How investors come to look back on 2014 will in part be determined by how they positioned themselves for two rotations. One was widely expected but failed to happen. The other was predicted by few but is well underway. No one said this was easy.
The call that didn’t happen was the expected swing from bonds to equities. At the beginning of the year, the yield on US Treasuries was 3 per cent and expected to rise further. It was hard to find anyone with a good word to say for bonds. With the European Central Bank recently confirming it would pick up where the Federal Reserve left off as far as monetary stimulus is concerned, bond yields have gone the other way. That’s been uncomfortable for many investors.
The rotation that did happen this year sneaked up on investors and also confounded the conventional wisdom at the beginning of 2014. It’s a shift back into Asian stock markets. The move above 2000 points for the S&P 500 Index has not been the main story of the past three months. Rather it has been the unexpected return to form of many of the Asian markets that were short of friends at the start of the year.
Unexpectedly better places
Unexpectedly, Thailand, China, Taiwan, the Philippines, India, Hong Kong and Indonesia have all been better places to be invested over the past three months than the US. In most cases they have outperformed Wall Street by a significant margin.
There are five reasons for the improving fortunes of Asian markets over the middle of the year. The first is an easing of concerns about the winding down of monetary stimulus in the US. The end of the Fed’s asset buying is nearly upon us but Fed chair Janet Yellen is in no hurry to raise rates.
Second, there has been a reawakening of foreign investor interest in the region. If you disregard a couple of months of outflows from Thailand as the military took control, each of the past six months has seen steady inflows to pretty much every country in the region.
That’s been driven by the third reason, a growing appreciation of the attractive valuations in the region, although it has to be said that the averages are heavily skewed by China and Korea, which are notably cheap.
Fourth, politics has been a positive in Asia since the start of the year, prompting the waggish observation that the election of Mo (Narendra Modi in India) and Jo (Joko Widodo in Indonesia) have together helped the region recover its mojo. Investors see both as business-friendly leaders who carry none of the baggage of the traditional political elites in the two countries.
New engine
If they can deliver on promised reforms, the world’s third and fourth most populous countries might yet provide a new engine of global growth.
The early signs of a synchronised cyclical recovery, helped by the recent mini-stimulus in China and a program of fiscal boosts in Korea, provide the fifth reason to believe that the Asian rotation can continue.
These fiscal prods should buy time for the slower-burn reforms in China and Japan to take hold and the long-run advantages of the region to reassert themselves.
