World Allocation:
Initial Position FXI: Large Cap China

China has basically gone no where since their post crisis recovery in 2009. Since the beginning of 2010, the S&P500 is up 80% and the top 25 large cap Chinese stocks are flat. The stimulus there left the economy extremely indebted from investment in infrastructure. There are obviously risks that US tapering may increase debt costs in China. There are further risks that capital flees the country, fearful that this debt burden is too much. But the valuations here are among the cheapest on the globe, earnings are growing at double digits and revenue is growing at 18%.

What could go right. China’s capital controls ease and it actually benefits the country. This combines with continued internationalization of China’s currency and they begin to purchase foreign assets. US growth numbers continue to improve (and impress). Europe begins to be a positive contributor.

This portfolio has been under-allocated to risk assets and we feel the combination of poor existing sentiment and low valuations produce a good risk/reward profile and good timing for a small allocation to China.

FXI

Increase Position DXJ: Currency Hedged Japan

As Japan has implemented programs to systematically weaken the Yen, Japanese stocks have benefited. Relative to currency movements, this benefit has been about 2x in Wisdom Tree’s hedged instrument.

Yen DXJ

 

We think Japanese officials will push the Yen at least another 15%.

YEN LT

And we believe that the US taper will provide additional momentum to the second leg of the move which is happening now.

Yen ST

 

As always, please feel free to contact me with any questions or concerns.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@4kb.d43.myftpupload.com

Disclaimer: The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Alhambra Investment Partners LLC, do not constitute investment advice offered by Alhambra,  are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and are not warranted to be correct, complete or accurate. Except as otherwise required by law, Alhambra shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.