanced. Thus, in the case of
Spain, the Spanish Treasury reported last week that it has already funded 40bn or 47% of this
years total expected gross issuance of medium-term and long-term bonds of 86bn, which
includes 50bn of redemptions and 36bn of net new issuance.
Still a longer term negative consequence of the LTROs has been further to interconnect the
sovereign debt issue and the bank debt issue in the case of Spain and Italy, where the banks
most eagerly used the ECB funding to hoover up more of their own sovereign debt. Thus,
Spanish and Italian banks holdings of Eurozone government securities increased by 67.9bn
and 54.2bn respectively since December to 245.8bn and 301.6bn at the end of February
(see Figure 4).
Figure 4
Spanish and Italian banks holdings of Eurozone government securities
60
110
160
210
260
310
2001 2003 2005 2007 2009 2011
( bn)
Spanish banks Italian banks

Source: ECB
Figure 5
Net % of Eurozone banks reporting stronger demand for loans
(50)
(40)
(30)
(20)
(10)
0
10
20
30
4
Q
0
9
1
Q
1
0
2
Q
1
0
3
Q
1
0
4
Q
1
0
1
Q
1
1
2
Q
1
1
3
Q
1
1
4
Q
1
1
1
Q
1
2
(%)
Loans to non-financial corporations
Loans for house purchase
Consumer credit

Source: ECB Bank Lending Survey
What trick will Flexible Mario pull out of the hat next time and what will be the Germans
reaction? These are sure to be issues markets will increasingly focus on. Meanwhile, the latest
ECB bank lending survey published this week shows that loan demand in the Eurozone
continued to weaken in 1Q12. Thus, a net 30% and 43% of Eurozone banks reported weaker
demand for loans for non-financial corporations and home mortgages respectively in 1Q12, up


from 5% and 27% in 4Q11 (see Figure 5). This sort of data is likely to be used by Draghi in
coming months to justify ECB easing.
Figure 6
Euro Stoxx Banks Index
80
120
160
200
240
280
320
360
400
440
480
520
2007 2008 2009 2010 2011 2012
Euro Stoxx Banks Index
Source: Bloomberg
The growing Eurozone tremors, including a Eurozone banking index now close to re-testing its
March 2009 and November 2011 lows (see Figure 6), also causes GREED & fear to reduce the
overweight in India by two percentage points in the Asia Pacific ex-Japan relative-return
portfolio. This is because, as argued here previously, if real Eurozone-triggered risk aversion
resumes, then India is Asias most vulnerable stock market since the likely rupee weakness
would remove the Reserve Bank of Indias scope for further easing. The reduced overweight in
India will be paid for by increasing the allocation in China and Malaysia (see Figure 15).
Ironically, evidence of more distress in the Eurozone is likely to increase pressure for easing in
China; though as ever investors should take their queue on the policy dynamic in China from
the action in the Shanghai A-share market. So far this quarter the market has been behaving
somewhat better, outperforming the rest of the Asia Pacific region. Thus, the Shanghai
Composite Index has risen by 6.3% in US dollar terms so far this quarter. This compares with a
1.2% gain in the MSCI China Index and a 1.1% decline in the MSCI AC Asia Pacific ex-Japan
Index (see Figure 7).
Figure 7
Shanghai Composite and MSCI Asia country indices 2Q12 quarter-to-date performance in US$ terms
-8
-6
-4
-2
0
2
4
6
8
S
h
a
n
g
h
a
i

A
P
h
i
l
i
p
p
i
n
e
s
C
h
i
n
a
A
u
s
t
r
a
l
i
a
H
o
n
g

K
o
n
g
S
i
n
g
a
p
o
r
e
N
e
w

Z
e
a
l
a
n
d
A
s
i
a
P
a
c

e
x
-
J
a
p
a
n
T
h
a
i
l
a
n
d
I
n
d
o
n
e
s
i
a
M
a
l
a
y
s
i
a
A
s
i
a

e
x
-
J
a
p
a
n
K
o
r
e
a
T
a
i
w
a
n
J
a
p
a
n
I
n
d
i
a
(%QTD)
Source: Datastream


Moving away from the perhaps tediously familiar subject of the Eurozone crisis, an interesting
theory has been brought to GREED & fears attention of late. That is on the subject of Japan.
The theory, put simply, is that the deflation trend in Japan is finally ending not because the
Bank of Japan has finally got religion on quanto easing but because the demographics means
that the working-age population continues to decline as post-war baby boomers reach
retirement age. This in turn means that labour should increasingly have pricing power, which
also should mean that income growth has bottomed.
What is the evidence for the above? First, there were about 2.7m people a year born in the
three years between 1947 and 1949, who will become 65 years old in 2012-2014, compared
with the latest birth rate of 1.06m in 2011. Second, the working-age population aged between
15 and 64 has fallen from a peak of 87.3m or 69.5% of the total population in 1995 to 81.3m
or 63.6% last year, and is projected by the National Institute of Population and Social Security
Research to decline by an annual average of 1.07m over the next five years to 76m or 60.2%
in 2016 (see Figure 8).
Figure 8
Japan working-age population projection
50
52
54
56
58
60
62
64
66
68
70
40
45
50
55
60
65
70
75
80
85
90
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Japan working-age population (15-64)
as % of total population
(m) (%)

Source: National Institute of Population and Social Security Research, Statistics Bureau
Figure 9
Japan job offers to applicants ratio
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
(x)
Japan job offers to applicants ratio

Source: Ministry of Health, Labour and Welfare (MHLW), CEIC Data
The theory is also supported by the improving job offers-to-applicants ratio which has risen
from a record low of 0.43 reached in August 2009 to 0.75 in February, the highest level since
October 2008 (see Figure 9). True, none of the above is clear cut evidence. There is also the
fact that the elderly have continued to participate in the labour force. But that said, the


demographics of Japan clearly mean that there has to be a supply shortage building in labour
which seemingly has positive implications for employees pricing power.
Figure 10
Japan wage growth (contractual cash earnings per employee)
-4
-3
-2
-1
0
1
2
3
4
5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
(%YoY)
Japan wage index (contractual cash earnings)

Source: Ministry of Health, Labour and Welfare (MHLW) - Monthly Labour Survey
This leads in turn to whether there is the evidence for such a shift in the demand for labour in
terms of the reported income data. The chart above of average monthly contractual cash
earnings per employee shows a 0.3%YoY rise in February, the first such increase since
December 2010, based on the revised data released this week by the Ministry of Labour (see
Figure 10). Another potential lead indicator could be wages of temporary workers. In this
respect, data published by the recruitment company Recruit Co. shows that the average
offering wage per hour for temporary jobs in the three major metropolitan areas in Japan rose
by 1.4%YoY in March, the 17
th
consecutive month of year-on-year growth.
The above has potentially huge implications from an investment standpoint since a definitive
move out of deflation, even if it is only to 1% or 2% annualised inflation, should be very
positive for many Japanese domestic stocks. It should also finally trigger at least the start of a
reallocation of domestic institutional portfolios out of JGBs into equities. For now all that can be
said is that the inflation data is showing no deterioration in the deflationary trend, if not yet
moving definitively into inflation. Thus, the core CPI excluding food and energy declined by
0.6%YoY in February, compared with a 1.1%YoY decline in December, while the overall CPI rose
by 0.3%YoY (see Figure 11).
Figure 11
Japan CPI inflation
-3
-2
-1
0
1
2
3
4
5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Japan overall CPI inflation
Japan CPI excluding food & energy
(%YoY)
Source: Statistics Bureau


Another encouraging development is that Japans breakeven inflation rate, measured as the
yield differential between the nominal 10-year JGB and the 10-year inflation-indexed JGB,
turned positive in February for the first time since September 2008 and is now 0.49% (see
Figure 12). The issue is whether this move has been driven by current market hopes for more
aggressive BoJ easing rather than the labour market issues discussed above.
Figure 12
Japan breakeven inflation rate
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
(%)
10-year breakeven inflation rate

Breakeven inflation rate = Nominal JGB yield - Inflation-indexed JGB yield. Source: Bloomberg
One point is clear. If Japans inflation rate gradually moves into positive territory over the next
12 months and more, no one will be happier than BoJ Governor Masaaki Shirakawa since that
will remove the growing political pressure for more monetary quackery. It is clear that the BoJ
remains deeply skeptical of the efficacy of monetisation even though it is also evident that the
central bank is now monetising rather aggressively. In this respect, the BoJ is on course to buy
Y34tn or 78% of the planned Y44tn in new JGB issuance this fiscal year as a result of both its
so-called Asset Purchase Programme and its regular outright JGB purchases of Y21.6tn per
year.
GREED & fear raises all of the above issues not because there is conviction here that Japan is
finally poised to move definitively out of deflation but rather because this is an issue which
merits monitoring, most particularly income growth, because of the obvious potentially
significant investment implications.
Meanwhile a further change in the Japan long-only portfolio will be made this week. The
investment in steelmaker JFE Holdings will be removed with the money raised added to the
existing investments in drugstore operators Sugi and Tsuruha and internet play CyberAgent
(see Figure 16).
Australia has traditionally been a country of cosy monopolies or oligopolies where leading
domestic players enjoyed pricing power. GREED & fear was therefore interested to read about a
new thematic report from CLSAs Australian office which discusses in detail the destructive
threat to the profit margins of Australian companies, most particularly discretionary retailers,
caused by consumers using the internet for price discovery (see CLSA research Australian
consumer: Price discovery - Online shift forcing structural changes, 16 April 2012 by head of
Australia research Scott Ryall).


Figure 13
Australia system credit growth and nominal GDP growth
(5)
0
5
10
15
20
25
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
(%YoY)
Australia system credit growth
Australia nominal GDP growth

Source: CLSA Asia-Pacific Markets, Reserve Bank of Australia, Australian Bureau of Statistics
This is an issue over and above the overvalued Australian dollar and related high real interest
rates, which have already caused a marked slowdown in Australias domestic economy.
Meanwhile, the continuing deceleration in credit growth portends deflationary risks given the
credit excesses that preceded it. Thus, as has been noted by CLSAs Australia banking analyst
Brian Johnson, between 1992 and 2007 Australian system credit growth was 1.9x nominal GDP
(see Figure 13 and CLSA research Australian Banks: Housing Bubble Pop or Pss?, 20 April
2012). The money markets are now expecting the Reserve Bank of Australia to cut rates by
25bp to 4% at its next monetary policy meeting scheduled on 1 May, and are anticipating a
total of 100bp rate cuts by the end of this year (see Figure 14). GREED & fear will maintain for
now the underweight in Australia in the relative-return portfolio.
Figure 14
Reserve Bank of Australia cash target rate and December 2012 interbank cash-rate futures
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12
RBA cash target rate
December-12 interbank cash-rate futures
(%)

Source: Bloomberg




Figure 15
CLSA Asia Pacific ex-Japan asset allocation
MSCI AC Asia
Pacific ex-Japan
weightings
25-Apr-12
CLSA
recommended
weightings
26-Apr-12
Mismatch
from current
benchmark
Australia 25.2% 8.0% -17.2%
China 18.4% 21.0% 2.6%
Hong Kong 8.5% 7.0% -1.5%
India 6.5% 7.0% 0.5%
Indonesia 2.8% 7.0% 4.2%
Korea 15.5% 17.0% 1.5%
Malaysia 3.5% 5.0% 1.5%
New Zealand 0.4% 0.0% -0.4%
Philippines 0.8% 6.0% 5.2%
Singapore 5.3% 4.0% -1.3%
Taiwan 11.1% 9.0% -2.1%
Thailand 2.1% 7.0% 4.9%
Vietnam -- 2.0% 2.0%
Total 100.0% 100.0% --

Source: CLSA Asia-Pacific Markets
Figure 16
Japan absolute-return long-only thematic portfolio
Theme Weight
(%)
Stocks Description Weight
(%)
Trading 15 Mitsubishi Corp general trading company 5
Mitsui & Co general trading company 5
Sumitomo Corp general trading company 5
Real Estate 22 Mitsubishi Estate real estate company 10
Mitsui Fudosan real estate company 6
Daito Trust Construction property developer 6
Autos 11 Suzuki Motor automaker 4
Isuzu Motors truck maker 3
Yamaha Motor motorcycle maker 4
Machinery 13 Keyence optical-sensor maker 4
Fanuc industrial robot maker 5
Nabtesco precision gear manufacturer 4
Gold mining 4 Sumitomo Metal Mining gold & non-ferrous metal miner 4
Consumer 21 Asahi Breweries beer producer 5
Sugi Holdings drugstore operator 6
Tsuruha Holdings drugstore operator 6
Sega Sammy gaming equipment maker 4
Airport 3 Japan Airport Terminal Haneda airport operator 3
Telecoms 7 Softbank mobile operator 7
Internet 4 CyberAgent internet conglomerate 4
Source: CLSA Asia-Pacific Markets



Key to CLSA investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return;
O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less
than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to
provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock
against the 12-month forecast return (including dividends) for the local market where the stock is traded.
CLSA changed the methodology by which it derives its investment rankings on 1 January 2012. The stocks covered in this report are
subject to the revised methodology. We have made no changes to the methodologies through which analysts derive price targets - our
views on intrinsic values and appropriate price targets are unchanged by this revised methodology. For further details of our new
investment ranking methodology, please refer to our website.

2012 CLSA Asia-Pacific Markets (CLSA). Note: In the interests of timeliness, this document has not been edited.
The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their
views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or
pressure by any person/s in compiling such publication/ communication.
The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with
companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or
more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets
prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research report and such
details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA Group only and
do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this
website, please contact webadmin@clsa.com or (852) 2600 8111. If you require disclosure information on previous dates, please contact
compliance_hk@clsa.com
IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory
Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA
Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. 01/01/2012

Greed & Fear 30th Apr

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Greed & Fear 30th Apr

Caricato da

Copyright:

Formati disponibili

Christopher Wood christopher.wood@clsa.

com (852) 26008516

Potrebbero piacerti anche

Greed &amp; Fear 30th Apr

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Greed &amp; Fear 30th Apr

Caricato da

Copyright:

Formati disponibili

Christopher Wood christopher.wood@clsa.

com (852) 26008516

Potrebbero piacerti anche

Greed & Fear 30th Apr

Greed & Fear 30th Apr