THE EQUITY bull market that started back in the fourth quarter of 2012 is continuing well into the first half of this year.
The S&P 500 has edged up 5 per cent year to date, breaking fresh highs. Europe’s STOXX 600 also went up 5 per cent in the same period. Compared with last year, this year’s rally is broader based.
Emerging-market stocks that started the year with pessimism after last year’s underperformance began to catch up with developed markets. Fund flows have returned and emerging markets have been outperforming developed markets since March. The Hang Seng China Enterprises Index (HSCEI) has surged 13 per cent in the past three months.
Earnings forecasts have turned positive in the past few weeks, most notably in China, where new rounds of government stimulus provide support to the economy, and in East Asia, where monthly export data show improvement in South Korea and Taiwan.
Europe’s earnings were also raised amid the euro’s weakness and announcement of a series of targeted longer-term refinancing operations (TLTROs).
I still favour stocks over bonds and commodities as macroeconomic conditions and monetary policies are still supportive of earnings.
However, country selection will be crucial in determining investment performance in the second half, as valuations are no longer cheap in many markets.
Despite the recent rally, stocks in emerging markets are still cheap, while those in the United States and peripheral Europe are becoming stretched. In my view, global stock markets are at the inflection point where expensive valuations are limiting upside in the West, and cheap valuations and better economic outlook in emerging markets are starting to draw funds back from abroad.
North Asia remains my top pick in emerging markets.
In developed markets, Japan and Germany offer strong economic fundamentals and reasonable valuations. These markets are expected to outperform the US and other European countries in the remaining half of the year.
In commodity space, gold recovered from a low of US$1,200 per ounce in December amid geopolitical conflicts in Ukraine and Iraq. New European Central Bank easing measures also provide support for the gold price.
But fundamental headwinds remain as inflation remains low, diverging ECB and US Federal Reserve monetary policies could lead to a stronger US dollar and US bond yields could resume uptrending in the second half.