Head of Equity Strategy
Summary: As we've previously observed, in any given business cycle, South Korea tends to be the first to buck the trend. With the country's leading indicators now again turning higher, it might be assumed that where South Korea goes, others will follow.
South Korea has turned higher
In March we got confirmation that South Korea’s leading indicators already turned higher in December and have continued to expand in January. OECD releases February figures on 8 April and we expect further confirmation that South Korea has turned in terms of the business cycle, demonstrating that Chinese stimulus has indeed proved to be enough once again to lift growth in Asia. As the months pass the effects will trickle into Europe and North America. This is likely also why the market was quite relaxed this morning when Germany Factory Orders in February hit -8.4% which is the worst growth since 2009 and at the 7th percentile of observations since 1992.
The global economy is currently in the fourth column (economic activity below trend and contracting) but if South Korea once again proves to be the first country to lead the world then global leading indicators will soon turn into the first column which is often called the recovery phase. In this phase investors should be overweight Asia Pacific (and in particularly China, Taiwan and Singapore) and North America. European equities are not worth being overweight until later into the business cycle.
In our latest equity presentation (which can viewed in a recorded version here) we draw parallels between now and 1998. As in 1998 the US 3M/10Y spread went negative at around the same time as a major crash in global equities and a policy panic by the Fed. Typically a US yield curve inversion has spelled trouble for investors with S&P 500 returns being negative -8% over the next 18 months. However, two recent cases go against this pattern: 1998 and 2006.