An unwind of market risk offers an opportunity to put more on, in our view.  In the Chinese zodiac, February 2010 marks the year of the tiger and denotes a period of great change.  We anticipate a significant rise in rates and steepening of yield curves.  We urge investors to look into the eye of the tiger as yields fall and position for just such a market move.  While the tail risks have increased, fundamentally we do not believe that prospects for global recovery have changed.  

US credit now fair value to equities, though cross-asset trades at sector and single-name levels will be increasingly important in 2010.  The two asset classes now appear well-aligned based on relative risk premia.  And when you adjust credit for current implied equity market volatility, it hardly yields a resounding call for credit as a ‘cheap' asset.  Credit and equity markets are very much bound together at present, with neither likely to benefit at the expense of the other quite yet.  

The world is looking to Iraq and Saudi Arabia to meet the next leg up in oil demand.  That may be a stretch, as Iraqi supply will likely disappoint and Saudi demand may surprise on the upside.  We continue to believe that the consensus view on the outlook for Iraqi crude production is too optimistic.  We are modeling Iraq reaching 4.0 mmb/d of production in 2015, from its current level of 2.5 million barrels per day.   

Our Global Risk Demand Index fell into negative territory for the first time since November, and weakness in risk appetite appears driven by growth concerns.  Investors looking for a hedge against declines in risk appetite should consider long US dollar positions, especially versus the euro.  The dollar should benefit as US growth outperforms this year, and the USD has also proved resilient during recent bouts of risk reduction. 

We have published the latest in our regular screens for sell ideas.  We intend these screens to help investors find potential underperformers.  They are based on quantitative metrics only and should be used as a starting point for investors looking for potential underperformers.  Several themes unite this month's picks:  cash-flow/balance-sheet concerns; negative earnings momentum despite the macro recovery under way; and structural pressures on growth or margins.  

The euro and pound look set to depreciate vs. the US dollar, and UK stocks are quite sensitive to FX moves.  We have compiled a list of UK stocks that generate the biggest proportion of their revenues from North America, as logic suggests these stocks should benefit from a stronger USD.  Also, a strong dollar favours large-caps, especially Pharmaceuticals, and investors looking for a simpler way to play this theme should consider taking an overweight Pharma position. 

The recent no-move decision from the central bank is probably only a pause.  However, it underscores that the RBA has been admirably pre-emptive and has already removed some monetary stimulus.  There may be one or two more rate increases coming, but I expect that policy will be kept on hold through 2H10.  It's too soon to have a strong view on how much higher rates may go beyond that, but I expect the key swing factors to be global growth and domestic labour costs. 

Positive view reiterated.  We have set our base case 12-month-forward KOSPI target at 1,900 (bull case 2,300).  Our constructive KOSPI call appears in line with the consensus but we are more constructive on exporters and China plays.  The consensus expects much stronger KRW appreciation and less favorable cross rates vs. JPY.  We focus on stocks with a strong global presence and relatively attractive valuations in semiconductors, consumer discretionary, and metals. 

Disinflation risks limited.  Record ‘slack' in the economy - a 10% unemployment rate, a 7% output gap, and operating rates lingering below those of past downturns - suggests near-term downside risks to inflation.  But in our view, those downside risks are limited, and our inflation views are unchanged:  We expect core inflation to decline towards 1% over the next several months, but to rise back to 2% in 2011.  

Now looking for 4.4% global GDP growth in 2010. Our Asia team has boosted its 2010 GDP growth forecasts for Japan (by 1.4pp), China (1pp), India (0.5pp), Malaysia (0.5pp) and Thailand (0.3pp). The main trigger was stronger-than-expected external trade, which should lead to stronger capex and domestic demand. Along with minor changes elsewhere, this pushes our 2010 global GDP forecast up by almost half a point, from 4.0%.  Our view on 2011 has barely changed.   

Early-hiking central banks face a policy dilemma.  They have to deal with currency appreciation and asset markets that have moved in sync with their counterparts in the major economies.  Getting asset markets and the domestic economy to respond to rate hikes could require significant tightening, which would then trigger strong appreciation of the currency.  But the monetary "peloton" will shift gears in the not-too-distant future as the Fed and the ECB hike rates, likely in 3Q10.    

We have moved to slightly more pessimistic assessment of the US government's fiscal situation over the next few years, with a dim view of the longer-run outlook.  We updated our US budget forecast to incorporate recent CBO baseline estimates and some of the policy proposals outlined in the president's State of the Union address.  For the current fiscal year, we expect the US budget deficit to be $1.325 trillion (9.1% of GDP) versus our previous estimate of $1.25 trillion.  

The euro-area is making the transition towards a sub-par recovery.  Incoming data are consistent with our forecast for euro area GDP to expand by a meager 1.2% in 2010.  There are still no clear signs that the engine of growth is shifting from inventories towards final domestic demand.  The mixed dataflow recently underlines our view that the transition is unlikely to be smooth, and investors should brace themselves for potential setbacks.   

We have raised our forecasts for China's GDP growth and inflation in 2010 to 11% (from 10%) and 3.2% (from 2.5%), respectively, as the external outlook will likely be stronger than envisaged. Recent policy action taken by Chinese authorities should be viewed as precautionary measures to prevent a full-blown overheating and a typical boom-bust cycle.  We now expect three base interest rate hikes, with the first hike as early as April, to help manage inflation expectations 

How big an inflation risk? Headline inflation in APxJ is rising due to higher energy and food prices and, in some countries, housing costs. Core inflationary pressures are highest in India and beginning to rise in China, but more subdued elsewhere. In our base case (70% likelihood) headline APxJ inflation peaks in Q2 2010 at 4.5% and falls in 2H to average 4.1% for the year as a whole. APxJ equities tend to experience P/E multiple contraction in periods of rising inflation. 

We continue to expect Korea's export competitiveness to outperform other exporters.  Nevertheless, we are concerned that upcoming export data could disappoint if expectations are built upon extrapolating the V-shaped rebound last year.  Meanwhile, it is also important to monitor any potential negative impact from the withdrawal of stimulus measures around the world.  In our view, the growth driver needs to shift to domestic demand growth in 2010. 

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