Macquarie Research, Global Horizon- Strategists see 2H sizzle

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Global Horizon
Strategists see 2H sizzle
Event
 Our global strategy team outlines their latest views on equity markets.
Impact
 With economic data flow expected to remain weak over the next 2-3 months,
equity markets are likely to remain volatile. But we see the weak data as a
sign of a mid-cycle slowdown, rather than anything more permanent.
 Short term, bonds can continue to outperform equities while economic data
remains weak, so yields on 10-year treasury bonds could rally to 2.5%.
Outlook
 We expect improved growth and sentiment to drive a 2H rebound in equity
markets. That said, we see ongoing market volatility, and on expectations this
will continue in the coming months, we recommend staying defensive,
although we are approaching the end of that move.
 The anticipated recovery is based on the expectation that US economic data
will show a rebound in the 2H, with the Fed also expected to start talking
about the need to tighten monetary policy. With China’s premier now claiming
victory over inflation, we also expect to see an easing of the restrictive
monetary conditions in China in the 2H.
 Emerging markets, particularly in Asia, are seen as having the most leverage
to an improving growth picture.  In our view, the countries with the most
upside will be externally focused economies such as Korea and Taiwan. Latin
America also looks attractive, with the best value in Brazil and Mexico.
 In the developed world, the US is expected to benefit most from a global
rebound, as the low US dollar improves US growth at the expense of Europe
and Japan. Having said that, we see bargains in Europe and Japan,
especially in companies leveraged to the growth of emerging markets.
 The key macro risks to our view are that the US rebound is not as robust as
we expect, or that contagion in Europe causes more disruptions to global
equity markets.  Maintaining control over inflation in China is also important,
as a requirement for a reversal on monetary tightening. Having said that,
economic growth does not have to be as strong as we are forecasting to see
positive 2H momentum in equity markets.
 To position for the anticipated rebound in equity markets our global strategy
team highlights 15 stocks (see table on left).  These stocks offer forecast 12-
month total shareholder returns in excess of 40%, and are also likely to
benefit from analyst upgrades when we see improved 2H growth.