The first bit of this blog is for all you equity market bulls out there – it’s a great chart from this weekend’s edition of the Sunday Briefing. The chart below shows the percentage of buy recommendations on the 1000 largest US stocks.
Back in Europe, the bulls will also have something to cheer about as the 2Q21 reporting season winds down. Morgan Stanley analysts have been tracking the numbers, as always, and report a strong set of numbers. “Weighted earnings are well ahead of expectations too, but price action shows a negative skew. One sweetener has been buybacks, which have been surging in Europe. “
In detailed terms, they’ve tracked 58% of companies beating their EPS estimates with only 22% missing, which gives a net beat of 36% of companies. “Sector/style-wise, net beats have been most prominent for value stocks which have posted a record differential in the breadth of beats versus growth stocks. Elsewhere, large caps and financials have also surprised positively on EPS.”
These strong numbers have had an inevitable knock-on effect, with earnings being revised up fairly constantly – the Morgan Stanley analysts reckon that “European earnings revisions are close to a historic high relative to global peers”.
Now for the bad news – from Asia this time! James Chu at Tricio highlights the chart below which shows how the Hong Kong blue-chip stock index (Hang Seng index) has been suffering from the rapidly changing policies from China (along with the performance of Tencent).
On paper, all these China troubles should be a net positive for the Hong Kong market. But Chu isn’t so sure. He reckons “Hong Kong is also stuck between a rock and a hard place – US and China, at the mercy of political games and policy changes from both countries. From an asset allocation perspective, investors may see better long-term value in other Asia Pacific markets. Tricio has advocated an underweight holding for Chinese equities for some time.”
And sticking with Asia, perhaps investors might start to look again at the other huge Asian market – Japan, and specifically small caps. Now to be fair Japanese small caps have been cheap for as long as I can remember, but GMO reckons that anomaly is especially pronounced at the moment. Now, again, a word of caution. I’ve heard this story before, many times, and then Jap small caps have proceeded to go nowhere for years. Maybe, this time it really is different?!!
According to the GMO folks, the MSCI Japan Value index has underperformed MSCI Japan Growth by 80% cumulatively. “Further, the global small cap rally of the past year largely bypassed Japan. The combination has left this market trading at a significant discount to its own history. As the display below indicates, Japan small value stocks, which normally trade at a 25% discount to the market, are now sitting at a 45% discount – their largest in twenty years.”
This wealth of opportunity should be great news for stockpickers – but there’s a problem. Despite Japan’s market size, Japanese stocks are relatively under-appreciated, under-researched, and under-owned according to GMO. “Approximately 40% of companies have no analyst coverage and foreign investors are generally underweight Japan. Further, improving corporate governance, better transparency, and a new willingness to work with engagement-oriented activist investors makes this a high-alpha pool to fish in”.
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