South Korea and Germany aren't buying the Chinese rally

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Equities worldwide are on a roll, boosted by optimism about a US-China trade settlement. But the cheer isn't universal as both German and South Korean indices are holding back – are they being prudent or just over-cautious?


The MSCI World Index in local currency has continued its rise in February, up 2.2% and pushing above the peak close of December with the peak close of November in sight (see chart). Investors continue to discount the positive effects of the US-China trade deal, because what else could drive this crazy rally since early January? Sentiment data on the economy does not warrant a strong rally and the policy change around the world has not been big enough to kick start an actual equity rally towards new highs. But will the US-China trade deal deliver the magic needed to turn around the global economy?
MSCI World Index (local currency) the past six months (cumulative return in %)                                                             Source: Bloomberg

The US-China trade deal will obviously alleviate some of the nervousness among companies but a lot of damage has already been done. Financial conditions have already eased somewhat but the bigger question is whether they have eased enough to offset the negative dynamics in play. The OECD’s leading indicators suggest the weakest outlook against trend growth since October 2009 with December’s data still suggesting a substantial slowdown with the current slowdown from the recent peak on par with the 2010/11 slowdown driven by the euro area crisis. As a result of this we continue to position ourselves defensively in equities.

The current phase in the business cycle suggests that investors should be:

Underweight:

Banks, insurance, semiconductors, consumer durables

Overweight:

Software & Services, Telecommunication, Retailing, Pharmaceuticals, Biotech & Life Sciences.

South Korea and Germany send a different signal

The biggest story in February is the Chinese equity market rising 9% measured on the CSI 300 Index. There are several structural reasons for this from potential MSCI inclusion weight rising on Chinese equities on the next reset date, and the new ChiNext board which builds on the US technology board model to encourage investing in technology companies. But we prefer using proxies to gauge direction in China and especially the countries with deep export links. 

If we zoom in on German and South Korean equities then both equity markets are mostly flat for the month suggesting little change in sentiment. As a result we are not buying into the positive Chinese sentiment in February but if German and South Korean equities begin to rally then the move is likely credible and more sustainable.
DAX Index (dark blue, the legend name is wrong), KOSPI 200 Index (orange line) and CSI 300 (purple line)                Source: Bloomberg
MSCI World Index weekly prices the past five years                                                                                                                Source: Bloomberg
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.