South Korea had previously announced its plan to tax capital gains from cryptocurrency trading to tackle what it sees as the risk of excessive speculation.
STOCKS around the world have staged one of the best-ever starts to a year, a synchronized rally that has only gained momentum following 2017’s sharp gains.
In the U.S., the S&P 500’s 7.5% rise so far in January is its biggest since 1987. In Asia, the Shanghai Composite has already surged 7.6%, surpassing last year’s gain. Hong Kong’s Hang Seng Index is up 11%, rising on all but two days this month. And in Europe, the German DAX and France’s CAC 40 are up 3.3% and 4.1%, respectively.
Strong corporate earnings and improving economic growth world-wide have fueled the gains, with the new U.S. tax law, which cuts corporate rates to 21% from 35%, bolstering optimism. The weaker U.S. dollar has been a boon to emerging markets and the recent pickup in Treasury yields has prompted a rotation out of bonds and into stocks, further propelling equity markets, investors say.
The gains have also put some investors on edge, intensifying analysts’ concerns about the rising price of buying into a bull market almost nine years old. The rallies have also drawn comparisons to the 2000 Nasdaq peak, when a mania for technology stocks drove the index to a level that it wouldn’t recapture for more than a dozen years.
While U.S. stocks have been generally expensive relative to historical norms in recent decades, Jim Paulsen, chief investment strategist at Leuthold Group, pointed out last week that the median price-to-earnings multiple for stocks listed on the New York Stock Exchange, Nasdaq and American Stock Exchange has reached a record high.
“For the first time in this recovery, the stock market has finally become expensive based on its ‘new valuation range,’” Mr. Paulsen said in a note to clients, referring to that record-high price-to-earnings multiple.
Overall, the MSCI All Country World Index, which captures equity returns from 23 developed and 24 emerging markets, has rallied 6.9% so far in January, on pace for its best monthly start to a year over the past three decades.
“I figured we’d rally again in 2018, but I wasn’t expecting a full-year’s worth of gains in the first few weeks of January,” said Andrew Clarke, director of trading at brokerage firm Mirabaud Asia Ltd. in Hong Kong.
The surge in U.S. stock indexes this year has extended a roaring postelection rally that few analysts predicted, taking the S&P 500 index to 14 record closes in 2018, alongside 13 in the Nasdaq Composite Index and 11 in the Dow Jones Industrial Average.
Stocks and Treasurys are in the midst of what Goldman Sachs calls the most “extreme” start to a year ever. The bank says its cross-asset risk indicator, a measure of how investors are positioned across various asset classes like stocks, bonds and credit, is at its most bullish since inception in 1991.
“Risk appetite is now at its highest level on record,” Goldman analysts wrote to clients, “which leads to the question of what future returns can be.”
The investing environment has made billionaire investor Howard Marks nervous. The co-founder of Los Angeles-based Oaktree Capital Management, which has about $100 billion of assets under management, said investors shouldn’t get caught up in the rallies and be defensive.
“Most valuation parameters are either the richest ever or among the highest in history,” Mr. Marks said, referring to U.S. equity valuations. “In the past, levels like these were followed by downturns. Thus a decision to invest today has to rely on the belief that ‘it’s different this time.’
“I’m convinced the easy money has been made,” he added.
Cash has recently started to pour into equity markets at a record-setting pace. Buyers committed a net $58 billion to mutual funds and exchange-traded funds that invest in global stocks over a four-week stretch through Jan. 17, the most inflows for any comparable stretch in records going back to 2002, according to Bank of America Merrill Lynch.
In its monthly summary of market positioning, the bank said that investors’ allocations to equities had jumped to a two-year high, whereas positioning in bonds had fallen to a four-year low.
But for some investors, that is evidence of a long-awaited rotation into equities, one that might only be just beginning of more cash supporting stock markets.
“I’m not yet observing that we’re at peak optimism,” said Samuel Le Cornu, co-head of Asian equities at Macquarie Investment Management in Hong Kong. “I could definitely understand if the market continued to rally from here.”
Analysts and investors remain upbeat about emerging markets. “We think emerging market macro fundamentals are the best they’ve been in 20 years,” said Ajay Kapur, head of Asia Pacific and global emerging market strategy at Bank of America Merrill Lynch, pointing to indicators such as current account balances, lending metrics and currency fluctuations. “Out of 17 countries we monitor, not one is sick. That’s a very rare thing.”
He predicts the MSCI Emerging Markets Index—a broad measure of emerging-market equities—will double in two years, supported by a weak U.S. dollar and valuations that are cheaper relative to developed markets.
Much of his optimism is due to China, which Mr. Kapur says is the firm’s biggest overweight in emerging markets. With Chinese economic growth accelerating again and memories of the 2015 stock-market crash fading, he said conditions are ripe for more gains.
“There are a lot of skeptics out there, but you don’t really hear much from them these days,” Mr. Kapur said. “They’re burrowed into some caves.” - WSJ
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