August Pause
The well-known maxim “sell in May and go away” didn’t necessarily apply this summer; Asian markets performed outstandingly in June–an outcome I predicted in the May issue of Silk Road Investor, Go Long in May:
Global markets are in the midst of a strong rally, bear or otherwise, which could extend for a little while longer. The view here remains that as things stand–i.e., no major negative surprises from major financial institutions–the bulls remain in control and the rally can only get better.
The bottom for the MSCI All Country Asia ex Japan Index was established October 28, 2008, four months ahead of developed markets, at 223. From there the index has gained roughly 60 percent, easily outperforming developed markets. And year-to-date the over 50 percent gain in Asian markets dwarfs the S&P 500’s paltry 12 percent gain.
But because August has historically been a weak month for Asian markets, and given the huge gains involved, cashing out of some positions might not be a bad idea.
That said, I continue to recommend buying when Asian markets dip because the markets appear poised to take the indices higher. If the S&P 500 breaches its current barrier at 1,000 to 1,500 and sustains that level, Asian markets could easily head 20 percent higher over the next five to six months.
My bullish outlook stems from the market’s excitement about the US economic reovery; as I noted in the June 11 installment of Emerging Market Speculator, The End of the US Recession, this recovery is not only underway but also will be initially more powerful than many expected thanks to the government’s stimulus efforts.
More important, the US restocking cycle should be underway soon (a big positive for Asia). And non-financial US-based corporations appear to be generating healthy cash flows, suggesting that capital spending should pick up when conditions improve.
Note that the US recovery appears to be a production-led move rather than a consumer-led move. For that reason, the market will perceive any positive sign on the consumer side with enthusiasm.
Accordingly, analysts across the board have been extremely busy upgrading the earnings per share (EPS) projections for Asia-based companies in almost every sector and every country. If the trend continues, a lot more institutional money will enter Asian markets.
Year-to-date, net foreign buying in Emerging Asia (ex China) totals USD29.5 billion; because foreign outflows reached USD70 billion in 2008, more inflows are likely. Nevertheless, foreign investors have now become net buyers in Asia for the first time in 20 months.
Contrary to what many commentators expected earlier this year, Asian economies didn’t collapse after the developed economies weakened dramatically; Asia’s economic recovery appears solidly rooted in domestic demand, with China taking the pole position. That’s cushioned the hit from lower exports.
And the market is waking up to the fact that the Chinese banks are lending to households and businesses who are funneling this money into the economy. In fact, retail sales growth in China continues at an annual rate of 15 percent. Meanwhile, residential property transactions are on the rise in Hong Kong and Singapore–in many cases, real estate prices are up 20 percent from the beginning of the year.
Asia is still the place to be: Not only has the region’s growth surprised on the upside, but increasing domestic demand suggests that its economies are better equipped to generate future growth.
The well known maxim “sell in May and go away” did not work this year as June in particular was one of the best months for Asian markets. As was suggested in the www.SilkRoadInvestor.com in early May (see Silk 7 May 2009 – – Go Long in May):
“Global markets are in the midst of a strong rally, bear or otherwise, which could extend for a little while longer. The view here remains that as things stand–i.e., no major negative surprises from major financial institutions–the bulls remain in control and the rally can only get better.”
Thus, the bottom for the MSCI All Country Asia ex Japan Index was established 28 October 2008, four months ahead of developed markets, at 223. From there the index has gained about 60 percent easily outperforming the developed markets. Even in a year to date comparison the 50 plus percent gain in the Asian markets in USD terms, dwarfing the 12 percent gain of the S&P500.
But as August has statistically been a weak month for Asian markets, and given the huge gains described above, getting some of the cash home sounds like a good idea.
That said, the view here remains that dips should be bought as markets seem poised to take the indices higher. What is meant by higher is any level above the current S&P500 resistance at the 1,000-1,050 level. Such a move, if sustained, can easily take Asian markets 20 percent higher in the next 5-6 months.
The reason one can be so positive on a tactical basis is that markets are now getting really excited on the US economic recovery. As has been noted here before, (See EMS, 11 June 2009, The End of the US Recession) this recovery is not only already underway but also will be initially more powerful than thought before by the majority as the money that has been thrown at the economy is finally shaking things up.
Furthermore, the US restocking cycle should soon be underway (a big positive for Asia) while non-financial US based corporations seem to enjoy healthy cash flows. There should therefore be a greater ability for capital spending when things get better.
Notice that as has been expected here, the US recovery seems to be a more “production led” one rather than consumer led. For that reason, any positive sign from the consumer side will be perceived very positively by the market.
Translating the above for Asia, analysts across the board have been extremely busy upgrading the earnings per share (EPS) for Asian based companies in almost every sector and every country. If the trend continues, a lot more institutional money will be compelled to go into Asia.
So, Year-to-date, net foreign buying in Emerging Asia (ex. China) has reached USD29.5 billion, which given the net foreign selling of USD70 billion in 2008 could be an indicator for more buying. Nevertheless, foreign investors have now turned net buyers in Asia for the first time in the past twenty months.
Furthermore, Asia’s domestic demand recovery remains strong with China being the leader. So, contrary to what the majority of commentators were expecting in the beginning of the year, the Asian economies did not collapse into chaos as the US and the rest of the developed economies weakened dramatically.
On the contrary, it has been the domestic demand of these emerging economies that has held well thus cushioning the hit from lower exports. The market is now weakening up to the fact that the Chinese banks are lending real money to people that is being spent in the economy and as a result retail sales have remained solid at around 15 percent growth YoY. Economies like Hong Kong and Singapore are seeing their residential property transactions rising while prices are in a lot of cases higher by 20 percent since the beginning of the year.
Looking at the markets and the global economy, Asia is in the sweet spot as the region not only has surprised on the upside, but its economies are gradually looking better equipped to successfully deal with the future.