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Perma-bear thaws

Warming towards emerging markets
October 12, 2017

Whether you worry about global warming, or think the Paris Agreement on Climate Change is a load of hot air, entrenched opinions can and do change.  So too with investing, especially when contrasted with trading positions. I see these as very different beasts, requiring different analysis, time horizons and strategy. I am happy to hold my core investments for years, decades in fact, as do so many people. Think of your main home versus buy-to-let. So too with really good shares that might be worth holding for life rather than the five-year minimum mantra; fans of Warren Buffett’s Berkshire Hathaway will confirm this.

My view on developed market stock indices has been affected by my first-hand experiences of these, from the fact that stockbrokers rather than bankers traded in shares pre-Big Bang, that only the wealthy tended to own them, and that I have witnessed one crash too many. Behavioural finance, where Richard Thaler this week won the Nobel prize for economics, describes this as “anchoring”; early experiences form the framework of our thinking and expectations.

The cult of the equity is a fairly new phenomenon in many countries; think ex-Soviet Union, China and India. Even in Germany the stock market bug did not bite until the mid-1990s – the Dax index was only created in 1988 – and even today Germans tend to prefer cash and bonds as savings vehicles.  Globalisation has led to a lot more interest in investments abroad – payment systems now have a fantastic reach.

Stock markets that look like they could trade a lot higher are today’s focus – based on chart patterns, as always. Brazil, which is still trying to recover from its worst recession in at least 100 years, and has too many corruption and money-laundering cases to mention, is my first exhibit. Relatively low interest rates and inflation, and a currency that is not too strong or too weak, has seen the Bovespa index in a huge holding pattern since 2008’s collapse. This year we have inched up to a new record high, closing on a quarterly basis above previous resistance at 73920. Three decent consecutive monthly rallies, known as three white soldiers, hint at further gains through to year-end.  A minimum measured target might be 84000.

Over to Indonesia, where the political landscape has changed significantly since independence and Sukarno and Suharto’s five decades in power.  Like India, the Jakarta Composite index traded in a straitjacket until 2003, quadrupling in value over the next five years, then slumping like the rest of the world in 2008. Since then it has been Asia’s best performer, outdoing China many times over, with a neat controlled rally since 2016. Potentially a surge to 7000 is possible.

The Philippine stock exchange index only got its skates on in 2010, but look at it now. Consolidating in a massive triangle since 2014, we’ve seen the first monthly close above its upper edge. A conservative measured target taken from its height suggests 9250 soon.

Finally, the stock exchange of Thailand index, which let’s not forget kicked off the Asian four-year financial crisis in 1994. Recovering well since 2009, and consolidating in a neat rectangle since 2013, it’s edging up towards the record high at 1789.  A rally through the psychological 2000 looks easily do-able, based on the height of the most recent building block.