28 Aug 2013

Macro Strategy Update

Market Update

Equity markets have been in corrective mode for the past two weeks. This is not surprising, given that most markets were overbought prior to the correction. For now, we see this recent market action as a correction, rather than the beginnings of a bear market.

1. Economic Data for the US & Eurozone

Fundamental data continues to show that both the US and European economies are growing. Flash PMI estimates for August suggest that the recovery in the manufacturing sector is gaining momentum in both the US and the eurozone. US manufacturing PMI for August rose to 53.9 from 53.7, while the eurozone’s PMI climbed to 51.3, a 26-month high. Even China saw some signs of stability, with the PMI back in positive territory.

Germany’s Ifo survey also showed continued improvement in business prospects, with all three sub-indices rising (Figure 1). Meanwhile eurozone consumer confidence in August rose to a 2-year high1. Increasingly, there are more signs to show a return to growth, albeit at lower levels, for the world’s largest economic bloc.

2. Developed Markets versus Emerging Markets

Market action over the last two weeks suggests to us that our view of developed markets outperforming emerging markets remains intact (Figure 2). Some emerging markets, like India and Indonesia, are down 20%, officially in bear market territory. While it may seem tempting to begin buying emerging market assets, we suspect it is still too early, judging by how quick investors are to defend the emerging market story2.

3. War in Syria?

Finally, the Syrian situation is likely to escalate further, given that chemical attacks are believed to have occurred. Intervention by the US is likely since a chemical attack has effectively crossed Obama’s “line in the sand”. The threat of a middle-east conflict has resulted in a surge in oil prices. Given Saudi Arabia’s involvement to topple the Al Assad government3, the odds are high that the supply of crude oil will not be disrupted. Furthermore, after Iraq and Afghanistan, US appetite for a long drawn military operation is poor. This is also not a legacy that Obama wishes to leave behind. So, any spike in oil prices is likely to be reactionary and short term in nature. Furthermore, for investors overweight in developed markets, the oil dependence is not as high as for emerging markets. Any sell off due to higher oil prices will cause more damage for emerging economies.
Therefore our advice is that investors will be better off staying with developed market equities.

Figure 1: Germany Ifo Business Survey index improving

Image courtesy of Stockcharts.com

Figure 2: Developed market equities continue to outperform emerging market equities

Image courtesy of Stockcharts.com

Figure 3: Crude oil prices still below cycle high

Portfolio Positions

As per our update in Jul 2013 where we recommended switching out of emerging markets to US and global equities, We strongly urge you to complete any outstanding rebalancing for your CPF portfolios as soon as possible if you have not yet done so. Please talk to your adviser if necessary.

1. Euro-Zone Consumer Confidence Rises to Two-Year High. 23 August 2013 WSJ
2. Neuberger Joins Pimco in Seeing Value in Emerging-Market Selloff. 20 August 2013 Bloomberg
3. A Veteran Saudi Power Player Works To Build Support to Topple Assad. 25 August 2013 WSJ

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