Citibank: This Time Is “No Different”. Growth…

Buy Resource Rich North Asia and former Russian States which are now part of Asia, Sell Consumer Asia

The growth deceleration scare has resurfaced. — Our LEI is suggesting the opposite: growth is fine and the economy improving. Furthermore, there is always a growth deceleration at this stage of the cycle. It would be unusual for it not to happen.

Year 3 of a cycle is always tough — There is always a market and earnings lull between late year 2 and mid year 3. Markets do rise when real rates rise, as do earnings. Valuations today are exactly where they are on average in year 3. Earnings revisions remain above mean.

Investor sentiment is now more negative than average — Bull, haystack, needle come to mind. Caution is the operative word. This is good as it allows the market to digest bad news. We still prefer cyclicals and are underweight consumer, utilities and telecoms. Long North vs South.

We see earnings downgrades in India

The countries and sectors where earnings revisions are now below mean, where we are seeing more downward than upward revisions are India, The Philippines and Indonesia. And by sector, utilities, telecoms, real estate and other financials are those which are now showing more downward revisions than upward revisions. All the other countries or sectors are either showing flat or upward revisions to earnings.

Investor Sentiment Is Outright Negative

Over the course of the last three-to-four weeks it has become noticeable how investor sentiment has shifted from the vaguely optimistic to the cautious. The Japanese earthquake has added to this caution with concerns on the speed of economic recovery and the impact on the supply chain.

Momentum won in April, Beta failed

Risk, i.e. beta, has underperformed, which is to be expected but it has not been a disaster as a strategy. Value and growth are doing equally well and the real winner is momentum, which is a combination of both price and EPS revisions. As we highlighted last week, at this stage of the cycle, momentum investing has historically been a factor which the market has rewarded. It is doing so again.