First, the fourth quarter in a US Presidential election year is normally positive for stocks. What markets need is a clear direction for policy, with less of a logjam, whether in the US (where political polarization is close to a 100-year high), Europe (a classic creditor-debtor debate), or China (policy transition). We think on all three fronts, things are likely to get less bad.
Second, policy uncertainty has been high since the global financial crisis –the two Presidential candidates in the USA offer starkly different policy directions; whatever the outcome, less policy uncertainty would be a potential positive for decision-making, and for stock-picking – stock correlations with the benchmark have moved exceptionally closely with a quantifiable measure of policy uncertainty. Life might just get easier for stock-pickers with less policy uncertainty.
Third, Asia's terms of trade, which LEAD Asian margins, are picking up. Bottom-up analysts are unaware of this, or don't seem to care. This year, their (almost perpetual) no margin change view was violated to the downside, leading to sharp downward EPS revisions. In most Asian markets, except China, the terms of trade/margin proxies are rising, potentially setting us up for positive margin and EPS surprises.
Fourth, Risk-Love is in now in mild euphoria from a mild panic in late May, but the US economic surprise index and cyclical/defensive stock performance have only hit neutral from extreme lows in late May. We believe there is still juice in this stealth global equity bull market.
Eoin Treacy's view My view – This
report is dated September 6 th but has a broad enough remit to remain relevant
a week later. The above points help to illustrate the extent to which most investors
have missed the advance of the last three months as fears for the Euro's survival
trumped interest in the stock market. As people react to the concerted efforts
of global central banks to add liquidity, they realise an underweight position
in risk assets is not likely to be the most rewarding strategy, at least in
the short term. While we have concentrated on US and European markets over the
last few days, I thought it may in instructive to review a number of Asia's
leading stock market indices.
Malaysia found support in the region of the upper side of the underlying trading range on Tuesday and bounced emphatically. A sustained move below 1600 would be required to begin to question medium-term scope for additional upside.
Indonesia ranged mostly above the 200-day MA for the last month but found support in the region of 4000 two weeks ago and rallied to post a new closing high today. A sustained move below the recent low would be required to check potential for additional upside.
The Philippines continues to hold a progression of higher major reaction lows and is rallying towards the upper side of its four-month consolidation.
Thailand has held a progression of higher reaction lows since finding support in the region of the 200-day MA in June. It hit a new 16-year high today and a clear downward dynamic would be required to question potential for continued upside.
While not leaders, the following markets have exhibited renewed bullish interest nonetheless.
Singapore bounced from the region of the 200-day MA and the psychological 3000 last week and a sustained move below that level would be required to question medium-term scope for continued upside.
Taiwan has been ranging between 7000 and 8000 for more than a year. It rallied impressively this week but a sustained move above 8000 will be required to confirm base formation completion and reaffirm medium-term demand dominance. South Korea has a similar pattern.
India has held a progression of higher reaction lows since June and is now challenging the upper side of a more than yearlong range. A sustained move below 5225 would be required to begin to check medium-term scope for additional upside.