Rising headwinds make for rough sailing in Q2 - JP Morgan

RESEARCH CALLS
* The JPMorgan view: rising headwinds make for rough sailing in Q2. Portfolio strategy: Threats to the bull market are rising, and will make Q2 a rough quarter. For 2011, the bullish case for risk assets is still more convincing. We keep a reduced net long in risky assets, focusing more on RV. Equities: Stay long overall but underweight Cyclical vs. Defensive sectors and DM vs. EM equities to protect against near term downside risks. My take – among Indonesia’s defensive stocks, Tower Bersama (TBIG) would be my top defensive pick. Sell Jasa Marga on event risk.
https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-578591-0.pdf

* Flows and liquidity: positions leave equities vulnerable. This is the title we used exactly a year ago, Apr 16th 2010. Just as then real money investors and hedge funds have elevated equity exposures and very low cash balances. Investors have cut their EM equity underweights, but are yet to move to an overweight. What will the end of QE2 mean for asset flows? The last month of QE1 saw strong overseas and mutual fund demand for bonds. Flows into equity mutual funds dipped around and after the end of QE1, and did not recover until QE2 was launched in 10Q4.
https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-578610-0.pdf

* Astra International (ASII) – JPMorgan analyst Yoshiharu Izumi published research on Renesas Electronics (6723), the main global producer of Micro Controller Units (MCU) that could be in short supply in the coming months negatively affecting car companies such as ASII. He thinks there is no need to be overly pessimistic about the situation:

(1) before the earthquake production volume for automotive micro-control units (MCUs) at the Naka plant was equivalent to around 21,000 8-inch wafers/month, a relatively small scale for the semiconductor industry; (2) the MCUs are produced on 8-inch wafers, a very mature process technology compared with cutting-edge logic; (3) the Naka plant is in the earthquake-stricken area, which will probably be given priority for electric power; and (4) the wafers used are 8-inch, not the 12-inch variety that has been affected by a supply bottleneck due to the damage to Shin-Etsu Handotai’s Shirakawa plant.

What has caused the confusion? One reason for the confusion is that Renesas has not been clear about when production of automotive MCUs will resume. If the company seemed to give priority to certain users or certain customers, there might be a major backlash from other users. Given that Renesas has not commented in detail, we think it is also incorrect to assume the company has not acknowledged the importance of the automotive supply-chain.
https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-577936-0.pdf