eee cine aoe Alea JPMorgan [email protected] 09 November 2012 necessarily. Last summer, as equity markets rebounded in June and July, Cyclical sectors actually underperformed. The thin grey line in the top chart shows that Cyclical sectors have recaptured only a quarter of the underperformance seen between March and August and thus provide a better entry point. Position indicators suggest that investors are underweight Cyclicals and overweight Defensives which is turn means that Defensive sectors are more vulnerable to position unwinding. e We introduced an underweight in US equities in mid October to position for the US fiscal cliff risk. Obama’s win makes it more likely that this risk will intensify into year-end. Across regions we favor EM Asia and Europe vs. the US. While the US is facing fiscal cliffrisks, Asian equities are benefiting from concrete signs that economic activity is rebounding in China. European equities are benefiting from greater improvement in financial conditions, although they are more vulnerable to noise around the Greek and Spanish issues. Credit e US credit spreads edged wider in response to the fall in equity markets following the US elections. US HG widened 7bp to 160bp, undoing around half of October’s peak-to-trough moves. Similar moves registered in other USD credit markets. At 107bp, the CDX.IG is now back to early-August levels, even as the CDS-Bond basis moved back into negative territory with corporate bond spreads again moving above CDS. e Credit spreads may be repricing the risk of a fiscal-cliff induced recession in 2013. For context, we expect the eventual outcome of the negotiations to lead to about 2% of GDP in fiscal contraction, not enough to tip the economy back into recession in itself, and considerably lower than the 4% drag under the full enactment of all revenue raising measures and spending cuts currently set to become law on Jan 1. e From our point of view, the elections confirm the status quo both in Washingt