Inflation and Potential Market Rallies
09/08/2006 12:00 am EST
With his thorough analysis of domestic US, as well as Far East markets, Yiannis Mostrous discusses inflationary forecasts and possible market rallies. Here he offers two recommendations for investors interested in profiting from two very diverse economies…
“World markets enthusiastically digested the most recent US inflation data. The possibility that the Federal Reserve might stop raising rates (recent comments by Fed officials to the contrary notwithstanding) is a positive, particularly for Asian markets.
“My stance remains that a further increase in US inflation is possible, but ultimately the outcome will be deflationary given the amount of leverage in the system and the eventual adjustment (i.e., paying down of debt) such circumstances will require. US government bonds continue to be a good hedge position. Use the iShares Lehman 7-10 Year Treasury Bond Fund (IEF ASE). Even if there's short-term risk, now is the time to gain exposure to the Treasury market. Treat this as a more permanent hedge for the portfolio because, later in the year, this hedge will become important to achieve positive returns.
“If the market does rally from here, it’s obvious that higher-beta stocks will perform well. The Taiwanese market includes tech stocks that could advance in a potential rally, and it’s also out of favor with investors. Taiwan remains a politicized economy/market that could prove to be profitable in the longer term. Analysts have reserved their most pessimistic earnings assessments for Taiwan and expectations are therefore quite limited for the short term. Yet the Taiwan Stock Exchange is up more than 5% off its early August lows—foreigners turned from net sellers of USD1.4 trillion in June and USD886 billion in July to net buyers of USD1.2 trillion in the first half of the month.
“I must also note that Taiwanese companies have reduced debt; net debt-to-equity has fallen from a high of 37% in 1998 to 11% currently. In addition, the tech sector has increased supply discipline and is better equipped for a potential rebound. SRI Portfolio’s Taiwan exposure is through Chunghwa Telecom (CHT NYSE). It isn’t exciting, but it offers downside protection as well as a 7.4% dividend yield. Chunghwa Telecom remains my favorite long-term Taiwan holding.
“The technology stocks I favor (in the case of a rally) include Taiwan Semiconductor (TSM NYSE), United Microelectronics (UMC NYSE), and AU Optonics (AUO NYSE). International readers may want to take a look at Hon Hai Precision Industry (Taiwan: 2317). Absent a crashing US economy, adding some tech to your portfolio during the remainder of August and into September should prove to be a good move.”