While US leading economic indicators have stabilized, and are now rising, the rest of the world is in free-fall. The mercantilist and the current account surplus markets – Germany, Japan, China and most of Asia – are seeing their business model collapse.
The asset-backed over-fed US, UK, Spanish, and Australian consumers face years of deleveraging and diet. Policymakers across the world, despite their blue suits and erudition, are well behind the curve.
After years of critiquing Japan for being lead-footed, they have turned Japanese themselves in being out of sync with markets. Near-term, some of the tactical indicators we track are looking oversold – i.e. the Tape, “less-smart” investor sentiment and advisory sentiment.
We cut back net exposure in early January, and we are now thinking of nibbling a bit – just waiting for more of our short term indicators to line up. We would not be selling at these levels.
Undoubtedly, among larger regional markets, Singapore’s de-rating has been the most savage in this bear market. Like Hong Kong, Singapore relies heavily on the global trade cycle and the financial sector. Both are facing serious challenges.
Unlike Hong Kong, Singapore cannot rely on the PRC’s balance sheet to provide counter-cyclical support. Perhaps that is why the de-rating in Singapore’s open economy is so savage.
Sentiment in Singapore is poor, but a lot better than the depths of late 2008. Technicals in Singapore remain exceptionally poor. We do not want to fight the Tape, here or anywhere.
Leading indicators are plumbing the depths not seen since the early eighties. The world trade system has seized up, and high savings-external surplus countries like Singapore that rely on Western-driven over-consumption are going to bear the brunt of this slowdown.
This is a good time for massive counter-cyclical fiscal policy. The business model of export-driven growth with a relatively strong currency is going to be a tough one.
Cash-on-the-sidelines remains exceptionally high and free liquidity is accelerating.
Singapore is a growth-oriented market, while value is a runner-up. Still, the financial crisis of the past year has put a premium on low risk and high stability – low top-line and EPS volatility names and high Altman-Z have been rewarded handsomely. I expect this to continue.
China
Historically, value, earnings quality and risk have been poor metrics to select stocks in China. Earnings momentum and strong growth are the way to go. Indeed, this year, value has done poorly, while strong expected earnings growth stocks seem to be pulling ahead.
We think government and infrastructure-linked names should show good relative momentum, while export-related names are likely to suffer more earnings damage.
