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The bad news will end at some point, notes CLSA’s Christopher Wood in his weekly newsletter Greed & Fear. But on the US housing front, Wood expects continuing bad news for the rest of this year.

“This is why,” he says, “more massive downgrades are inevitable by credit rating agencies desperately seeking to salvage their institutional credibility. Fitch Ratings this week placed US$92.1bn of securities backed by subprime residential mortgages under review for a possible downgrade.”

But Wood has decided to “spare investors” lengthy discussion of the unwinding credit bubble this week, given the focus of his most recent newsletter.

The US property market is in his sites and for now, “more announcements of losses seem inevitable given the continuing deceleration in the physical property market in America,” he says.

The latest data on rising foreclosures are dramatic, most particularly if they are annualised. Foreclosure tracker RealtyTrac announced this week that US foreclosure activity rose by 93 per cent YoY to a record 179,599 filings in July. This means a national foreclosure rate of one foreclosure filing for every 693 households for that month, or an annualised rate of 1.7 per cent of all US households.
If the US consumer does not slow, it is possible that the present correction ended last Friday with the Fed’s action, says Wood, but that is not his view. What this means for investors in Asia is that an absolute-return portfolio in Asia ex-Japan is “still vulnerable to further downside as it remains relatively high beta in terms of its exposure to interest rate sensitives,” he notes.

This is why, he reminds us, that Greed & Fear “would not be happy to buy the Asia ex-Japan thematic portfolio unless it was hedged via the recommended hedge of shorting US consumer and corporate credit spreads.”

In the meantime, a (relatively) kind word about the recent performance of Japan’s equity markets: it is worth noting, says Wood, that in the recent correction, “the Japanese thematic portfolio outperformed the Asia-ex Japan one in US dollar terms for all the present negative focus in Japan”.

Thus, the Asia ex-Japan thematic portfolio declined by 21 per cent in US dollar terms from its peak, reached on 24 July, to a recent bottom last Friday, while the Japanese portfolio fell by 11 per cent over the same period.

This, says Wood, shows that Japanese domestic stocks can have some (relative) defensive merits.