As the credit crisis continues apace into 2009, we believe the time is rather "ripe" for pursuing various hedging "thematic" strategies to profit from relative valuations across the globe. Quite simply, we believe that the credit crisis will fundamentally impact various global regions in a different manner. Asian countries are likely to prosper more so than Latin American countries as Asia isn't as dependent upon energy or natural resources as is Latin America. Also, Ecuador's tacit default has caused a bit of angst in the region. Therefore, we are putting on a long Asia-Pacific ex-Japan (EPP)/short Latin America (ILF) spread trade.
Technically speaking, we see EPP has underperformed ILF for about the past 5-years; however, that changed in 2Q-2008 as the EPP/ILF ratio broke out of its bullish declining wedge. This bottoming pattern would suggest a multi-year rally; and one that appears ready to trade higher once again after a brief correction back into the now turning higher 60-week exponential moving average. If we keep it simple, and buy the ratio around 1.0, then we can expect over time to gain upwards of 50% on the trade with a target of 1.50.
We believe this shall be a "core position" for some years into the future, and we would look to add in various increments as we see it prove its merit with higher prices. More importantly, given the enormous government intervention into the capital markets around the world, we can not whether stocks go higher or lower - just that EPP outperforms ILF. There is beauty in this trade indeed.
Good luck and good trading!
