ATHENS, Greece–Will yesterday’s global equity market bounce evolve into a sustainable rally, or will it prove nothing more than a short-covering flare, as the ultra-purist market observers predict?

The reality is that global markets, measured by the MSCI All Country World Index, reached a low at the end of January. And since then, they’re up 6 percent in US dollar terms. At the same time, Asia was hit harder and reached a low in mid-March, but now it’s up 8 percent.

My view on this year’s market has been clear from the beginning: 2008 will be difficult for the markets, agility will help investors achieve positive returns, and any weakness in Asia provides another opportunity to buy into this strong bull market. For more on the 2008 Asian investment story, see Silk, 2 January 2008, The Year of the Rat; Silk, 9 January 2008, Difficult Times for Longs; and Silk, 27 February 2008, A Year of Consolidation.

Asia has been hit hard during this brutal first quarter. During severe downturns, investors first sell out of profitable positions to protect their earnings. And as risk appetite diminishes, investors tend to avoid risky markets.   

If the recent lows hold, expect a decent rally that could potentially take indexes 15 to 20 percent higher (high volatility notwithstanding), which will reward us with a profitable second quarter before the difficult summer months settle in.

In terms of stocks, I favor banks and telecoms in this environment because both sectors have been hit fairly hard, and they’re selling at bargain prices. Furthermore, their earnings have better visibility: The former are much less exposed to the credit woes than their western counterparts, while the latter offer good cash flow streams and solid, sustainable dividends.

The Silk portfolios and the Fresh Money Buys clearly indicate my preference for the aforementioned sectors.

I’m moving Singapore higher in the Fresh Money Buys because the market has good exposure in banking and telecoms. It’s also been hit quite hard as a whole, resulting in reasonable valuations.

Follow the Fresh Money Buys as a guide on how to allocate funds in the Silk portfolios. For more, take a look at How Silk Works.

Please note this is a long-only portfolio that doesn’t hold any cash. I imposed this restriction in order to fairly compare performance against benchmarks because all major market indexes are also long-only. Also note that this performance doesn’t include the Alternative Holdings Portfolio returns or the Permanent Hedges returns.

Although quarterly results aren’t my main concern, the end of the period offers an opportunity to assess performance since the Portfolio’s inception.

Since Silk’s inception 15 February 2006 through the end of the first quarter 2008, the Portfolio is up 36.4 percent. My benchmark–the Morgan Stanley Capital International All Country World Index Total Return (MSCI World Index Total Return), which includes gross dividends–is up 18.9 percent. The S&P 500 is up 6 percent, including dividends, during the same time frame.

The three permanent hedges–US Treasury bonds via the iShares Lehman 7-10 Year Treasury Fund (AMEX: IEF), streetTRACKS Gold Trust (NYSE: GLD) and the short on Consumer Discretionary SPDR (AMEX: XLY)–continue their respectable contributions to Silk returns. See Silk, 8 March 2006, Hedge Your Bets; Silk, 29 March 2006, Right You Are (If You Think You Are); and Silk, 6 December 2006, The Money Month, respectively.

Bonds are up 21 percent since first recommended, gold gained 58 percent, and shorting the American consumer turned out a profit of 19.8 percent. Notice that this last position is a leveraged hedging short to a long-only Asia overweight portfolio and should be viewed as such.

I initiated the bond hedge at a time when many pundits were busy justifying their views regarding why the US 10-year Treasury yield was about to rise to 6 percent and beyond in 2006, a target first revealed at the beginning of that year.

But bonds didn’t collapse, a fact that shouldn’t surprise Silk subscribers. Furthermore, bonds proved a good hedge instrument, holding their own during uncertainty over the past two years.

The latest hedge permanent position I recommended is the iShares Investment Grade Corporate Bond Fund (NYSE: LQD). Although the position was initiated two months ago, it still needs more time.

Corporate credit has been beaten down over the past few years, and now it’s time to start buying into it. If you don’t want to commit fresh funds in this hedge, you can do so by taking some profits from iShares Lehman 7-10 Year Treasury Fund hedge, which has done well for investors who have been invested in it over the long term.

I also hold a long-term bullish view on gold.

It’s becoming increasingly obvious that the majority of investors remain uncertain regarding the final outcome of the Federal Reserve’s moves and the slowdown of the US economy this year. The debate between deflationists and inflationists remains animated.

I anticipate an eventual deflationary outcome (i.e., a de-leveraging of the consumer). However, the only hedge able to cover both is gold.

The yellow metal has been the object of ardor and the target of scorn throughout the centuries, but it’s never been refused as a means of payment. The reason is because gold has no substitutes.

And given the demand for gold we’ve seen during the past three years (from central bank purchases to new gold exchanges and liberalization of trade around the world), it’s become the world’s fourth currency. In today’s world of massive deficit spending and financial imbalances, expect demand for gold to continue to increase.

I first recommended gold as a hedge five years ago (while overseeing a portfolio for another advisory), and the metal remains the ultimate bulwark today. Gold is in a secular bull market that commenced in 1999 and should be expected to rise much higher, easily surpassing previous highs by the end of the decade. I strongly recommend gold as a hedge position for long-only portfolios.

Pay attention to the hedges and see them as they are: protection for the rough patches. Protecting your portfolio is always a good idea.

During the November market turmoil, I recommended shorting the Chinese insurers for extra protection. (See Silk, 13 November 2007, Flash Alert: Hedging the Portfolios.)

My US trading recommendation was to short China Life Insurance Co (NYSE: LFC). The profit was around 39 percent as of March 31, 2008. If you’ve shorted China Life Insurance Co, stay with the position, and set your stop-loss at USD58. This is a hedging trade for a long-only portfolio, which is why the stop-loss is fairly loose.

Recently, I recommended another short: HSBC Holdings (Hong Kong: 5, NYSE: HBC). The rational there is simple: It hasn’t been hit as much, although 63 percent of its loans are in the US and UK. This trade hasn’t worked for us yet (down 8 percent), which is a fairly good sign because we’re aiming for our long positions to perform well over time.

This recommendation should also be viewed as a hedge against a long-only portfolio because it’s not intended as a stand-alone trade. If you have entered the trade, stay with it and keep your stop at USD85.

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the portfolios on the left-hand side of your screen for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Philippines (telecommunications, real estate)
• Singapore (banking, telecommunications, industrial)
• China (consumer, telecommunications, machinery, oil, e-commerce, coal)
• South Korea (banking)
• Taiwan (ETF)
• Japan (banking, industrials)
• Cambodia (casino/hotels)
• Macau (casino/hotels)
• Europe (communications equipment)