It is another year, and investors naturally worry whether last year’s successful trade can work, notes CLSA’s Christopher Wood in the latest issue of his client newsletter, Greed & Fear.

Wood’s view is still that it makes sense to remain long Asia and emerging markets and short Western financials, which “can go a lot lower if the US economy really rolls over, most particularly as crazy regulatory rules have prevented bankers from provisioning”.

Western financials are still well above distress valuations, as reflected in their market capitalisation relative to their deposit base. Japanese banks continue to look better valued on this score. Greed & Fear continues to take the view that there remains plenty of potential for nasty surprises to emerge from the whole scary area of imploding structured finance.

Equity investors have been hoping that US employment and incomes will continue to hold up, which is why they react negatively when presented with contrary evidence. Do not expect a sudden collapse in US employment and income growth but rather, a continuing decline, says Wood. “This is a story of attrition in the context of an ongoing declining housing market, not a V-shaped bottom.”

Meanwhile over at the Federal Reserve, if the latest newsflow has increased the chance of a 50bp cut in the Federal fund rate at the next FOMC meeting on January 29-30, what happens on that date will ultimately depend on how the S&P 500 trades in the run up to that meeting. Certainly, anything less than 50bp will disappoint Wall Street, notes Wood.

Greed & Fear’s continuing view is that Asia and emerging markets are the next bubble in the making. Within Asia, GREED & fear’s view remains firmly that cyclical areas should be avoided, while Hong Kong asset-reflation remains the favoured high-beta trade. Hong Kong’s ability to hyperventilate to the upside should never be underestimated.

Overall, Wood remains convinced of the “structural bull case for gold”. But from a tactical perspective, he is interested to see if gold participates in a commodities correction triggered by recognition of slowing global growth.

If gold does not participate that would be very bullish for gold-mining stocks, given the damage rising energy costs have done to profit margins.

The growing size of gold ETFs has not only made investing in bullion much easier for retail investors, it has also taken supply off the market. The investment case for gold, the absolute inverse of structured excreta, remains compelling.

This entry was posted by Gwen Robinson on Friday, January 11th, 2008 at 15:49 and is filed under Capital markets. Tagged with christopher wood. Edit this entry.