A Bull Run is Born from Pessimism

“A Bull Run is born from pessimism”. Some famous fund manager said that. I think it’s Peter Lynch. The bottom of the “Big Correction” was Christmas Eve, 24^th Dec 2018. All stock markets rallied very hard in the first four months of 2019. But then the Trade War started, with Twitters threatening every other day of escalating embargoes. Asia ex Japan, MSCI Emerging Market and Japan were hit very hard, while the western world continued to rally. It was very difficult as an advisor to “push” or “persuade” clients to increase equity allocation because the news was simply very bad at every angle. There lies my repeated urgings to ignore mainstream news. One simply cannot make economic forecasts and translate that to equity returns! What matters is momentum and value! Pick the best value or cheapest stocks, sectors, funds, check the technicals if they are going to rise or fall. If they are rising, you buy. If they are falling, stay far away.

Now that most of the easy money is made in 2019, the first quarter of 2020 may see a “great adjustment” because many retail investors and fund managers are wrongly positioned by overweight cash and bonds. They have to adjust back to equities so we may see a tremendous “melt up”. Most of the retail money may flow in on the 2Q2020 and I worry who else is left that haven’t invested in 3Q2020 onwards. We shall see how much money is going to flow into equities. I think Emerging Markets / Asia, particularly Russia, Turkey, Poland, Korea etc will outperform in this rally.

S&P500 ended up 29.8%. Asia ex Japan was up only 18.9%. It was basically sideways from April 19 till year end. Same for MSCI Emerging Markets, up 18.03%.

There are a few surprises however. The best performing stock market was surprise, surprise, Russia RTS Index. I remembered telling most of you to hold on and be patient. I liked Russia the best because it was the cheapest in terms of CAPE ratio. It was up 45.3%.

The tech sector, as represented by NASDAQ 100 was up 39.5%. I remembered talking about buying ALIBABA, Apple, Tencent, Meituan. Basically, the “FANG” stocks without “Netflix”. Which is Facebook, Amazon, Alphabet / Google. In China, I like “ATM”, Alibaba, Tencent and Meituan.

Third best was Brazil, which was up 30.3%. Again, I’ve spoken this to quite a few clients that Brazil or the ETF EWZ was worth investing. The worst markets were Malaysia which finished the year negative 3.9%, Jakarta up 1.7% and Thailand up 1.9%. Singapore was up just 7%. It was a tale of 2 markets; the west and certain emerging markets shooting up while ASEAN struggling. Even Hang Seng Index was up 13.6% despite its troubles with riots and the Trade War.

I still think there’s a lot of upside for Asia and Emerging Markets. Take a look at the top performing regions in the last 10 years. S&P500 was up 11.3% per year. But MSCI Asia ex Japan is up just 3.7% per year and MSCI Emerging Market up just 1.32%. Bear in mind earnings growth in Asia ex Japan’s earnings per share has been rising by 3.4% annually last 10 years and MSCI Emerging Markets have been rising 7.1% same period. So the valuations of Asia x Japan has stayed the same while Emerging Markets have gotten cheaper! Because of this I do think Emerging Markets and Asia x Japan will continue to outperform going forward.

Although Russia was the top performing country in 2019, it is likely to outperform. As it was the worst performing in the last 10 years, only achieving 0.8% per year!

Take note of those laggards, MSCI Emerging Markets, Singapore, China which was up only 2.1%, Malaysia, up 2.3%, Korea, up 2.6%, HK 2.7%, Asia up 3.7% and Taiwan up 4%.

In terms of the top performing ETFs, they were dominated by the 2x and 3x leveraged ones. Direxion Tech 3x up 38.9% per year in the last 10 years! S&P500 UltraPro which I think is 2x leveraged is up 32.3%. it doesn’t mean anything by looking at this because we cannot assume that those that performed the best in the last 10 years will continue to do so in the next 10. In fact the reverse is often true!

The best funds of 2019 was dominated by Gold and Tech. Threadneedle Global Tech was up 51%, JPMorgan China A Opp was up 48.9%. Franklin Gold & Precious Metals up 47.5%.