Citigroup Asia ex Strategy - Inflation, Rates and Equities Not Quite What You’d Think

ޠLast years fears, double dip and deflation; this years fear, inflation X Last  year it was going to be different and it wasnt, and the probability is high the same will be true of the inflation scare. Inflation in this cycle is running at less than the median of prior cycles. Second, at this stage of the cycle, inflation always picks up in Asia ex only to come off again. Third, we see no, literally no, relationship between inflation and valuation of Asian markets. 
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 Local rates have the least effect on equity markets X Correlations between local rates (long or short) matter less in Asia ex than US long or short rates, but what matters most is the direction of the DXY. DXY up, Asia ex down. DXY down/flat Asia ex up. Post US rate rises (a long way off), Asia ex has been up 
13%, and post the second rise, 22% up. When inflation pricks up, rates rise: be long North Asia and cyclicals. Avoid South Asia , consumer and utilities. 
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 Investors continue to be underweight North Asia and cyclicals X The procyclical trade has certainly begun, but it has a long way to go. In the near term, global growth looks stronger and hence cyclicals benefit. Inflation shifts the profit share away from the consumer to the manufacturer. This is what is in the process 
of occurring. Remain long HK (cheap money), Korea and Taiwan (global growth and cyclical), underweight ASEAN and India .