Alpha beckons in Germany & Korea ::Macquarie Research,

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Alpha beckons in Germany & Korea
Event
 We update the results of the Macquarie Country Alpha Model, and update our
views on which markets are expected to outperform/underperform.
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.
Outlook
 We expect improved growth and sentiment to drive a second-half rebound in
equity markets. That said, we see ongoing market volatility, and believe a
more balance measure of defensive and cyclical stocks is likely correct.
 The anticipated rebound is based on the expectation that US economic data
will show a rebound in the second half, 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 second half. Paul Cavey’s
latest China survey also shows that consumers are more optimistic, and this
gives us more confidence that a second-half rebound will occur.
 Emerging markets are seen as having the most leverage to an improving
growth picture, and our recent work on the equity risk premium confirms that
emerging markets offer the best upside. Aside from Russia, which has the
highest alpha, the most attractive emerging markets are Indonesia, Korea and
Brazil. Of these, we favour Korea, as we expect externally-focused
economies to benefit most from the second-half bounce in equity markets
expected by our global strategists. For leverage, two of our top picks in Korea
are Woori Finance (053000 KS) and Hyundai Motor (005380 KS).
 While our European strategist, Matthias Joerss expects the market to remain
in a range near term, if you look only at the world’s 10 largest equity markets,
the three offering the highest forecast alpha, and would therefore be expected
to outperform moving forward, are the United Kingdom, Germany and
France. Once again, we favour Germany for its export focus and some
stocks positioned to benefit from the anticipated rebound are Wacker Chemie
(WCH GR), K+S (SDF GR) and BMW (BMW GR).
 We also continue to highlight that the key factor driving our asset allocation
view is the expected direction in US bond yields, and we expect the next
signal on rates is likely to come at the Fed’s Jackson Hole meeting. Talk that
higher rates are needed would be positive for equities, as changes in Fed
policy are generally a good leading indicator, and with emerging markets
having a negative 85% correlation with US 10-year bond yields, our emerging
market equities have the most upside in a rising rates scenario.