Sat, May 16, 2009 page11

• CLSA strategist warns of long-term asset bubble

  TOO MUCH BULL Christopher Wood said that Taiwan had the ‘greatest potential’ for speculative mania amid a recent rally, with ‘seemingly stupid equity valuations’

  • BLOOMBERG
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  A two-month global equity rally that has added US$8.8 trillion to stocks may continue in the short term as risk aversion declines and investors overreact to improving economic data, CLSA Ltd’s Christopher Wood said.

  In the longer term, buyers of US shares are likely to suffer as the prospects of a swift recovery dim, Institutional Investor’s No. 1-ranked strategist wrote in a report. Asian and emerging market stocks, especially Taiwan, have the potential to become the next asset bubble, he said.

  “The risk will continue to be that investors will interpret improving month-on-month data more bullishly than is really justified,” Wood wrote.

  The “fundamental view remains that growth will disappoint in the US,” he wrote.

  Taiwan, which is opening up to investment from China, has the “greatest potential” for an asset bubble with “seemingly stupid equity valuations,” Wood said.

  Taiwan’s TAIEX index is the second-best performer in Asia this year behind China.

  Japan, with national debt more than double the size of its economy, could be the first country to experience hyperinflation as a result of ballooning deficits, he said. Thus, investors should hold property that will benefit from such inflation.

  Wood predicted in 2003 the explosion of mortgage securitization in the US would lead to a boom and bust for the housing market. In September 2007, he began recommending investors sell banks in the US and Europe.

  The MSCI World Index of equities in 23 developed nations has soared 34 percent since March 9. The MSCI Emerging Markets Index has rallied 46 percent in the same period.

  Wood’s stance echoes that of investor Marc Faber, publisher of The Gloom, Boom & Doom Report. Faber said in an interview with reporters on Wednesday that the deficit and monetization policies of governments and central banks around the world will lead to inflation, making equities and hard assets such as gold and agriculture more attractive than bonds.

  The US Federal Reserve has doubled the size of its balance sheet in the last year to US$2.2 trillion as it prints money to purchase assets such as mortgage backed securities and government bonds. Government and central bank spending and guarantee pledges in the US soared to US$12.8 trillion as of the end of March, a level nearing the nation’s annual economic output.

  These actions should benefit risk appetite in the near term, though they may eventually lead to the collapse of the dollar, Wood said.

  “The inevitable long-term consequence of this reluctance to allow failure will be the discrediting of the fiat paper currency system as public sector balance sheets are finally totally discredited along with so called government guarantees,” Wood said.
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