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Market – Bullish on emerging vs. developed markets in 2019?

Fri 21 Dec 2018

In overnight market action, US stocks continued to see a second day of sharp sell-offs. The Dow Jones Industrial Average dropped 464.06 points to close at 22,859.6 — bringing its two-day declines to more than 800 points and its 5-day losses to more than 1,700 points.

The S&P 500 shed 1.58 percent to end the trading day at 2,467.41 while the Nasdaq Composite fell 1.6 percent and closed at 6,528.41 after dipping into bear market territory during the session.

Meanwhile, fear is rising in the air as the Cboe Volatility Index — one of the US market’s best gauges of marketplace fear — rose above 30.

Stocks fell to the low for the day after U.S. House of Representatives Speaker Paul Ryan announced that President Donald Trump would not sign a temporary government funding resolution. Following the announcement, more political turmoil in the White House ensued when Defense Secretary James Mattis resigned from his post over disagreements with Trump.

The latest market weakness here came a day after the US Federal Reserve decided to hike its benchmark overnight lending rate by one quarter point in the prior session.

The acceleration of declines in the US market has brought fears and money market managers have to either now keep cash or move their funds to other markets.

Are emerging markets the right place to seek refuge now? According to one US investment bank, the markets in Asia have already “reached trough” in late October or early November and the cycle is shifting favourably for the Asian markets, particularly in China.

It recently upgraded its call for emerging market stocks from “underweight” to “overweight” for 2019, while U.S. equities were downgraded to “underweight.”

The thesis is due to China’s expansionary monetary policies to help spur economic growth where it us believed that the Chinese monetary cycle is diverging from the U.S. monetary cycle.

The markets in Asia is likely to be positive when China is easing. It was noted that when the U.S. Federal Reserve raised its benchmark interest rate a quarter-point yesterday, the Chinese central bank left its short-term borrowing rates unchanged.

It was reported that other measures taken by Beijing to boost economic activity include lowering property mortgage rates in some cities and the rollout of a policy tool — known as the targeted medium-term lending facility, that’s aimed at encouraging loans to small and private firms.

Institutional funds and investors have been jittery due to the recent slide in the U.S. markets and could thus move their funds elsewhere especially to emerging markets in this case.

The US investment bank expects turning point in emerging markets in 2019 and emerging markets such as China, India, Indonesia and Brazil to perform well in the second half of the year.

“Their acceleration will be in stark contrast to the deceleration underway in the U.S.,” it added.

However, trade wars and other issues could derail the growth in Asia as well and cause a global slowdown everywhere at the same time.

On Thursday, the U.S. Justice Department also announced charges against two Chinese nationals for being part of a global hacking campaign where prosecutors also accused the two of operating in conjunction with the Chinese government.

The two individuals were charged with conspiring to commit computer intrusions and wire fraud, as well as aggravated identity theft. It was part of campaigns that lasted for years, as they sought to steal from several foreign governments and dozens of companies.

Amid the slide in the stock markets, oil prices have also plummeted to their lowest levels in more than a year, continuing a sell-off which has been driven by concerns about oversupply.

The International benchmark Brent crude futures dropped $2.89, or 5.05 percent, to settle at $54.35 a barrel. U.S. West Texas Intermediate (WTI) crude futures declined by $2.29, or 4.75 percent, to settle at $45.88 a barrel.

Both major oil futures contracts have fallen more than 35 percent from multi-year highs reached at the beginning of October.

Is it the right time to accumulate stocks in Asian markets? The local Bursa Malaysia is also likely to stage a reversal if foreign funds start to shift their attention back to emerging markets.

However, the devil is in the details and timing. Will it get better before it gets worse or will it get worst before it gets better at this juncture?

How long will the current downtrend or bear markets in some countries last? Which stock market could rebound the fastest in Asia?

What are the key levels and trends for these markets which will signal an acceleration or reversal for markets in China, Japan, Malaysia and others?

Will they all move in synchronisation or will they decouple against each other versus the developed markets in US and Europe?

How soon should you get in the market or is still not too late to get out?

What should traders and institutional funds plan for their 2019 asset allocation or trading strategy?

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Note: Certain info presented in the tables above has been redacted to comply with the agreement with elite members of the mPower Algorithm program and mPower Trading program and certain institutional clients. The above analysis reflects our personal view only and is subject to terms of use. Please refer to the full report inside for the complete info.

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