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The momentum and trend of US equities were clear and nobody wants to go against the rally. The question now, is not whether the US bourses will continue to trend higher, but where the value is?
Valuation and growth
The strategy, money managers are looking at is, picking up bargains in the emerging markets once tapering starts. The volatility, associated with tapering, is the opportunity managers are looking for, since the upside on US equities were limited, compared to the lagging of emerging markets and the possible upside of these markets when the macro landscape improves. The argument is whether potential growth in the emerging markets is still much higher and valuation is cheaper than the US.
The timeframe is an important parameter for this argument. If we take five-years as the period of measure, since the start of QE, it would show that emerging Asian markets have gained more than 200%, compared to the modest S&P500’s 96%. Given that market tends are forward looking, this year’s performance would mask those early gains and the S&P 500 will triumph with a 24% year-to-date return. Emerging Asian markets pales in comparison, with single digit returns, the exception being the Kospi, which has a slight negative for the year so far.
Digging further into the performance of each of these markets will reveal that most of them have recovered since the 20% correction in August to September. Some have touched new highs in October, such as the KLCI, Kospi, and the Nifty. The wait-and-see attitude is evident in the daily and weekly foreign funds investments, where most countries have outflows. South Korea has the largest monthly outflows with -$526m, followed by Thailand with -$356m, Indonesia with -$224m, and the Philippines with -$115m, for the month ending 11 November 2013. The exception is India, with net daily inflows of $56.8m and net monthly inflows of $246m for the date ending 8 November 2013.
Corporate sales and earnings would show that the Far East has more potential for growth than the US. However, factors such as demand for goods and services, and stronger global outlook are the drivers that will sustain corporate wealth.
Small Business Index
A better perspective is to take a step back, as core economic data needs to show that the underlying micro sectors are improving and generating growth for equities to trend higher. Tonight’s US small business optimism index will be closely watched by investors for signs of improvement after a dip in September. Confidence in US small businesses is crucial in creating jobs as they represent 99% of all US employers.