“I like Asia.  You don’t have to sell me the story but I’m going to wait until the next leg down before making any allocation”.  This has been the typical response over the last couple of months, as the snooty dismissal of the latest rally as nothing more than a bear market phenomenon with no legs has given way to sweaty desperation.  Yesterday, one investor even dusted off the old adage about “selling in May and going away” and used it as an excuse for prevarication.

Don’t get us wrong: as we said earlier this week, things look a little overcooked short term and as a result we have reduced our beta and raised a little cash.  But as to the next leg down?  Don’t expect it to be big (more Kate Moss than Usain Bolt) as there are too many out there who will not want to miss out a second time.

‘Reduce beta in May and go away’ may not have quite the lyrical simplicity of the original old market adage, but may well prove to be appropriate this year.  A quick perusal of the financial press this weekend could have been from a different planet compared to the doom and gloom of February. Now everyone is spotting green shoots and it is becoming consensual that there is some sort of recovery towards year-end. As you will know from our previous entries, we agree.

However, we think that the markets are starting to get a little carried away with these early signs of economic rebound. It was never going to be an ‘L’ shaped recovery, but neither will it be a ‘V’ . The rebound in industrial production is a statistical necessity after the complete stasis of the turn of the year, and it would be as wrong to extrapolate the recovery continuing to move in an uninterrupted fashion upwards as it was to assume the death spiral that was consensus a few months ago.  » Read more: Reducing beta in Asia but still money to be made

The dramatic rise in markets over the last two months has removed some of the lowest hanging cyclical fruit from the investor’s orchards, with some of the most remarkable rises coming from a reduction in perceived bankruptcy risk as bond markets have reopened, equity has been raised and investors start to believe that bankers may one day make another loan. There are still many opportunities in cyclical sectors, but some profits (100% to 300% in some extreme cases) are too tempting to turn down.

Luckily the upward move in the indices has not been mirrored in many of the ‘defensive’ sectors such as telecom and consumer non-durables. » Read more: “Expensive” defensives in Asia are no longer