As global stock markets have rebounded strongly since the turn of November, many will ask if we have seen the end of the bear. First and foremost, what is a bear market? If a stock index closed 20% below the previous peak, it will officially reaches bear territory. A correction is somewhere between 10% to 19.9%.
Hong Kong Market
Just about a year ago, Hang Seng Index was trading at around 26,000 level and we saw it moving below 15,000 just at the end of October. At current level of Hang Seng Index, we are looking at a pullback of more than 30% (18,133). The recent low was c. 14,600. So with the recent recovery, it is translated to a recovery of c. 24%, which interestingly, signifies the start of a bull market, characterised by the closing price gains 20% from its low.
S&P500 hit a high of 4,800 just a year ago. Similarly, it has crossed into bear market territory when it hit 3,840 level in June this year. Subsequently, the index had recovered and currently (3,991) which is c. 10% above the lowest close of the year at c. 3,577. To see a new bull in the US, we need to see index moving higher than c. 4,292 level. At this level, the S&P500 is facing resistance from its 200-days moving averages and trading at the top-band of its downtrend channels. Technically, it it showing signs of a turn with the index not pulling back to the lowest channel during the October pullback.
I have a year-end target of 4,411 for the S&P500, link to the article here. This represents about 10% from the current level of 3,991.
Back then in late June earlier this year, I have advocated investors to start positioning while index was hitting lows. With the benefits of hindsight, we saw the lows of the year then and index had recovered more than 10% since then. Link to the article here.
What to do now?
After recovering from lows in the last one month or two and the major indexes hitting key resistance levels, I think the market will consolidate while awaiting more economic data heading into December. Just a week ago, CPI for October came in at 7.7% which was lower than expectation, partly contributed by the falling prices of used cars, medical care and apparels. This will give the FED more room to slow down their interest rate hikes; a positive for both the fixed income and equities markets.
The global bond market is way much bigger than the global equities market. As such, watching that space will give us some visibility on market expectations of future yield of US treasuries and in turn, interest rates. The MOVE Index is a well-recognized measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries. In a nutshell, one can look at it as the “VIX” for bonds. A stabilised interest rate environment is positive for the stock market.
Interestingly, there is a possible new uptrend forming on S&P500 chart. If the index consolidate at this level going forward, there is a high chance that it will move higher to test the top end of the bullish channel. We may see trending higher in the next two quarters if momentum is sustained.
On the fundamental front, we are also seeing inflationary pressure easing off. FED started raising rates earlier this year and we are seeing its impact on the economy gaining traction now. This is pretty normal as monetary policies require time to flow through to the real economy, and in my opinion, range from 6 months to a year.
Unemployment rates were at historically low in 2022. This is one of the key factor in a hawkish FED in the past. We are seeing this coming off with corporate America cuts thousands of jobs and holding back capital investments. In October alone, job cuts announced by U.S.-based employers jumped 13% to 33,843, the highest since February 2021 (source: Challenger, Gray & Christmas ). According to the report, in October, employers announced plans to hire 237,380 workers last month compared to 380,014 in September. Even big banks like Citigroup has announced job cuts across its investment banking unit.
With the 10-year treasury yield coming off the 4% and showing signs of a reversion back to mean, it will be a tailwind for the market recovery moving into 2023.
Though we are seeing an easing inflationary environment, it may be too early to expect a lowering of rates. My expectation is that the interest rate will remain high in 2023 and as the global economy slows further in the first half of 2023, we may see lower rates at the end of 2023. Of course, the stock market will move ahead of data; trying to price in new variables as it unfolds.
Statistically, investors will have a 12-months period to position, counting from the moment the trough was established, which was October 2022; assuming we have seen the lows of this inflation crisis. As such, on both fundamental and technical perspectives, I would be buyers of stocks at 3,900 level, and I believe its a buy on weakness and not selling into strength.
As for the Hong Kong and Chinese markets, I believe that we have seen the lows and indices will start consolidating at current levels. Personally, based on similar crisis in the past in economies like US and Japan, I would give China a 2-3 years time frame to recover from their current domestic issues. Again, market will start pricing in this recovery early.
With limited investment capital, I would position into the US market currently and revisit China and Hong Kong again in 2023. Of course, if you are trading (short term), there are opportunities everywhere.
With tense relationship between China and the West, there are also pockets of opportunities in ASEAN. One country that is under my radar is Vietnam. In July this year, we see the Vietnamese government approving a national strategy on foreign investment for the period 2021-2030, reforming business environment and increasing FDI from certain countries.
The strategy puts forward nine specific solutions:
- Implement the issued solutions effectively.
- Improve the business investment environment, and improve the economy’s quality, efficiency, and competitiveness.
- Developing an ecosystem of science, technology, and innovation.
- Innovating and enhancing competition in attracting foreign investment.
- Developing supporting industries, promoting linkages, and spreading.
- Promote internal capacity and take advantage of competitive advantages to improve the efficiency of foreign investment cooperation.
- Improve the efficiency of international economic integration and Vietnam’s position in the international arena.
- Modernize and diversify investment promotion.
- Improve the effectiveness and efficiency of state management of the foreign investment.
All these will make Vietnam an attractive investment destination for foreign capital. The country is also prioritizing growth in high-tech sectors and addressing problems relating to its competitiveness in the global stage by undergoing institutional reforms and proper management of intellectual properties.
However, retail investors may have difficulties investing directly into the Vietnamese market. Personally I am using LIONGLOBAL VIETNAM SGD as a proxy. The fund had dropped 38.71% year-to-date and thus, an opportunity to gain some exposure to it at a discounted valuation. Vietnam is not spared from the high interest rate environment as well and therefore, the heavy drop in prices. Investors should view this as a tactical play; banking on price discovery and recovery. The allocation to this fund SHOULD NOT entail anything more than 10% as the fund is very highly concentrated in terms of geographical positioning, therefore, higher risks.
As we are nearing the end of the year, I would like to wish everyone of my readers a happy holiday season!