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Rabu, 30 Maret 2011

GEM Equity Strategy In 2004, markets bottomed 3-4 months ahead of the inflation peak - Credit Suisse

In 2004, H (Hong Kong-listed Chinese) shares bottomed in April, four months ahead of the inflation high in August. With the theme of my presentation at the Credit Suisse Asian Investment Conference (AIC) that inflation/tightening risk is priced in, in this note, we provide another reason to buy GEM on dips. We are using 2004 as a guide as that was the last time GEM and NJA (Non-Japan Asia) inflation was around the current level of 5-6%. In 2004, GEM CPI peaked at 6.1% (currently 5.5%) in August. For Non-Japan Asia (NJA), CPI peaked at 5.4% (currently 5.2%) in August 2004. CS economists believe inflation could peak around July 2011. Assuming markets lead as they did in 2004, we continue to recommend buying on dips.F

Should we just follow history? In the 2004 episode, the strongest rallies were in Turkey, India, Indonesia and Brazil (and in that order) from the 2004 lows to year-end. These four markets were associated with 30%-plus rallies.

We prefer to combine history with valuations. While 2004 looks the most comparable in terms of inflation, valuations for some markets look different. In Indonesia’s case, the 85% discount then contrasts with a 20% premium currently. With India, there was a 52% discount then versus a 16% premium currently. If we combine history with valuations, it suggests China, Turkey and Korea potentially offer the best upside.

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