Sometimes it's useful to sit back and examine the technical leadership of the market to see where the strength is coming from and to understand the message of the market. Instead of the usual analysis of technical leadership from a sectors or market cap perspective, I thought that I would do something slightly different and look at the global picture of international stock leadership.
The bottom line? The current macro outlook is highly uncertain, suggesting that the near-term path for equities will be choppy and volatile. The charts are showing continued leadership by US equities and the US Dollar. All other global regions are underperforming. Under these circumstances, I would stay with the strength and concentrate the bulk of any equity exposure in the US and overweight USD assets in a global portfolio.
Where is the leadership?
The chart below shows the relative performance of US equities, as represented by SPY, against ACWI, or the ETF for the Morgan Stanley All-Country World Index. Since all prices are quoted in US Dollars, the currency effects have all been filtered out of the analysis. As you can see, US equities have been in a relative uptrend against ACWI for about a year:
Click charts to enlarge
What about Europe? The market is telling us that it is indeed concerned about the eurozone, as its equities have been underperforming for over a year.
The other large developed country in EAFE is Japan. The performance of Japanese stocks is nothing to write home about. They are either flat to weak against ACWI, depending on you interpret this chart.
Emerging market equities have not been a pretty picture. The relative performance of these stocks show that they appear to be rolling over on a relative basis.
Until the BRIC countries, and China in particular, begin to show some sustained strength, I would underweight these stocks in a global portfolio. There is a glimmer of hope, as Bloomberg reported that analysts who called 2010 bottom in China stocks now say buy.
Finally, a look at the US Dollar Index shows that it remains in an uptrend that began last summer. Currently, it appears to be testing the bottom trendline of the uptrend, but I would give the USD bulls the benefit of the doubt for now.
What about the fiscal cliff?
Recently, Fed Chair Ben Bernanke warned Congress about taking sufficient action so that the US doesn't go over the fiscal cliff. Bloomberg reported that he said:
If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy.
Other analysts, like Nouriel Roubini, David Rosenberg and Citi's Steven Wieting have warned about the impending fiscal cliff that the US faces. No doubt the risks are gargantuan and my inner investor is highly concerned about an overly high concentration in USD assets under these circumstances.
My inner trader tells me that, for the markets, these things don't matter until they matter. Stay with the relative performance trend and then pull back when you see the trend break.
Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.