Be wary of Asian & Emerging Markets rally

GLOBAL investors seeking value have been switching money into Asian and emerging markets. But following steep rallies from the depressed levels in December, several analysts are cautioning that markets are overbought.

“The rotation from developed markets equity funds to emerging markets has rolled on,” said EPFR Global Monitor, adding that the trend has been continuing for 13 out of the last 15 weeks.
Value mingled with potential growth were investment incentives. The cyclically adjusted price-earnings (CAPE) ratio, for example, has shown that global stock markets which are relatively cheap include Russia, Singapore, South Korea and China. In contrast, the most expensive are the US, Ireland, Switzerland, India and Canada. The UK and Japan are rated reasonable, but with unexciting value. StarCapital, a German fund management firm, collates the CAPE for international markets. Based on the work of Robert J Shiller, a winner of the Nobel Prize for Economics, the CAPE is the ratio of the current market price of an individual share or stock index over the average inflation-adjusted earnings of the 10 preceding years. StarCapital determines the relative attractiveness of 6,500 companies from 66 countries on a monthly basis.

Global Stock Market Valuations
Country CAPE PE Dividend Yield %
Russia 6.4 5.8 6.3
Singapore 12.8 10.9 3.9
China 13.9 6.7 4.7
South Korea 12.3 10.7 2.3
Spain 12.3 13.3 4.3
Brazil 14.7 17.4 3.5
United States 26.8 17.5 2.1
Ireland 42.4 14.1 1.8
Switzerland 22.9 20.8 3.3
India 21.7 26.2 1.4
Netherlands 21.6 14.2 3.4
Canada 19.1 15.4 3.3
Source: StarCapital  

Wall Street the Key to emerging market performance

Despite better values in Asia and emerging markets, the US and other global investors are mainly influenced by developments on Wall Street and the US economy, according to a paper, ETF Arbitrage and International Correlation.
Authors Ilias Filippou of Washington University in St Louis, and Arie Gozluklu and Hari Rozental from the University of Warwick caution that if Wall Street slides, global investors tend to sell their country’s ETFs. When Wall Street is strong, ETF investors diversify and will only tend to divest from a country if local risks increase.

Major Wall Street Rally

With this in mind, global investors have to be mindful that there has been a considerable Wall Street rally since December. The S&P 500, Dow Jones Index and Nasdaq tech index have fallen slightly from their recent 2019 peaks, but since their late-2018 lows, the Nasdaq index is still up by 19.3 per cent as at last Friday. The S&P 500 has risen by 17.4 per cent and the Dow Jones Index by 16.9 per cent. In contrast, Japan has only rallied by 7.5 per cent, China’s 50 leading stock Index by 7.7 per cent, London’s FTSE 100 Index by 9.1 per cent and Germany by 7.6 per cent.
According to traders, hedge funds and other speculators had turned bearish about US stocks in December. They had sold them short on the expectation that they would be able to buy back their positions at a profit. Instead, the market began rising and they repurchased the stocks causing them to rally further. The rise attracted other investors and the momentum caused Wall Street to surge.

Market Worries

Strategists at Charles Schwab caution that Wall Street is overbought, even though US stock market indices and the so-called FAANGS ( Facebook, Apple, Amazon, Netflix and Google) are still below their 2018 peaks. A key event that could cause uncertainty is the March 2 deadline for a trade agreement between the US and China. There has been a 90-day truce on tariffs but if there is no accord, then duties on some US$200 billion in Chinese goods are expected to climb to 25 per cent from the current levels of 10 per cent.
The other worry is Brexit. If the UK Parliament does not accept Prime Minister Theresa May’s expected concessions from the European Union, Britain could crash out with no deal on March 29.
In the meantime, global surveys of directors show that they are expecting a business slowdown in Europe, while China’s economy is also vulnerable from ongoing trade tensions.

© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
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