No Warning Signs Emerging

01/11/2010 10:24 am EST

Focus: GLOBAL

David Fuller

Global Strategist and Producer, Fullermoney

Secular trends favor Asian stock markets, and so does the business cycle as well as the recent trading action, writes David Fuller of Fullermoney.

The speed with which China- and India-led emerging (progressing) economies are growing in power and influence relative to the West has been a key theme throughout this decade. The process, hastened by globalization, became inevitable once the big-population economies abandoned their moribund economic systems and embraced capitalism.

Assuming equally effective economic policies, plus approximately equal opportunities and emphasis on education, how can countries and economic regions of 300-million-plus people (USA and Euroland) not lose ground to emerging powerhouses with populations in excess of 1.2 billion each (China and India)?

Similarly, once globalization and capitalism embrace most of the world, as they now do, how can a developed region with a total population of slightly more than one billion out-produce and out-consume 5.5 billion people energized by their improved opportunities and ambitions?

The West's derivatives boffins and paper shufflers bet the bank—in other words, other people's money—and lost. Consequently, our western economies have actually been regressing, which has tilted the power and prosperity axis further towards progressing economies. They have an additional advantage in not having to reinvent the wheel. The wiser leaders in emerging markets have a considerable knowledge of western economic policies. Consequently, they are in a better position to adopt and adapt what works, and avoid much of the folly.

What does this mean for investors?

Subject to governance, the better long-term opportunities in stock markets and currencies will be in emerging markets. However, emerging markets will not uncouple, because we live in a global economy.

Consequently the Wall Street leash effect will remain hugely influential. Also, emerging markets will continue to be regarded as "riskier assets," ensuring that they remain high-beta.

This perception of risk is dated, but it has a monetary and liquidity component. Western investors and not least investment managers will plough funds into emerging markets during the up swings, in pursuit of better returns. Thin markets, at least relative to Wall Street, will boost returns in the good times but are inevitably a double-edged sword.

Consequently we should remember the apt adage: "Buy when there is blood in the streets." October 2008 to March 2009 provided the most recent great opportunity, but there were plenty of others.

Conversely, we should consider lightening when the crowd is euphoric, aggressively extrapolating trends and wishfully talking about uncoupling.

Where are we in the stock market cycle today?

As I see it, most stock market indices are resuming their upward trends following several months of consolidation towards their rising 200-day moving averages. Technically, this action is very bullish provided upward breaks are maintained, and crucially, so are the progressions of higher reaction lows during subsequent reactions. The crowd is cautiously optimistic rather than euphoric. Most value analysts concur that on average, while equities are no longer cheap, they are not particularly expensive today. Crucially, monetary policy remains very accommodative.

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