Since bottoming at the end of October, the MSCI Emerging Market Index (MXEA) and MSCI Asia Ex-Japan ...
Where the Next Leg Will Take Off
06/23/2011 7:30 am EST
The answer to this subscriber question is valuable for all investors that are interested in getting out ahead of the headlines…and thus, ahead of the markets, says David Fuller of Fullermoney.
With the equity markets experiencing a pullback, I am conscious that you will be looking to the performance of major country/region banking sectors as an indicator of an eventual turnaround. What would you list as the ten to 15 charts that best represent the respective country/regional performances of this sector (a sort of banking sector watchlist)?"
As you point out, we often look at banks as lead indicators—not least because this is so often backed up by fact, but also because, as liquidity providers, they should prosper during a major bull market. They also tend to peak early as liquidity is removed.
If I had to limit the number of sector indices to ten or 15, I would choose at least a few places for the United States. As the largest economy by far, economic conditions and monetary policy in the US will always be of concern.
In a watchlist, I would have the S&P Diversified Financials, because it represents the large global investment banks. I would also like to have the KRW Regional Banking Index because, with its smaller regional banks, it probably gives a more accurate representation of America's domestic economy.
For Europe, I would have the Euro Stoxx Banks Index, the FTSE-350 Banks Index, and Swiss Banks Index…all of which have deteriorated markedly this year, but found at least short-term support this week.
I would concentrate my list in Asia, because it is the engine of global growth and home to some of the best performing markets globally since late 2008.
The dominant investment theme of the decade, the Greatest Urbanization in History, is also focused on this region. Asia is also where bank leadership in the current cycle is most evident.
Indian banks led on the upside and have also led in the current correction. They are again likely to lead once a recovery commences. Indonesian banks have also demonstrated leadership, and continue to at least perform in line with the wider market.
Asia's financial centers of Singapore and Hong Kong would be essential constituents. Both have been ranging for much of the last 18 months, and have exhibited a downward bias since the beginning of 2011.
China's FTSE Xinhua A600 Banks Index has been range-bound for the last 16 months, and needs to hold a move back above 10,000 to indicate a return to demand dominance.
I would round out the list with sector indices for Thailand, South Korea, Taiwan, Canada, Australia, and Japan, and since Brazil does not appear to have a banking sector index, perhaps Banco do Brasil.
For the record, I think US stock-market valuations are reasonable against the background of near zero short-term interest rates—assuming that deflation is not the problem, as I do. What I like most about leading US multinational companies is the overall strength of their balance sheets.
Generally, I think global stock markets are still on course for a decent fourth-quarter rally, continuing into at least the first quarter of 2012.
In the short term, there is some evidence that a technical rally has commenced. Two important Western indices—S&P 500 (weekly and daily) and DAX (also weekly and daily)—continue to show relative strength, and have steadied following tests of their rising 200-day moving averages.
More importantly in terms of global leadership, Indonesia and Malaysia remain very firm, with JCI's upward dynamic halting a small pullback. The ASEAN stock markets led following 2008's crash and led following last year's correction.
If and when Indonesia and Malaysia lead a sustained upward break, as we saw this time last year, that will bode well for many other stock markets.
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