Judging by previous post-recession cycles Asia’s equity markets should enjoy some strong gains next year, predicts Laurence Balanco, Asia’s top quantitative analyst according to Asiamoney’s latest Brokers Poll.
“Basically we have drawn the comparison that 2010 is the equivalent to 2004,” said the CLSA analyst, who has been voted the top quantitative/technical analyst for the third year running. “If we dare extrapolate this into next year then it’s likely that markets will rally into February before having a meaningful correction of 10%-12%.
“The US market will remain choppy but have an upward bias. And for Asia if the roadmap of financial and economic trends accelerates the up trends will keep looking higher,” he added.
Balanco estimates that the MSCI Asia ex-Japan could rise 18%-20% from here, potentially moving from 575 to 680 by the third or fourth quarter of 2011.
He also believes that Thailand looks particularly well-placed for strong growth—“we caught the Thailand surge ahead of time”, while China’s A-shares have good technical reasons to improve. India and Indonesia’s stock markets should also rise, despite already enjoying strong growth this year.
One market yet to fully benefit from improving sentiment is Taiwan, but Balanco believes that will change. “We are looking at the lag on the technology sector playing catch up and I think it’s the next market with the potential to perform in 2011,” he says.
Balanco’s confidence over these predictions stems from his job. Quantitative/technical analysts predict future events based on past performance. Stock market highs and lows tend to ride in cycles that are influenced by a myriad of events. Pay enough attention, compare enough cycles, and patterns can be found.
That, at least, is the theory. Unfortunately even the most predictable trends can be thrown a-kilter when the world’s largest economy is struggling in protracted economic weakness, as Balanco discovered earlier this year.
“From the technical side we’ve had quite a few false signals,” says the South African, who is based in Sydney. “The first two quarters were full of volatility and false signals, while the four year US presidential cycle low happened two months earlier than the typical low of October in the second year of his term.”
Balanco rues the fact that he missed this early market trough, but otherwise he feels that he has been on top of most of the trends this year. As he predicted when winning the same award last year, Asia’s markets enjoyed a period of early growth only to correct and sell off 17% in April.
“There were two major cycles this year,” he says. “The presidential cycle has historically seen a 20% market correction in the second year of his term, while the seasonal pattern tends to see the markets do well in January and February, and then from the end of February to September is on average the worst time to invest, before picking up from October. It’s been a typical pattern for 70 years, in Asia as well as the West.”
However this year the markets hit rock bottom in July, and then began to strongly rebound in August and especially September. It was led, bizarrely enough, by strong performance in south-East Asia in particular.
“In the August to September period Thailand, Malaysia and the Philippines all broke out of their secular bear market trading ranges of the past 16 or 17 years,” says Balanco. “That led other Asian markets and even the US to break out too.”
The market indicators continue to look good now. “In the US market industrials, the S&P [index] and transport are closing above their April peaks,” he notes. “The reason for this is the Fed[eral Reserve’s] quantitative easing programme.”
Are there any historical means of testing the likely impact of QE, as it has become known?
“We haven’t quantified this with back-testing, instead we have looked at a slightly different scenario,” Balanco says. “We looked back to the 1938/39 period, and at 2002 onwards as well, to chart the pattern of post-depression periods in the US. We can’t do this with Asia because it lacks data in terms of price and market behaviour.”
It’s that analysis that has led to Balanco’s confidence that Asia’s markets are embarking on the upsurge of a sustained bull run once more.
From a personal perspective this is good news for Balanco. While investors tend to pour over quantitative research when times are bad, amid periods of plenty they are less concerned, trusting more to their own instincts.
That means a slightly less hectic period for him, giving him chance to enjoy time with his wife and one- and six-year-old daughters. “At least that’s what it means if it happens as I predict it will,” he says.