Roubini's April 2010 research report conclusion

Great Expectations & Sobering Realities:
From the Great Moderation to Widening Divergences
Macro & Market Views | April 26, 2010

In Conclusion:
Translating global macro themes and performance into global market views…
I. Key global macro themes and performance attributes:
I. Divergences: A year of two halves in the United States, within a multi‐speed global recovery
II. Fiscal retrenchment: Now in the EZ periphery, eventually United Kingdom, Japan, United States
III. G7 reflation: Fed, ECB, BoJ, BoE on hold as far as the eye can see, especially with fiscal retrenchment
IV. EM disinflation: Less dollar pegging, more tightening, stronger currencies
II. Cyclical asset allocation views:
I. Currencies: H1 – a strong dollar and US risky asset markets with a steepening yield curve; H2, EM currencies to rise as reflation persists in the US, EU, Japan, but disinflation takes hold in EM
II. Rates: Yield curve steepening to give way to bull flattening as Fed stays on hold and growth falters; EZ government bonds to see continuing divergence
III. Risky Assets: US high‐grade corporates should outperform equities; global high‐yield at ongoing credit crunch risk, as we expect Greece to remain under pressure
IV. Emerging Markets: Disinflation in H2 implies EM equity underperformance as gradual tightening reduces overheating – underweight; currencies to rise, curves to flatten – overweight
V. Commodities: Continued buoyant range‐trading – neutral
III. Secular views:
I. Global index weights will shift: (Government) Bonds up; equity down. EM up; G10, down
II. Historical home bias/index weights require major portfolio shifts, from G10 to EM
III. Episodic risk aversion implies that portfolios have less risk/tracking error in bonds than in EM