Bull's Eye Of DBS And Citi, Danske Joins The Party From Nordic Perspective

The Singaporean DBS published its latest "Tactical Regional Asset Allocation" report for Asia ex-Japan yesterday, with a fairly confident tone:

We do not subscribe to W-shaped scenarios for the US or Asia, especially the latter. We have never regarded this downturn as a garden variety recession, rather as “shell-shock” arising from the Lehman Brothers debacle and several one-off factors related to China, and have always looked for the sharp rebound that is now underway. And our bet is that the next 10 years will look a lot like the ten that led up to 1997. Faster growth, strong earnings, appreciating currencies and a marked shift towards external deficits.

We stay positive on equities in the fourth quarter. This is despite the fact that the Hong Kong and Chinese markets may experience more volatility. Consolidation, if any, would be a good opportunity to add to positions and we recommend staying invested for longer-term gains. Asia's valuations are getting stretched but support levels suggest a correction would not be severe. Moreover, while Asia is not cheap,
world equity valuations are and Asian stock markets will trade higher with the rest of the world against a backdrop of a synchronized global recovery.

With policy easing having come to an end in Asia, upward pressure on interest rates is intensifying in most regional markets. Improving global economic conditions and inflation fears give rise to rate hike speculation and Asian yield curves will continue to exhibit a steepening bias in 4Q09. Long-end yields remain more likely to rise than fall in 4Q09 as supply pressures continue to weigh on bond markets. Hence, the outlook for most Asian local currency bond markets remains bearish. Curve flattening is unlikely before rate hikes and we think 4Q09 is too early for this to occur.

Citigroup Global Markets published their "Global Economic Outlook and Strategy" report yesterday too, with little room for concern:

The global economic recovery continues to strengthen. Recent data suggest that the US, Euro Area, Canada, UK and Switzerland are all returning to positive growth in Q3. We continue to make more upgrades than downgrades to our growth forecasts, reflecting the mix of improving financial conditions, the turn in the inventory cycle, major monetary and fiscal stimulus, plus marked improvements in recent surveys and gains in activity data. This month, we are again revising up our growth forecasts for the US and (especially) the euro area, while also significantly revising up our forecasts in Australia, Brazil, Korea, Norway, Poland, Russia, Sweden and Switzerland. Consensus growth forecasts also are rising, but our growth forecasts remain above consensus in most major countries.

With inflation low or absent in most countries, recovery is unlikely to trigger preemptive tightening, and most major central banks will keep rates at ultra-low
levels until growth is solid. We expect the Norges bank and RBA to hike before yearend, but the Fed and PBOC are likely to keep rates on hold to Q2-2010, with the BoJ and ECB on hold for even longer.

This month's GEOS has a theme piece highlighting developments in global imbalances ... Imbalances have diminished markedly as demand has slumped in industrial countries, and we express some cautious optimism that imbalances are unlikely to return any time soon as a threat to global stability.

We also feature latest views from Citi strategists on key asset classes. We are nervous about prospects for government bond yields and fear that the rising volumes of carry trades in the market is creating a long duration position for the wrong reasons and at the wrong time in the cycle. We remain constructive on equities, credit products and securitised products, but more cautious for many commodities. We expect further weakness in the USD and, especially, sterling. In contrast, we expect further gains by both NOK and SEK against the Euro.

Danske Bank in its Nordic Equity Strategy report also notes today:

Overall we conclude, that the experienced multiple expansion for Nordic companies is not yet critical for the Nordic markets’ ability to perform in the coming months.

A key reason why the Nordic PER is higher than in Europe is a) the more cyclical nature of Nordic EPS and b) the strong PER expansion in especially Sweden and Denmark. Of the 60% noted above, 93% are cyclicals while 50% of the companies are Swedish and Danish.

We are not taking an overly positive stance on the Nordic market vs. the European market. However our point is: take care not to view Nordic stocks too negatively. The total inflation in Nordic PER is justified in our view, as we expect strong global expansion and further credit market healing to trigger stronger Nordic earnings
revisions than likely to occur in the broad Pan-European market.

The only reason for concern is not to participate in the risky asset festivities?