Risk on or risk off, depending on which one you meant; still my themes play out

Lately the pundits and investors are running around like headless chicken again, with their confidence shattered by the broad selloff globally, especially in emerging markets. The usual question is asked again: Is it risk on or risk off?

Asking this question means you are clueless. It really depends which market you talk about. If it is the US, it will still do well and once reaching about 10% correction, lots of people will jump in so as not to miss the opportunity, even though earnings growth will be under some pressure. So the current correction may be mostly over, and likely people will jump in even before 10% correct because they are afraid of other people taking the bargain from them. So if you are holding US risky assets, the risk is still on.

For EM, they will keep going down for a couple of more years, with temporary reversals like the second half of 2013. The trend there will be driven mostly by China’s numbers (if it turns brighter for a couple of quarters, things will stabilize for a while, but the trend is down for the last couple of quarters after some bright numbers earlier last year), but also some noticeable events such as Argentina (more people wake up that some EM are much worse than thought). So far, China’s numbers are still not so bright; there have also been a few bad surprises. More importantly, China, and EM’s trend, is still going down. So the risk is always off. However, in the near turn, this round of pessimism may have been largely vented and this may be a time to start to get into the market to play some risky asset rally.

So the whole thing/theme is still exactly playing out as what I predicted 2.5 years ago. Not too many surprises.

My view on Europe has changed again. I have been suggesting buying European bonds and stocks since summer 2012, which turned out to be a hugely profitable trade. However, after the huge rally, European liquid assets have been largely fairly priced. So it is not a bargain any more, unless ECB takes big action again, which they have so far been girlish about.