Asian Markets: Watch the Second Half of 2012

What do we see as the major market events of 2012? First, we expect China’s economy to improve during the second half of the year. This will shock many, who perhaps have forgotten that Asia is in a cyclical slump while the industrialized democracies of Japan, the United States and the European Union are in structural slumps.

In a cyclical slump, the government always creates an excess supply of money in an effort to rekindle the flames of growth. Indeed this cyclical succession is the basis of our Economic Clock framework, in which we take key economic indicators and filter them down to concise, commercially applicable information for investors of all sizes.

In a structural slump, only structural measures will help to re-kindle failing economies. The major investment implication of this is that Hong Kong's stock market will shine as of June: we are, after all, the water skier behind the Chinese speed boat

On the other side of the earth, Europe's problems cannot be solved. It appears to be that many non-Continental people expect the European problem to be solved "suddenly", i.e. in one fell swoop.

My many years living in Germany suggest that there is no instant, one and for all "solution" to the European problem. This is because Europe's problems are of structural nature. Trying to solve this problem with a cyclical bazooka is really like chasing an elephant with a pop gun

Besides, even one-nation America (as in: Capitol Hill) cannot solve her fiscal problems. How, then, can one expect 17 - 27 EU nations to all agree on the same "solution"?

The major investment implication of this has to be that European stocks will underperform Asia strongly, especially as of the second half of next year.

A steepening US dollar yield curve thwarts a solid recovery in US housing. In America, short-term rates stay low, courtesy of the US Federal Reserve's easing policy continuing. However, long bond corporate yields will rise because there will be increased supply of bonds being issued. When supply rises, the price goes down so the yield goes up, as we all know.

This rise in corporate yields, in turn, thwarts a recovery in the US mortgage market, so housing will continue stuck in a soggy marsh.

The major investment implication of this has to be that American stocks will underperform Asian markets especially as of the second half of 2012.