Current financial market signals- November 2018

Set out below is the latest update from one of our research partners, Ineichen Research & Management (IR&M) as at 23 November 2018.

 

Observations
The main message from Ineichen this month suggests no good news flow.

Apart from the US economy, which still implies all is well, the rest of world is seeing red. The key take outs are:

  • The average growth rate of industrial production is falling
  • Global economy continues to approach the “red alert zone”
  • Long term price momentum for MSCI World, Russel 2000, Energy, Canada, India, Mexico and Australia turned negative.
  • Earnings momentum remains mostly positive. However, the changes are negatively biased, implying earnings peak has past.
  • Economic momentum remains mostly negative, especially in Europe.
  • From 53 regime tests 57% were positive compared to 64% last month and 97% in January
  • All 6 preliminary November PMI are lower (incl. US).
  • USD is strengthening and equities are weakening.
  • Smart money continues to leave as liquidity dries up.

 

The table below summarises the IR&M economic models, macro surprises, earnings and IR&M’s perceived economic trend and some technical stock market trend indicators. Changes vs last month are circled.

 

Looking at each of the factors, broadly from left to right, the first five columns set out IR&M’s interpretation of various recent economic data released in those counties and whether it is generally improving or deteriorating. The EPS change column in the middle is a very important indicator of whether profits estimates for the next year are rising or falling. The final three columns look at the momentum (or technicals) in the various global share markets.

 

The Risks?

Over the month the sum of ticks has continued to fall. Key changes include:

The Positives- there were no positive changes this month.

The Negatives- Germany was the only country to have a bomb pop up with long term earnings momentum of the DAX fall into negative territory.

October 2018 bottom line tally:

 

What about Australia?
According to Ineichen’s data:

  • GDP forecasts for 19-20 seem stable around 2.7%.
  • All is well from a consumer sentiment perspective.
  • Economic momentum continues to worsen, whereas, macro surprises remain positive.
  • Earnings estimates have worsened over the month and long-term price momentum for 2 of our composite indices (ASX200 and ASX300) has turned negative.
  • Australia’s leading indicator (OECD Australia Leading Indicator) remains rising, consistent with PMI and consumer sentiment.

 

This month Ineichen looked at the relative valuation of the ASX200 vs S&P500 (AUD). To turn positive the US Tech sector, which has rallied >600% since the GFC, needs to retrace and/or China and commodities needs to reverse and start rallying.

 

 

Source: Ineichen Research & Management
IR&M is one of several research sources that guide our investment decision making. They are Swiss based and provide a detailed global view of the many drivers of investment markets. Like us, they believe that in the long run investment returns are driven by the fundamentals (the prices today will ultimately revert to what various things fundamentally ought to be worth) but in the short term may be driven more by sentiment and momentum (otherwise known as “technical” signals).

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