This rally is too obvious. There are no more worries. The Fiscal Cliff has been settled for now. But this eerily reminded me of the start of 2011, when there is consensus among all (retail, institutional, TV anchors from CNBC and Bloomberg) that emerging market equities are the way to go.
When everybody turns bullish, it means that there is little additional money to pile into stocks to make it go higher. I believe for the next three months, asset allocators will still take time to shift from bonds to stocks. Beyond that, there will be very little to push stocks higher.
From 2009 to now, US and ASEAN equities have moved to higher highs. Valuations are not cheap any more. S&P500 is at around 16x PE. If it rises another 20% and even if earnings shoot up by 10%, PE would have reached around 18x. PE to growth ratio would be > 1. The Jakarta Composite Index is at 16x PE. Even if earnings rise by 15%, PEG would be > 1. It will take a very strong growth momentum to push PEG < 1.
On the other hand, Chinese equities peaked in late 2009 and has fallen by 30 - 40% to 8x PE. European (including Russia) and mining stocks peaked in 2011 and are now at around 10 and 15x PE respectively. If you wish to invest, and fear volatility due to profit taking later in 2013, go for the cheapest markets with the worst news factored in. I like Chinese equities the most now. Also, Russian stocks look like the cheapest in terms of exposure to cyclicals. Chinese equities, namely those listed in Hang Seng could rise by 50% and their PE is still at 13x with no earnings growth. If I factor in 15% earnings growth, HSCEI stocks could rise by 65 - 70% before hitting median valuations. Russian stocks have even higher upside than HSCEI because it is at around 5x PE and historically high dividend yields. Global mining stocks have rather muted upside. They are at around 14x PE on a median of 15x. I believe it can rise by around 10 - 30% before hitting the brakes. In fact, the mining sector is still finding the bottom and dollar cost averaging into this sector is a good idea now.
Usually, the first year of the US Presidential cycle is the worst for stocks. I believe it could ring true again, especially for US stocks.
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