We hear two objections to our view that the market rally is petering out: momentum and liquidity
But in the past these haven’t necessarily kept markets rising
We also adjust our market calls for the new view: we cut Taiwan to neutral and raise HK and Malaysia to overweight
In last week’s AI we reversed the bullish stance we have taken on Asian equities since March and argued the stock market rally was close to petering out. Not only are valuations getting stretched, but the better news on the economy and earnings is largely in the price (and, if anything, has shown signs of worsening again in the past few days).
When discussing this view with clients, we found few who agreed. Many argue that a new bull market has begun. This is a sharp turnaround from the first half of April when fund managers remained very cautious. We frequently heard two bull arguments. First, momentum indicators – for example, the golden cross between the 20 and 200 day moving average that appeared on May 5– point to the rally continuing. Second, with interest rates ultra-low and the US undertaking quantitative easing, liquidity globally is very strong. In Asia, for example average M1 growth, which has historically had a good correlation with equities, has picked up from 3% to 10% since the end of last year. In this piece, we examine these arguments and conclude that, while they have some merit, historically these factors have not necessarily guaranteed a rising stock market.
We also review recommended country weightings in the light of our new view. The view suggests we should think less about cyclical factors and worry a little about valuation. Accordingly, we lower Taiwan to neutral and Indonesia to underweight, and raise Hong Kong and Malaysia to overweight. We remain overweight on India and Singapore.
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