Around January 2013, I told my clients and colleagues that I felt uncomfortable about equities around the world. I felt positive due to the following factors:
1. The three largest economies in the world will see gradual improvements. US' real estate is on the mend, consumption is rising. EU is the weakest of the three areas, as austerity measures begin to bite. China's exports will start to climb on the back of US' recovery. While they export less due to the weakening USDCNY pair, this is partly offset by stronger domestic consumption.
2. Most investors are overweight bonds. Yields have fallen to levels which don't make sense. The "Great Rotation" out of cash / bonds into equities will take a year to complete.
3. Valuations of Asian and certain European countries are near 2008 trough valuations: e.g. China, Russia, Spain and Italy.
4. Low or falling inflation in OECD countries.
However, I am worreid for the following factors:
1. Whenever everyone is bullish on equities, that means anyone who intends to buy has already done so. The same situation happened in 2011. I felt that around April and May 2013, we'll see a correction.
2. Asia is struggling with inflation. S&P500's PE ratio is over 16x. Will the US correction bring down Asian equities too?
3. Mining margins have collapsed. Metal inventories are at the same high as in 2011, before the collapse of mining stocks. While destocking has occured, costs of mining have risen and hence brought down margins. Mining stocks will be a laggard.
IN the last four days, my hedge fund manager friends told me that they have started to buy 2828 and 2823 HK. Sure enough, I saw the chart of Poly Property, a real estate developer turn around strongly yesterday. Cyclical stocks have made the first signs of turning. Xtep, an apparel company, also showed signs of turnaround.
This is by no means a confirmation that the correction is over. I think we need a week or two before confirming it. But for traders who are willing to cut loss, it may be a good time to accumulate now. If it falls a further 10%, cut your loss.
