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Thursday, May 7, 2015

Searching for value abroad

The equity bull market is now the third longest in US history, and it is increasingly more expensive relative to international markets. At this stage, paying a higher price to participate in an extended rally is one reason to begin the search abroad for value opportunities.

The Cyclically Adjusted Price to Earnings Ratio (CAPE) for US stocks is around 27 compared to its historical average around 16. Meanwhile, CAPE is well below its historical average in many countries such as Greece, Austria, and Japan.

While valuation should not be used in isolation, it is important to note that  value opportunities appear more attractive as technical breakouts occur abroad. For example, it took about 20 years for Japan to work off extreme valuation from its bubble era in the late 1980s. The current pull-back in international markets should be assessed for opportunities to buy.

I compiled data featured on WSJ of selected markets that appear undervalued, overvalued, and near its historical average based on the CAPE measure.




Saturday, April 25, 2015

Pressure to ease as South Korean shares advance

Slower global growth and declining inflation adds pressure on the Bank of Korea to cut interest rates. If the Korean Won depreciates due to lower rates, a boost to exports could follow, which will add further support for Korean equities.

South Korea has joined the Asian stock market rally. The top chart shows a bullish advance in the South Korea iShares ETF (EWY). A pull-back is likely, which could offer opportunity to build positions.

The recent move is supported by improving momentum as the MACD turned positive. The most recent positive inflection occurred near the 2013 bottom in EWY. The MACD histogram (blue bars) is more sensitive to price changes within the longer trend, thereby providing an early signal of an advance at the start of 2015.

The last panel offers confirmation from the Chaikin Money Flow (CMF), a volume-related oscillator. The CMF is a measure of buying pressure compared to the total volume over the past 21 days. The CMF recently turned above zero, indicating the potential start of an upward trend. Further confirmation of sustained momentum is needed if a pull-back (with declining volume) around the 66.00 resistance level nears.


For a technical view of South Korea's KOSPI index, read Nicole Elliott's 4/23 column in the South China Morning Post. Nicole identifies a potential breakout from major long-term resistance going back to 2007.

South Korea (a "closet developed-market country"), is not unique in its latest breakout. China, Japan, and Europe are trending higher on policy support. As investors cover their shorts, expect increased flows outside of the US. This will likely precede a pick up in global growth.

This should be a positive for emerging markets - a group that has evolved to track ex-US/Canada country performance (EAFE index). However, despite the recent counter-trend breakout in the emerging market ETF (EEM) relative to the S&P 500, more confirmation is needed given increasing signs of a pull-back along the long-term downtrend.

Given further confirmation in the months ahead, positive signals from international equities could imply a breakdown in the US Dollar and an advance in commodities -- all of which provide support for inflation.

Monday, November 17, 2014

Repost: What Abe wants, Abe gets. Japan's battle on the Yen

Updated from Jan. 2013: 

Aggressive measures by the BoJ and a staunch tone by PM Abe must continue to maintain pressure on the Yen. But is the recent rally enough? Japan's Economy Minister stated on Monday [Jan. 2013] that "the Yen has come to a good level....if it falls to a three-digit level it would boost import prices, weighing on the everyday life of the nation."

The market needs progress, not just rhetoric in order to play its part. PM Shinzo Abe is building up the pressure, and he has a history of speaking out about the Japanese economy, but has done little to actually show for it. Abe was elected as the 90th PM of Japan by a special session in 2006, but only served for less than a year. Perhaps now is his time to shine as he stood on a strong platform of pressuring the BoJ to tackle deflation by means of inflation with aggressive monetary stimulus and greater cooperation with the newly elected government. The monetary-fiscal cooperation interferes with the Bank's legal independence, but talks still continue amid the threat of a constitutional change to the BoJ's independence so long as the Bank abides by Abe's recommended 2% inflation target. 

So called 'Abeconomics' has a direct market effect, causing a bounce off 2012 September lows in USD/JPY to extend to its current rally. The market's reaction is welcomed as a softer Yen helps boost Japanese exports and paves the way for inflation. But will this inflation come with growth? Abe's [2013] $117bn stimulus is projected to boost GDP by about 2% while creating 600,000 jobs. Nomura estimates that the the stimulus will help deliver real annualized GDP growth of 3.5%; and with ongoing disaster recovery from the 2011 tsunami, we could see more government-led growth. Economists worry that this is a big gamble for a sustained recovery. Nikkei Business Daily cites the growing probability of large spending in rural regions and the government's ability to prioritize projects. This is why there is so much pressure on the monetary side. 

In comes Shirakawa, the current BoJ Governor. Shirakawa announced an additional $128bn as part of the Bank's monetary easing programs in the fall [2012]. Japan's total spent on asset-buying programs has now past the $1tn mark, which is quite excessive. Meanwhile, the Japanese economy is stuck in its fourth recession since 2000. Much of this downfall is due to a strong Yen which halts export growth. A sluggish global economy,  and the struggle to recoup from the 2011 tsunami disaster is added pressure on Japan. Nevertheless, the Japanese economy has continued its  constant debt buildup and fiscal woes for about 20 years now. At some point, this cannot be sustained. 

The market implications are clear. Further Yen weakness could continue so long as the BoJ abides by Abe's commands. The market needs to see progress on Abe's strategy in order for the Yen to weaken by theory. The USD/JPY shorts could pave the way for the April appointment of the next BoJ Gov, creating another profit opportunity in the pair. So far, Abe is meeting this week with monetary policy experts to begin the discussion on who will be the next BoJ Gov. Abe stated that he is looking for a "bold leader...someone who shares our views." [in comes Kuroda, current BoJ Gov.]