As of mid-February, the iShares MSCI Asia ex. Japan and the S&P 500 have comparable performance, gaining 8-10% year-to-date. In late October 2018, the AAXJ found support near 22-month lows, two months prior to the S&P 500. APAC markets have now climbed back to an inflection point near the 200-DMA. In this webinar, William O’Neil + Co. Director, Research Analyst Derek Higa will review similarities to the 2016 global correction and evaluate what’s necessary to become more bullish or bearish. He will also discuss ideas to keep on your radar. Lastly, Executive Director, Research Analyst Dean Kim will join him to touch on themes and top Focus List ideas.
Author: Derek Higa
Derek Higa is a senior equity analyst and a lead for the APAC region and the Consumer Cyclical sector. He serves on the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets, and compiles Asia Watch, a weekly recap of regional investing news. Since joining William O’Neil + Company in 2005, he has lent his market expertise to alpha capture, product development, and historical studies on outperforming stocks. Derek graduated summa cum laude from California State University Los Angeles with a B.S. in Finance and Information Systems. He holds a Series 65 securities license.
APAC Weekly Summary
Key Points:
There was no change in the MSCI Asia or market conditions through Wednesday. The MSCI is consolidating near resistance while the majority of APAC remains in a Confirmed Uptrend. As of Thursday (February 7), we added nine new ideas to our APAC Focus List. We continue to notice constructive price action across sectors. The number of stocks above the 200‐DMA is rising. This is encouraging. Japan is in a Rally Attempt and we are still waiting for an official follow‐through day. The Nikkei is in its twenty‐ninth trading session without one, despite rising ~12% above December lows.
Looking back at Rally Attempt days over the past 10 years, it is rare that the Nikkei not have a strong follow‐through day.
The longest Rally Attempt most recently was from March to May 2018. The number of stocks breaking out or in pivot is still low historically. Currently, the most improvement in stocks with RS Ratings greater than 80 are among mid‐cap Japanese stocks ($2B to $10B market cap). Japan’s Sector Graph shows short‐term rotation into Technology and Cap Equipment. Although they are still lagging longer term, we are noticing early signs of improvement. We provided an Interest list of Japanese ideas with both strong fundamental growth and improving technical ratings. In our Focus List, we highlighted Lasertec (LASE.JP; 6920: JP).
APAC Weekly Summary
Key Points:
APAC strength continues to broaden with the rest of global markets. The MSCI Asia ex. Japan is on its fifth straight week of gains, rising nearly every week in 2019. The index is now right at the 200-DMA, where healthy resistance could be.
Market conditions continue to improve. On February 5, we upgraded Australia to a Confirmed Uptrend. Keeping our eyes on the APAC Sector Heat Map, strength across sectors continues to broaden, with every sector up in the trailing four weeks. The top sectors are Technology, Energy, and Financial. Defensive sectors with the highest average RS Rating are Utilities and Consumer Staple, consistently for several weeks now. Furthermore, Staple stocks have the most improvement in RS in the trailing four weeks.
Consumer Staples also have the highest average EPS Rank. Highlighting the Financials sector, 47% of those stocks are now trading above the 200-DMA (second behind Utilities with 55%). Constructive action is broadening within the sector. Within Financials, REITs stand out, especially in Hong Kong, where several have weathered the volatility and are now approaching pivots. See our list for ideas. In our Focus List we highlighted Kotak Mahindra Bank ( KOK.IN; KMB: IN ) and new addition Bajaj Finance ( BJF.IN, BAF: IN ).
APAC Weekly Summary
Key Points:
We are are noticing broadening strength in APAC markets. As of Wednesday, the MSCI Asia ex. Japan is trading above December 2018 highs, continuing its strength from the backend of last week and breaking through the upper end of the downward channel. We now expect the index to test resistance near the 200-DMA (2% upside from Wednesday’s close).
We upgraded both South Korea (January 24) and Hong Kong (January 25) to a Confirmed Uptrend from an Uptrend Under Pressure. In the same fashion as the MSCI, the Hang Seng is rising to the 200-DMA (~27,800), which we view as the next resistance. The index has not traded above this level since June 2018 and a rise above this level on above average volume would be a significant bullish sign in our view.
Continuing from last week’s discussion, APAC sector strength is broadening to more risk-on sectors. We are noticing strength return to the Technology and Financial sectors, particularly this week. Both sectors are leading over a five-day and four-week period.
In a 13-week period, Utilities continue to lead, but the breadth of strength is widening noticeably. Overall, we believe this is an encouraging sign for a sustained rally.
This week, we focus on Technology, providing ideas from both ends of the spectrum. We revisit our negative outlook on Nintendo (removed from the Focus List in June 2018). The Company reports on January 31.
Other highlighted ideas include short idea Autohome ( ATHM ), and stock of interest ( ICGI.HK, 799:HK )
APAC Weekly Summary
MSCI Asia ex. Japan is at 100-DMA resistance. This is the second attempt since pulling back in December. It remains in a downward channel since the 50-DMA fell below the 200-DMA in June 2018.
Overall, the index remains constructive as long as it holds above the 50-DMA (~$65 for the AAXJ). The higher low in October was an encouraging sign of bottoming.
In similar fashion, major APAC markets have also risen to resistance levels. Distribution days are currently low. To remain bullish, support levels (generally the 50-DMA) must hold should distribution rise again in the short term.
Taking a look at our APAC Sector Heat Map, we focus in on Consumer Discretionary Sectors (Cyclical and Retail). In the past four weeks, Cyclical ideas are among the top performing while Retail ideas are among the weakest.
Although Cyclical and Retail hold the lowest percent of stocks above the 200-DMA, those trading above it have the highest RS Ratings and in Retail, the highest RS Ratings and EPS Rankings among sectors.
We provided the best Consumer Discretionary Ideas to keep on radar.
APAC Weekly Summary
On January 15, we upgraded Mainland China markets to a Confirmed Uptrend as the CSI 300 had another follow‐through day. This is the seventh attempt as six have failed since 2018. In our note, we compare this current bear market trend to the last three in China’s history. It is not uncommon for the index to have several failed follow‐through days in a bear market (13 occured from 2009–2013). Now down 33% from January 2018 highs, the index is not even close to its worst correction of 73% from 2007–2008. Moreover, it is still below its average of 56% peak‐to‐trough. Since 2007, a bear market has lasted 325 days on average. Today, it is slightly higher, at 343 days.
Although we only look at a small sample of recent market cycles in China, it does provide perspective on how conditions could
worsen. On the bright side, the peak‐to‐trough duration is long from a historical perspective. This suggests, at the very least, a
bottom getting closer, assuming a 2009–2013 cycle is not in the works. Nonetheless and disregarding our skeptical feelings, the
follow‐through day is a sign of a turn in overall trend we want to highlight for clients. We continue to look for more signs of
improvment in indicies and the price action of growth stocks, which would increase our conviction.
We are more constructive on the Hang Seng Index that, unlike the CSI 300, avoided making new lows in January. The Hong Kong market remains in an Uptrend Under Pressure, but it is encouraging that distribution days declined in recent weeks. We
are waiting to see if the index can rise about ~27,300 to shift the market back to a Confirmed Uptrend.
Looking at Sector Rotation, Utilities have lost momentum recently while Capital Equipment and Financial sectors are
now improving in the short term and outperforming over the last 26 weeks. We provided several ideas to keep on radar, many
within REIT and infrastructure groups. Lastly, we highlight two stocks of interest, Logan Property (LPTY.HK, 3380: HK) and BOC Aviation (BOCA.HK, 2588: HK).
APAC Weekly Summary
The MSCI Asia ex. Japan rose approximately 2.5% through Wednesday this week. The index failed to hold above its 50‐DMA on
two previous attempts since November 2018. The tone of APAC markets has shifted to be more optimistic as midlevel U.S./China
trade talks ended and investors look for a trade deal by the end of January ( March 2 deadline ). The next resistance for the MSCI
index is 2% higher ( 100‐DMA ); it has not traded above this level since June 2018, prior to the index’s correction. Relative strength
compared with the S&P 500 has been in an uptrend since November despite a recent pullback due to U.S. strength (we upgraded
the U.S. to a Confirmed Uptrend on January 4). Among smaller Southeast Asian markets, the Philippines has stood out since
bottoming in November. The PSEi is trading at eight‐month highs and is among the few markets above both its 50‐DMA and 200‐
DMA. See our note for the best liquid ideas to keep on your radar.
In the major markets, it is still unclear whether this shift in mood is enough to begin a prolonged rally. Over the last four weeks,
Utilities has joined the top performing sectors in Japan, Hong Kong, India, and South Korea. See our note for Utility ideas and
highlighted idea China Resources Power Holdings ( CREP.HK; 836:HK ). Overall, we have yet to see a strong shift to risk‐on
sectors. We believe any rally is still in the very early innings at best and markets have more to prove to warrant getting more
aggressive. The bottom line is that we continue to lean toward being defensive, keeping an eye on base development, and
staying selective based on market conditions. Lastly, we added Titan ( TIT.IN; TTAN:IN ) back to our Focus List.
APAC Weekly Summary
APAC performance in 2018 was difficult, to say the least. Nearly all markets closed with losses for the year and only two (India and
New Zealand) had gains. Day one of 2019 was a poor start, as nearly all markets closed with losses. The MSCI Asia ex. Japan
index continues to be under pressure, failing to hold above the 50‐DMA since its mid‐June 2018 decline. The correction remains
intact and the index has been unable to shift course thus far. Overall, we remain cautious and continue to recommend a
defensive and selective approach to buying APAC stocks.
APAC Weekly Summary
We are taking time off from our note this week but will back next week for 2019.
From the O’Neil APAC team, we wish everyone a Happy New Year and safe Holiday. We appreciate your support.
In 2019, we are planning several improvements to our Weekly Summaries. Stay tuned.
APAC Weekly Summary
Today we downgraded Japan to a Downtrend and upgraded India to a Confirmed Uptrend. We have become increasingly concerned by the action in Japan as the Nikkei undercut its October low and distribution has risen to an elevated level.
Furthermore, we believe there are technical signs that suggest further declines in the near term. We recommend being
underweight Japan or shifting to a more defensive approach. On the bullish end, we continue to favor India and upgraded
its market to a Confirmed Uptrend from an Uptrend Under Pressure. The Sensex is now trading near October highs and has risen above its 100‐DMA.
Since November we have added nine Indian ideas to our Focus List. India now comprises 50% of our APAC list and 54% of our
Emerging Markets list. Looking at our Sector Rotation Graph in India, we are noticing short‐term momentum from Consumer
Staples, Financial, and Retail. Moreover, seven of the nine ideas we added recently are in Staples and Financials. In our note, we also include 15 ideas to keep on your radar. Lastly, we highlight our new Focus List addition Marico ( MRC.IN; MRCO:IN ).
