WITH increasing calls to avoid US stocks, which other stocks would be good to trade?
Watch big cap stocks on Bursa Malaysia for “quick trade” opportunities.
Emerging markets (EMs) and currencies are benefitting from favourable funds flows that boost EM stocks in the consumer, construction and financial sectors.
Defensive stocks with decent dividend yield are also sought after. For most of 2018, investors had pulled out of EMs and gone into US assets which became attractive as the dollar appreciated.
The advice this month from GMO LLC, a Boston-based asset management firm, is to own as little of US stocks as possible.
Morgan Stanley’s advice on Jan 1, is also to avoid US stocks and that EM stocks, especially value stocks in financials, materials, energy and utilities, are poised for a turnaround.
Since last month, concerns were that investors were just piling into US stocks (for which at that time, three major indexes had gone into correction, having fallen more than 10% off their recent highs) and ignoring EM stocks.
EM stocks took a severe beating last year, as the Federal Reserve hiked rates for four times, which was more than expected, and as the US-China trade war raged on.
A pause or slowdown and better still, a reversal, in Fed tightening policy, coupled with some resolution of the US-China trade war, could give EMs a big bounce.
So far, optimism is brewing on these two potential events and the MSCI EM index has rebounded by 7%.
“Most governments are expected to roll out fiscal measures to cushion any expected slowdown. With expectations of a more dovish Fed, EMs are likely to get a boost,” said Thomas Yong, CEO, Fortress Capital.
China, for instance, has announced income and consumption tax cuts, lowered reserve requirements for banks and raised infrastructure spending.
Still, a nimble approach is suggested as uncertainties abound; following positive statements from the US and China, as markets were looking for a partial resolution, US Commerce Secretary Wilbur Ross suddenly said on Bloomberg TV that both parties are ‘miles and miles from getting a resolution’ to the trade war.
Substantial differences on intellectual property rights, equal market access and forced technology transfers are to be ironed out but Ross sees a ‘fair chance’ of arriving at a deal ‘eventually.’
Closely followed will be meetings this week in Washington between Chinese Vice Premier Liu He and US Trade Representative Robert Lighthizer, for signs of further progress in the talks.
Markets got a stark reminder of risks in heightened trade tensions and tightening credit, as the International Monetary Fund downgraded its global outlook for a second time in three months.
“This is a period of quick trades, particularly for big cap stocks on Bursa after they experience huge drops in prices for a few days in a row.
“If timed correctly, these risky trades can be very profitable,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.
Of concern is that the S&P 500 went 0.2% lower last week, its smallest weekly move since October, as the full earnings season kicked in. Is this the pause that refreshes, or the eye of the hurricane? asked Bloomberg.
In looking at sentiment versus fundamentals, GMO’s Bubble Model showed that bubbles are prone to form when times are good and expected to get better.
This is reflected in high valuations and improving fundamentals that lead to positive changes in sentiment, further fuelling the bubble.
When sentiment turns negative on fallen hopes for better times, there will be nothing left to feed the bubble.
US market action over the last quarter reflected this negative change in sentiment, with expectations of lower although still positive growth.
Between August and December last year, US earnings per share for 2019 fell more than 4% to US$156.28 from US$163.51.
Tightening by the Fed and trade war can also cause negative changes in sentiment.
A ‘head fake’ occurred in the 1998 reading of the bubble that had continued to grow for another 18 months before bursting in 2000.
The Bubble Model suggested that a bubble in the US stockmarket had started inflating in early 2017, and continued to do so through the third quarter of 2018.
By the fourth quarter of 2018, the bubble had started to deflate with a volatility ‘bang’ as negative changes in sentiment overpowered strong fundamentals. As the US macro and earnings outlook becomes more uncertain, the focus for US markets would be on quality and defensive sectors such as healthcare.
“Important factors are strength in free cashflow, growth and strong balance sheets,’’ said Dr Anthony Dass, chief economist, AmBank group.
Columnist Yap Leng Kuen notes that investors have a lot to look out for.
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