Flipping through the markets
We might now be on the cusp of a great rotation as the Emerging & Asian markets start to trade near their lows relative to the rest of the world and especially the US. As the ratios between the Asian and Singapore index vs. the US and World indices fail to break another low again, we are likely right at the turning point, and many tailwinds are already in place.
On a monthly timeframe, the MSCI Singapore Index has been trading off the intersection between two long-term support lines. We have a horizontal one around 280 which halted multiple major declines since 2010, and an ascending trendline support going all the way back to 1999! Prices have recently retested this significant juncture, and if history prevails, we expect a meaningful bounce soon.
On a daily timeframe, the MSCI Singapore Index seems to have completed an inverse Head-and-Shoulder (H&S) bottom, usually a bullish reversal setup. If the neckline is decisively broken, we could see the trend continue higher.
With much narrative swirling around China and its recent reopening, we think the FTSE China A50 Index is worth keeping an eye on. With the index clearly breaking out of the two-year descending channel, we see a potential continuation in the bullish reversal trend.
The rapid decline in the greenback has only but accelerated since October 2022. Generally speaking, the US Dollar weakness provides some tailwind to emerging markets and Asian assets as investors are rewarded for holding out assets denominated in other currencies, sidestepping the Dollar’s turbulence.
What’s inside our playbook?
The recent reopening of China, a weakening US Dollar, and a potential Fed pause are among the many factors that have sparked a case for the “great rotation”. A rotation where investors shift allocation from focusing on US equities and fixed income to emerging markets & Asian opportunities.
A weaker Dollar keeps investors looking outside of the US for investment opportunities as they try to sidestep the currency decline; it also helps to ease the inflationary pressure on countries that heavily rely on food and energy imports. The reopening of China led to a resurgence in trade and capital flows between China and its neighboring trade partners. A potential Fed pause means central banks around the world can finally catch up with the rising rates in the US, closing the yield differential between them and the US. This closing yield differential could attract flows back to their shores as investors assess on a relative basis the attractiveness of opportunities.
In light of these factors, we focus our opportunities on Singapore and Chinese equities;
In particular, we see tailwinds for the Singapore equities when considering the relative performance between Singapore vs. the US indices. We think one can benefit from hopping on the rotation momentum, as it is just off the low and seemingly trending higher. The technical picture is a confluence of multi-decade support levels meeting short-term inverse H&S bottom reversal breakouts. The cherry on top of it all is the Singapore Dollar currency exposure which provides an enclave from the Dollar decline. It does not often happen when the fundamental, long-term, and short-term technicals all align to give a strong bullish bias.
On China, we see the reopening effect taking some time to translate into hard economic numbers. Still, renewed investor optimism and a reset in valuations have put China equities back under the spotlight. Couple this with a supportive technical breakout from a two-year downward channel; we think momentum can further drive this trade.
Executing the plays
A hypothetical investor can consider the following two trades[1]:
Case Study 1: Long MSCI Singapore Index Futures (SGP)
We would consider taking a long position on the MSCI Singapore Index Futures (SGP) at the present level of 304 and set the stop below 275, roughly two times the Average True Range (ATR) away, which could bring us a hypothetical maximum loss of 29 points. Looking at Figure 2, if we pick the next level of resistance as our exit, SGP has the potential to reach the 360 level, 54 points away. Each point move in the SGP contract is SGD 100.
Case Study 2: Long FTSE China A50 Futures (CN)
We would consider taking a long position on the FTSE China A50 Futures (CN) at the current level of 14,175, with a stop-loss at the previous resistance of around 13,330. Looking at Figure 4, if the trend reversal continues, CN has the potential to retract at least half of the down move since the 2021 high, i.e., around the 16,000 level, a hypothetical gain of 1,825 points. Each point move in the CN contract is USD 1.
Original Link: https://www.sgx.com/research-education/market-updates/20230130-sgx-traders-playbook-great-rotation
[1] Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.