Thursday, February 10, 2011
Well TMM are not sure whether the king of Saudi is dead or not but one thing is for sure: he's really old and apparently not that well. Which leads TMM to think - if he were to die would they even tell us? TMM would like to see a remake of one of their favorite films - weekend at Bernie's.
With respect to India below it does seem to pick a few big turns and by that metric equities should be getting cheap sometime around 16000 on the Sensex. But cheap to what?
Well, cheap to local rates but how good value are they in historical context? To that end TMM have plotted the spread between Indian local FX 10 years and the US 10 year treasury and the inflation differential between India and the US. As can be seen below Indian bonds tend to be great value when the inflation differential isn’t so bad and they arguably are at this point in time as the CPI differential is falling. However – there are two ways these series can converge on inflation – either US picks up or India gets under control. Given what we are seeing in agricultural markets we can rule out the latter in the short term but a peak in CPI later in the year could not be far off and is plenty in local FX bonds at this point in time. TMM are holding off on equities but as we said before, dabbling in local FX bonds does not look completely insane except in a full-blown risk off panic which we aren’t ruling out.
To that end, TMM are thinking that one of two things are possible - we see a bounce within the next few weeks in EM, likely after some more bloodshed OR we move into a generalized risk off. DM vs EM may have seen its best days this year (after 8% or so of alpha in 6 weeks, depending upon your reference indices) but things that have taken an absolute pasting this year - US rates, bearish bets in DM, etc etc may not be dead just yet. TMM are looking at a few other favorites like IBEX/DAX and thinking that though this is probably not the end as we know it, its likely time for a turn.