Trading Range - For Now

- Long-Term Bullish — "After a 7.2% fall in H1, we expect emerging markets to bounce in the second half of the year. Our forecast is for 20-25% returns for GEMs to the end of 2010, with the best returns being concentrated in Q4."
- Q3 Trading Range — "Several factors, including seasonal trends, suggest that the current trading range will stay in place for some weeks still, with a breakout to a new high for the cycle (12% above current levels) only likely around end-Q3."
- Regions — "We lift EMEA to Neutral, based on better earnings momentum and even lower valuations, and cut Latin America to Underweight, on weaker earnings momentum, low ROEs and rising interest rates. Asia remains an Overweight."
- Countries — "Our top market picks are Russia, Turkey, Korea, Taiwan and Thailand (the latter is upgraded from Neutral). We cut Brazil to Neutral and India to Underweight. We raise South Africa, Poland, Egypt and Malaysia to Neutral. China and Mexico remain Neutrals."
- Sectors — "Our sector views have a slight beta bias, with Overweights in Materials, IT and Industrials. We are Underweight in some classic defensive sectors – Healthcare, Consumer and Telecoms – all of which outperformed in Q2. We are Neutral in Financials and Energy."
- No ‘Double-Dip’ — "Fears of a ‘double-dip’ are overdone, in our view. We expect recovery to continue, albeit unevenly. Emerging markets (at 6.8% forecast GDP growth in 2010) should remain the strongest part of the global recovery story. China may slow to 8% growth by Q4, but this is far from a ‘hard landing.’"
- Downgrade Risk — "However, markets must navigate the peaking-out of GDP and earnings growth forecasts. Despite forecast EPS growth of as high as 37% in emerging markets in 2010, 12-month forward forecasts are now rolling over and our upgrades/downgrades ratio is eroding."
- Liquidity and Valuation Support — "Through this process, equity markets should be supported by ‘lower interest rates for longer’ in many parts of the world and by attractive valuations. GEMs now trade at 10.8x forward earnings (a 9% discount to their long-term average) and cheap to emerging market bonds. Attractive valuations provide leeway for equity markets in the event of earnings downgrades."
Citigroup Global Emerging Markets Strategist 20100708

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