Three thoughts on the ongoing bear market:
- MSCI Asia-Pacific (MXAP) Index has corrected -11.7% YTD, in USD terms.
- On 26 -27 February 2016, Shanghai will host the G20 Meeting of finance ministers and central bankers
- On 16 February 2016, BOJ will implement the negative interest rate policy.
Three-year P/E chart of MXAP Index
1. Market correction
The financial markets have taken a beating with the MXAP Index correcting -11.7% YTD, in USD terms. This came on the back of persistent worries over global economic growth, slumping oil prices and uncertainties on Chinese “hard landing”. Valuations have priced in these worsening fundamentals with MXAP Index trading at trough valuations of 12.3x P/E, at more than two standard deviation below its 3-year mean P/E of 14.0x. Although markets may still overshoot in the near term, there appears limited downside with the current compelling valuations.
2. Shanghai Accord
China will host a G20 meeting of finance ministers on 26 – 27 February 2016. The recent market and currency turmoil will surely be high on the agenda during this meeting.
The meeting could give birth to the Shanghai Accord, an updated version of the first Plaza Accord in 1985. The first Plaza Accord consisted of an agreement among the major global economies to devalue the US Dollar relative to Japanese Yen and German Deutsche Mark. This is to boost economic growth during a period of weak growth.
The current economic climate reflects similar concerns with the strong US Dollar affecting the emerging markets. Thus, the upcoming G20 Meeting could be an opportunity for policy makers to address the strong US Dollar and implement a global policy coordination especially on currency volatility and economic growth. Therefore, we believe that this may trigger a wave of short-covering in the period leading up to the G20 Meeting.
3. Oversold USDJPY (USDJPY)
Since the announcement of negative interest rate policy on 29 January 2016, the Japanese Yen (USDJPY) has crashed from a high of 121.69 to a low of 110.99 on 11 February 2016. The steep decline has resulted in the Nikkei (NKY) Index to crash -10.3%, in JPY terms. We believe that the correction has also overshot and the upcoming implementation of negative interest rate policy on 16 February 2016 may stop the ongoing rout. In addition, the NKY Index is trading at an undemanding valuation of 16.8x P/E, at more than two standard deviation below its 3-year mean P/E of 21.3. Thus, Japan’s bears should beware.