If you look through my blog posts, you can see that from 21 June, I already sounded cautious and mentioned that the correction is likely to be deeper than most. S&P500 was 2110. EuroStoxx 500 was 268. Asia x Japan ETF AAXJ was 64.90. Emerging Market ETF or EEM was 40.64.
On 20 Aug, I made another post about worrying signs in Emerging Markets. S&P500 was 2036. EuroStoxx 500 was 252. AAXJ was 53.83. EEM was at 33.79.
On 24 Aug I said that a Bear Market beckons. S&P500 was 1893. It has since rebounded to 1920. EuroStoxx 500 was 231. It has since rebounded to 239. AAXJ was 49.55. it has since also rebounded a little to 50.91. EEM was 31.32. It has since rebounded to 32.08.
So you can see that the time that I started to reduce my own equity allocation, it was near the top of the stock markets. The major indices are lower than the first two warnings that I posted and have rebounded above my last warning.
Two days ago, ECB President Mario Draghi said that he may extend QE beyond Sep 2016. This provides a PUT option on European stocks, just like the US' QE was a God Send for US stocks.
Tonight, 173k jobs were created in the US in Aug. Although this is below the 215k expected, unemployment rate fell from 5.3% to 5.1%. The US economy appears to be moving along. However, the US and Europe responded with declines in their indices.
2011 Event, Not 2008 or 2000 - 03
I believe the correction could last until Oct. My thesis is that the western economies, helped by QE, will pull the world out of recession. The correction will be a lot steeper in in EM / AxJ. I'm expecting around 30 - 35% top to bottom. It's almost there for both.
During the 2011 Euro Crisis, EEM fell by 30%. During the 1997/98 Asian Crisis EEM fell by 55%. This time round I'm hoping for another 10% drop. The crisis this time is induced by China and is not of the same magnitude of 1997/98. The EEM has fallen by 35% from the high in 15 Apr 2011 price of 49.13 to 32. If you measure the top from the last peak on 24 Apr 15, which is 43.85, then the fall is 27%.
During the 2011 Euro Crisis, AAXJ fell by 29%. During the 1997/98 Asian Crisis AAXJ fell by 50%. I expect a drop this time of around 30 - 40%. Recently, AAXJ's peak was 67.85 in 17 Apr 15. It has fallen by 25% to 50.91. I am hoping for another 5 - 10% drop. I don't expect AAXJ to fall more than EEM because many EM economies are commodity exporters, e.g. Brazil, Russia and are the worst hit by the Chinese slowdown. It may be a good time to start looking at Asia x Japan funds because the PE has fallen back to 12x.
In the 2011 Euro Crisis, EuroStoxx fell by 22%. EuroStoxx 500 has so far fallen by 14%. I expect it to fall by another 5 - 7%. This will make European equities really attractive. CAPE will fall from 14x to 12.5x.
In the 2011 Euro Crisis, S&P500 fell by 15%. Now, S&P500 has fallen by 10% from 15 Jun to now. I suspect it could fall by another 5 - 10%. This will put its PE ratio at around 15x. CAPE will fall from 25 to 22. It will still be expensive on a 10-year average earnings' basis. But the historical PE will make it below average again and I expect global equities to power up to another 10 - 20% into 2016.
Again I do not foresee a global recession until 2017, which is after the US Presidential election (Nov 2016). The first year of the US presidential cycle usually produces the worst return in four years. We are still in a low inflationary situation so central banks can continue QE to prop up stock markets, property prices and the economy.
Conclusion
Most major indices have to fall by at least 5% to make it worth buying. A 10% drop will be ideal because the returns 12 months later will be over 20%. a 5% drop will merely motivate me to put at best 60% of my capital at risk into equity. a 10% drop will motivate me to put in up to 80%. The bigger the drop, the more aggressive I shall become. If the stock markets rise from here, I won't risk more than 50% of my capital. My allocation is at present 30% equities. Hence I will deploy only 20% of my dry powder.
On 20 Aug, I made another post about worrying signs in Emerging Markets. S&P500 was 2036. EuroStoxx 500 was 252. AAXJ was 53.83. EEM was at 33.79.
On 24 Aug I said that a Bear Market beckons. S&P500 was 1893. It has since rebounded to 1920. EuroStoxx 500 was 231. It has since rebounded to 239. AAXJ was 49.55. it has since also rebounded a little to 50.91. EEM was 31.32. It has since rebounded to 32.08.
So you can see that the time that I started to reduce my own equity allocation, it was near the top of the stock markets. The major indices are lower than the first two warnings that I posted and have rebounded above my last warning.
Two days ago, ECB President Mario Draghi said that he may extend QE beyond Sep 2016. This provides a PUT option on European stocks, just like the US' QE was a God Send for US stocks.
Tonight, 173k jobs were created in the US in Aug. Although this is below the 215k expected, unemployment rate fell from 5.3% to 5.1%. The US economy appears to be moving along. However, the US and Europe responded with declines in their indices.
2011 Event, Not 2008 or 2000 - 03
I believe the correction could last until Oct. My thesis is that the western economies, helped by QE, will pull the world out of recession. The correction will be a lot steeper in in EM / AxJ. I'm expecting around 30 - 35% top to bottom. It's almost there for both.
During the 2011 Euro Crisis, EEM fell by 30%. During the 1997/98 Asian Crisis EEM fell by 55%. This time round I'm hoping for another 10% drop. The crisis this time is induced by China and is not of the same magnitude of 1997/98. The EEM has fallen by 35% from the high in 15 Apr 2011 price of 49.13 to 32. If you measure the top from the last peak on 24 Apr 15, which is 43.85, then the fall is 27%.
During the 2011 Euro Crisis, AAXJ fell by 29%. During the 1997/98 Asian Crisis AAXJ fell by 50%. I expect a drop this time of around 30 - 40%. Recently, AAXJ's peak was 67.85 in 17 Apr 15. It has fallen by 25% to 50.91. I am hoping for another 5 - 10% drop. I don't expect AAXJ to fall more than EEM because many EM economies are commodity exporters, e.g. Brazil, Russia and are the worst hit by the Chinese slowdown. It may be a good time to start looking at Asia x Japan funds because the PE has fallen back to 12x.
In the 2011 Euro Crisis, EuroStoxx fell by 22%. EuroStoxx 500 has so far fallen by 14%. I expect it to fall by another 5 - 7%. This will make European equities really attractive. CAPE will fall from 14x to 12.5x.
In the 2011 Euro Crisis, S&P500 fell by 15%. Now, S&P500 has fallen by 10% from 15 Jun to now. I suspect it could fall by another 5 - 10%. This will put its PE ratio at around 15x. CAPE will fall from 25 to 22. It will still be expensive on a 10-year average earnings' basis. But the historical PE will make it below average again and I expect global equities to power up to another 10 - 20% into 2016.
Again I do not foresee a global recession until 2017, which is after the US Presidential election (Nov 2016). The first year of the US presidential cycle usually produces the worst return in four years. We are still in a low inflationary situation so central banks can continue QE to prop up stock markets, property prices and the economy.
Conclusion
Most major indices have to fall by at least 5% to make it worth buying. A 10% drop will be ideal because the returns 12 months later will be over 20%. a 5% drop will merely motivate me to put at best 60% of my capital at risk into equity. a 10% drop will motivate me to put in up to 80%. The bigger the drop, the more aggressive I shall become. If the stock markets rise from here, I won't risk more than 50% of my capital. My allocation is at present 30% equities. Hence I will deploy only 20% of my dry powder.
