Friday, November 26th, 2021

Chinese Technology could lead a rally in EM Equities

We spend a lot of our time dissuading clients from going bottom-fishing, mainly because it doesn’t work very well. But there are times when we may need to do it to protect ourselves from the risk of being underweight a sector or country which rallies very fast. This week we highlight a combination of charts (EM Equities and China vs the World and Chinese Technology vs China) which have all sent recent signals suggesting that we may need to close our underweight positions in a hurry. There is a risk/opportunity that Chinese Technology could lead sharp and unexpected rally in EM Equities.

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Friday, November 12th, 2021

Global equities are about to start rotating faster than usual

We expect global equities to start rotating faster than usual on a country/regional basis. We discuss the technical rationale in some detail, but the important message is that this not about the recent winners such as the US and India, or the losers like China and Korea, but all the others, which are somewhere in the middle. There are several European countries like Germany, the Netherlands and Sweden, which are at risk of dropping down the ranking, while selected EM countries in Asia and Latin America could benefit. If our analysis is correct, this should happen before Christmas.

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Friday, August 27th, 2021

Exposure to some sectors may be justified but timing is critical

Our recommended exposure to Chinese equities is effectively zero, but EM Equities (of which China is by far the largest part) are critical to the success of any global balanced portfolio. So, we have looked at individual Chinese sectors to see which ones have been the most successful diversifiers compared to their US counterpart. The good news is that it is easy to identify those which fail the test badly: Financials, Industrials, Telecom and Small Caps. The bad news is that only Technology has offered successful diversification over the whole of our test period, but now is not a good entry point. There may also be opportunities in Consumer Staples and Healthcare, but, again, we prefer to wait for a better entry point.

Friday, August 13th, 2021

EM ex China has begun an interesting rally

We think it is time to take China out of the main EM equity indices. Some of the arguments made for its inclusion are no longer valid. It doesn’t make sense to have separate benchmarks for companies listed in China and Hong Kong. Separate indices for China plus Hong Kong and the rest of Emerging Markets would increase flexibility for all investors, not just those who no longer wish to have passive exposure to the current regime in China. Once we make the split, we can see that EM ex China has already begun an interesting rally.

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Friday, July 30th, 2021

China’s problem may be Europe’s opportunity.

Our recommended weight for Chinese equities has just hit its all-time low since the beginning of this century. They have been in extreme underweight territory for their longest period ever. We think this is more than a temporary misunderstanding. It could represent the breakdown of the pro-China consensus that has dominated US investment thinking for over a decade. There may be parallels with what happened when the US became disillusioned with Russia 10 years ago. US investors who want international equity diversification will be forced to have another look at Europe.

Friday, January 29th, 2021

The immediate danger lies in Asia, not the US

Everyone is suddenly on bubble alert, but our numbers suggest that the main danger lies in Asian equities, not the US. China, Hong Kong, Taiwan, Korea, India, Japan, Australia and Indonesia all have weekly RSIs above 70%, which is our warning signal. US equities are still below this threshold, apart from Small Caps, which broke above it three weeks ago.

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Friday, November 27th, 2020

The value trade won’t work everywhere

This report is a real-time survey of how the great rotation is progressing in different regions of the world. Our conclusions are (1) Many of the important sector infection points happened back in September; so talking about them now in terms of factors suggests that people missed them the first time round. (2) The UK has much the most aggressive sector rotation and China the least. (3) There are different winners and losers in each region and any attempt to apply one paradigm to all of them is likely to fail. (4) Many value-rich sectors in each region have hardly moved, suggesting that the value trade has already been differentiated into those sectors which have catalysts and those which don’t.

Friday, October 30th, 2020

Push and pull factors suggest that the timing is right

We think that global equities could be on the cusp of switching to a new big idea, moving out of US Technology and into something else. It may be US infrastructure, depending on who wins the election and controls the Senate, but the growth of the Chinese consumer has been thrown into sharp relief by the relative impact of Covid on China vs the West. Oil at $35/bbl is a significant stimulus and a similar idea (overweight in EM Equities) worked very well in 2002-05. We have a big overweight on both Consumer sectors in China and we highlight 10 consumer-related companies in Europe which derive more than 10% of sales from mainland China.

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Friday, October 16th, 2020

Some US Tech giants are already rated underweight

We re-iterate our call to take profits in US Tech. We have downgraded Communications to neutral this week and we already have Google/Alphabet as an underweight. The Tech sector broke down through an important technical signal in late August and is now accelerating towards a downgrade. Leading stocks like Microsoft have been downgraded and only Apple looks robust at current levels. The majority of the large stocks we cover have lower scores than they did at the end of summer.

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Friday, August 21st, 2020

Cause for concern in Technology and Financials

China’s stock market is always subject to official intervention, so the signals need to be interpreted carefully. However, there are two new red flags in our equity sector model, relating to Technology and Financials. Technology has suddenly started to deteriorate, which has historically been a good lead indicator for the US Tech sector. Financials are heading for a multi-year low relative to the index, which could have important implications for China’s FX policy regime.

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