At A Premium
By Yiannis G. Mostrous
FALLS CHURCH, Va.–A little more than a month ago, as the MSCI All-Country Asia ex-Japan Index (MSCI Asia Index) surpassed a previous high that had stood for 12 years, I noted it can be dangerous for investors to be sitting on positions that have achieved all-time highs.
As I argued at the time, the view may be beautiful from the rooftop, but the fact of the matter is that Asia will once again be at the center of liquidation activity when investors decide–or are forced–to take profits (see SRI, 10 January 2007, Fiddler On The Roof).
Given that the markets remain well bid and the MSCI Asia Index continues to trade at a valuation premium to the S&P 500 (16.7 times trailing earnings versus 16.5 for the S&P), I’ve spent a lot of time fielding questions regarding the timing and magnitude of an eventual selloff.
The chart below depicts the MSCI Asia Index’s break to new highs, as indicated by the top horizontal line; the bottom horizontal line (in the 350 area) defines the potential drop during a serious selloff period. In other words, expect a 20 to 25 percent correction, in line with what took place in May 2006.
Source: Bloomberg
I claim no absolute knowledge on the timing issue, but note that, during the last two decades, April and May have had more negative than positive monthly returns.
What makes the above scenario a probable one is that bears (“perma” or otherwise) have become less vocal. Whether bankrupt by now (the aggressive ones) or simply waiting on the sidelines for the next short opportunity, their collective voice has become quite weak. Always be careful when our bearish friends stop growling.
I still expect a global economic slowdown to happen this year, but there’s no conviction of a US-led global recession outcome. The latter is mentioned because there’s been talk–from serious analysts–that 2007 will be the year that a real estate-based recession will take place in the US eventually affecting the global economy and markets.
I’m sympathetic to the view that a spectacular housing collapse in the US would have dire consequences for its economy and the world–at least initially. I just don’t see a recession looming, even though I’ve seen my share of scary charts this time around, too.
I’ll prepare for an economic slowdown–even a severe one–and get ready to evaluate if the rest of the world has finally reduced its dependence on the US as the only engine of global economic growth.
Although the relationship still holds to a certain degree, we’ve seen incremental changes–the most important being that the US economy and its businesses are now influenced by developments abroad much more than before. Also note that global strength helped the US economy perform well last year; US exports were extremely strong, adding more than half a percent to US growth, the difference between above- and below-trend performance for 2006.
Asia Outlook
Asia continues to grow as a whole. China and India remain the main engines, but there’s room for everyone. Asia’s growth potential, although influenced by global growth, should be viewed in the context of an economic region that’s developing while ensuring long-lasting structural change. In other words, Asia is counting more on itself now for its economic development than on the kindness of foreign investors, as it did before.
Headwinds will always be present–after all, nobody’s immune to economic cycles and disruptions to global trade–but they should be viewed as short-term slowdowns in the context of a long-term economic trend that will make Asia an equal partner and a strong contributor to the world’s economic growth.
My view remains benign when it comes to the danger of a financial disaster in Asia because of the increased portfolio inflows. Aside from the fundamental improvement in Asian economies, net portfolio inflows remain much lower today at 4.5 percent of the region’s GDP than they were 10 years ago–during the Asian Financial Crisis–at more than 6 percent of GDP.
As changes in Asia continue to take place, I expect the market to stay stronger for longer, even trading at par to US valuations given its superior growth characteristics. If the selloff scenario materializes–in a tactical rather than a recessional context–expect the Asian markets to rebound, finishing the year 40 percent to 50 percent above current levels.
The Year Of The Pig
2007 is the Year of the Pig, according to Chinese astrology. But it’s not an ordinary pig year, which comes every 12 years. This is believed to be the Year of the Golden Pig, which comes every 600 years.
Babies born during the golden-pig year are believed to have comfortable and wealthy lives. Reports from China indicate that obstetrics and gynecology clinics are currently counseling more about pregnancy, and related industries are eagerly promoting baby products.
Although you can’t base investment decisions solely on tradition (exposure to a “continuing pattern of culture beliefs or practices” isn’t a normal criterion for an SRI recommendation), the Portfolio’s consumer play in China, Hengan International, has a strong presence in the baby industry, i.e. diapers, and should benefit substantially from this development (see SRI, 24 January 2007, Just Fine).
The Portfolio remains domestically oriented, based on the expectation that as asset prices in Asia increase and economies improve, so will the wealth effect, leading to increased consumption, investment and credit growth. Please see the 31 January 2007 issue, Main Themes Redux, for more on the investment themes represented in the Portfolio.
FALLS CHURCH, Va.–A little more than a month ago, as the MSCI All-Country Asia ex-Japan Index (MSCI Asia Index) surpassed a previous high that had stood for 12 years, I noted it can be dangerous for investors to be sitting on positions that have achieved all-time highs.
As I argued at the time, the view may be beautiful from the rooftop, but the fact of the matter is that Asia will once again be at the center of liquidation activity when investors decide–or are forced–to take profits (see SRI, 10 January 2007, Fiddler On The Roof).
Given that the markets remain well bid and the MSCI Asia Index continues to trade at a valuation premium to the S&P 500 (16.7 times trailing earnings versus 16.5 for the S&P), I’ve spent a lot of time fielding questions regarding the timing and magnitude of an eventual selloff.
The chart below depicts the MSCI Asia Index’s break to new highs, as indicated by the top horizontal line; the bottom horizontal line (in the 350 area) defines the potential drop during a serious selloff period. In other words, expect a 20 to 25 percent correction, in line with what took place in May 2006.
Source: Bloomberg
I claim no absolute knowledge on the timing issue, but note that, during the last two decades, April and May have had more negative than positive monthly returns.
What makes the above scenario a probable one is that bears (“perma” or otherwise) have become less vocal. Whether bankrupt by now (the aggressive ones) or simply waiting on the sidelines for the next short opportunity, their collective voice has become quite weak. Always be careful when our bearish friends stop growling.
I still expect a global economic slowdown to happen this year, but there’s no conviction of a US-led global recession outcome. The latter is mentioned because there’s been talk–from serious analysts–that 2007 will be the year that a real estate-based recession will take place in the US eventually affecting the global economy and markets.
I’m sympathetic to the view that a spectacular housing collapse in the US would have dire consequences for its economy and the world–at least initially. I just don’t see a recession looming, even though I’ve seen my share of scary charts this time around, too.
I’ll prepare for an economic slowdown–even a severe one–and get ready to evaluate if the rest of the world has finally reduced its dependence on the US as the only engine of global economic growth.
Although the relationship still holds to a certain degree, we’ve seen incremental changes–the most important being that the US economy and its businesses are now influenced by developments abroad much more than before. Also note that global strength helped the US economy perform well last year; US exports were extremely strong, adding more than half a percent to US growth, the difference between above- and below-trend performance for 2006.
Asia Outlook
Asia continues to grow as a whole. China and India remain the main engines, but there’s room for everyone. Asia’s growth potential, although influenced by global growth, should be viewed in the context of an economic region that’s developing while ensuring long-lasting structural change. In other words, Asia is counting more on itself now for its economic development than on the kindness of foreign investors, as it did before.
Headwinds will always be present–after all, nobody’s immune to economic cycles and disruptions to global trade–but they should be viewed as short-term slowdowns in the context of a long-term economic trend that will make Asia an equal partner and a strong contributor to the world’s economic growth.
My view remains benign when it comes to the danger of a financial disaster in Asia because of the increased portfolio inflows. Aside from the fundamental improvement in Asian economies, net portfolio inflows remain much lower today at 4.5 percent of the region’s GDP than they were 10 years ago–during the Asian Financial Crisis–at more than 6 percent of GDP.
As changes in Asia continue to take place, I expect the market to stay stronger for longer, even trading at par to US valuations given its superior growth characteristics. If the selloff scenario materializes–in a tactical rather than a recessional context–expect the Asian markets to rebound, finishing the year 40 percent to 50 percent above current levels.
The Year Of The Pig
2007 is the Year of the Pig, according to Chinese astrology. But it’s not an ordinary pig year, which comes every 12 years. This is believed to be the Year of the Golden Pig, which comes every 600 years.
Babies born during the golden-pig year are believed to have comfortable and wealthy lives. Reports from China indicate that obstetrics and gynecology clinics are currently counseling more about pregnancy, and related industries are eagerly promoting baby products.
Although you can’t base investment decisions solely on tradition (exposure to a “continuing pattern of culture beliefs or practices” isn’t a normal criterion for an SRI recommendation), the Portfolio’s consumer play in China, Hengan International, has a strong presence in the baby industry, i.e. diapers, and should benefit substantially from this development (see SRI, 24 January 2007, Just Fine).
The Portfolio remains domestically oriented, based on the expectation that as asset prices in Asia increase and economies improve, so will the wealth effect, leading to increased consumption, investment and credit growth. Please see the 31 January 2007 issue, Main Themes Redux, for more on the investment themes represented in the Portfolio.