Nomura research: Known unknowns

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Known unknowns 
"What you see depends on what you're looking for", Anon
"People wait for opportunity to come along... yet it is there every morning", Denis the
Menace
"He's got the whole world at his feet and he can't find his shoes", John Williamson

Our global team is forecasting approximately 4% GDP growth for 2011F and 16% EPS
growth. We expect developed markets to outperform emerging markets and Asia while
also expecting equities to trounce government bonds.
Asian equity markets managed to rally into the year-end despite local currencies
weakening against the greenback. In fact, regional equity markets’ performance was
impressive against higher G3 bond yields. European sovereign woes were largely
ignored while China's markets stumbled through much higher inflation data and policy
tightening.
In retrospect, Asia has been able to deliver a third year of successive total returns
despite the base effects working against the 2009-10 numbers. However, evidence is
building of serious negative feedback loops that may constrain share prices in the
short run. There is some evidence of a build-up of inventories in overseas wholesale
and retail channels despite the recent impressive data. Margins are also coming under
pressure not only due to higher raw materials, but also from an appreciating currency.
It may be that 4Q10 results may flatter to deceive in that impressive headline growth
outshines underlying earnings numbers. Investors should remember that we are
already into our third year of an economic expansion, and the best part of the earnings
growth is behind us. That said, equities still look reasonably priced relative to bonds.
Perhaps, the surprise for regional equity markets will come from financials. Loan
growth data continues to firm and the yield curves in many markets are steepening.
With the property sector still overshadowed by administrative measures to cool prices,
it is likely that financials may lead the markets in the early part of the year.
We entered December with a more cautious stance in anticipation of a correction. We
slowly removed our shorts and became more aggressive toward stocks, particularly
technology and banks into year end. We would still like to add to our shorts and
become a bit more defensive later.