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DECODING GLOBAL STOCK MARKET TRENDS: TEN INDICATORS TO WATCH

 1. 
 2. Blog

17 Apr 2024 Save Chart Pack
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> With the US March CPI surpassing expectations and the market revising down the
> extent of interest rate cuts for this year, global stock markets are
> experiencing a noticeable decline. Will this lead to short-term corrections or
> potentially trigger a larger-scale collapse? To help investors grasp the
> forces driving global stock markets, MacroMicro provides an exclusive
> compilation of key indicators for global stock market analysis. Feel free to
> follow and stay updated at any time.
> 
> In this article, we highlight the following indicators from the collection:
> 
>  1.  Equity Indices Above 200-Day Moving Average
>  2.  Stock Market Cap by Country
>  3.  Stock Market Cap-to-GDP Ratio by Country
>  4.  Stock Market Cap Divided by M2 Money Supply
>  5.  Net % of Central Banks Cutting Rates
>  6.  OFR Financial Stress Index (FSI)
>  7.  Taiwan Export Growth (YoY) vs. MSCI ACWI
>  8.  MM Global Recession Probability
>  9.  Citigroup Earnings Revision Index
>  10. MM Economic Expectations Index

--------------------------------------------------------------------------------


I. MARKET SENTIMENT: ARE STOCK MARKETS GETTING OVERHEATED?

▌GLOBAL EQUITY INDICES ABOVE 200-DAY MOVING AVERAGE

(Customize | View Chart)

Is the global stock market in overheated territory? For that, we can look at the
percentage of major stock indices performing above their 200-day moving average.
A ratio above 80% or even 90% signals overheated market sentient and potential
corrections ahead.

Currently, around 60% of stock indices around the world is trading above the
200-day mark, and there’s notable variation among countries. As shown in the
chart below, while over 80% of stocks on the Nikkei and Sensex is trading above
the 200-day mark, the percentage in Hong Kong, Brazil, Singapore, and China is
below 50%.

(Customize | View Chart)

It’s also worth noting that overheating doesn’t necessarily always translate to
risk. On the contrary, as long as the market rally is supported by healthy
fundamentals and liquidity, pullbacks can actually present buy opportunities.

--------------------------------------------------------------------------------


II. VALUATION: ARE STOCKS TOO EXPENSIVE? AND IS THAT A PROBLEM?

▌INDICATOR: STOCK MARKET CAPITALIZATION BY COUNTRY

(Customize | View Chart)

The stock market capitalization of a country reflects its economic vitality and
attractiveness of its investment environment. Generally, a higher market cap
indicates a larger weighting in the MSCI ACWI World Index. Currently, the top
three stock markets globally are that of the US, China, and Japan.

Meanwhile, a fast-growing market cap indicates significant capital inflows into
the country. Such is the case of India, where robust domestic consumption,
relative political stability, and benefits from ongoing global supply chain
shifts have attracted significant foreign capital. In contrast, Hong Kong’s
stock market has been weighed down by China’s economic slowdown and geopolitical
tensions, leading to a steady outflow of foreign capital. By market cap, the
Indian stock market officially surpassed Hong Kong as the world’s fourth largest
stock market (excluding Euronext) in December 2023, and the gap continues to
widen.

▌STOCK MARKET CAPITALIZATION-TO-GDP RATIO

(Customize | View Chart)

We can also look at the market cap-to-GDP ratio, which measures stock market
capitalization relative to GDP and can be used to assess whether stock prices
are supported by solid economic growth. The ratio is also known as the Buffet
Indicator, as Warren Buffet once commented that the ratio is a useful tool for
gauging where stock valuations stand.

Currently, Taiwan, the US, and Japan have relatively high market cap-to-GDP
ratios, at 275%, 188%, and 155%, respectively. Hong Kong’s market cap-to-GDP
ratio stood at an even more astonishing level of over 1000%. But does this imply
stocks in these markets are absolutely overvalued?

It's crucial to note that a country's stock market does not always mirror its
economic structure. Also, constituents of major indices can dramatically change
over time. For instance, the US stock market was once dominated by manufacturing
and retail giants, but nowadays tech stocks have risen to become the dominant
force in stock indices, creating a disconnect between the stock market and the
broader US economy that is more service-oriented.

In Hong Kong’s case, many Chinese companies are listed in Hong Kong, but their
production and operations are not in Hong Kong and thus not reflected in Hong
Kong's GDP, leading to the market cap-to-GDP ratio of the Hong Kong stock market
exceeding 1000%.

Therefore, when analyzing this ratio, it's essential to consider whether stock
market composition aligns with the current economic structure.

▌STOCK MARKET CAP DIVIDED BY M2 MONEY SUPPLY

(Customize | View Chart)

In addition to using GDP to assess valuations, we can also divide stock market
capitalization by M2 money supply to see whether easing/tightening monetary
conditions are reflected in the stock market.

When a country adopts a more accommodative monetary policy, stock valuations
might benefit and we see the ratio of market cap to M2 money supply rise, as
seen in the US and Japanese stock markets after 2008.

On the other hand, despite multiple reductions in reserve requirements and
interest rates since 2014 to boost liquidity, the same ratio has continued to
fall in China, indicating that enhanced liquidity have not translated into
inflows into the Chinese equity market.

--------------------------------------------------------------------------------


III. LIQUIDITY: HOW ARE THE GLOBAL FINANCIAL CONDITIONS LOOKING?

▌NET PERCENTAGE OF CENTRAL BANKS CUTTING RATES

(Customize | View Chart)

The net percentage of central banks cutting rates, calculated as the percentage
of central banks whose last move was a rate cut minus those raising rates, is a
useful indicator of global liquidity and financing conditions. A rising
percentage indicates most central banks are in the easing camp. This means
market liquidity will gradually improve with more capital flowing into the stock
market. Lower interest rates also mean lower borrowing costs for businesses.
Both are positive developments that boost the performance of the global stock
market, as shown in rallies of the MSCI ACWI Index.

Global central banks, after aggressively tightening to combat inflation, are now
adopting more accommodative policies to prevent economic downturns. While the
timing of Fed rate cuts this year remains uncertain, other countries like Brazil
and Peru have already begun easing. Switzerland took the lead among G10
countries by initiating rate cuts in late March, and the global percentage of
central banks cutting rates has been increasing. Consequently, the stock market
has already factored in expectations of rate cuts and anticipates improved
liquidity conditions.

▌OFR FINANCIAL STRESS INDEX

(Customize | View Chart)

The Financial Stress Index (FSI) by the Office of Financial Research (OFR) in
the US incorporates financial variables from five categories: credit, equity
valuation, funding, safe assets, and volatility. The index provides a
comprehensive assessment of risks in global financial markets.

Benchmarked at zero, a higher reading indicates elevated financial risks, while
a value below zero indicates the financial market is relatively safe.

Presently, the FSI remains below zero and is on a downward trend, suggesting low
financial market risks and creating a favorable environment for risk assets such
as stocks.

--------------------------------------------------------------------------------


IV. MARKET FUNDAMENTALS: AMID RECORD HIGHS, WHICH MARKETS ARE POISED FOR MORE
GAINS?

As markets scale new highs, it’s essential to monitor whether underlying
fundamentals are keeping up to provide further momentum. This will help us
assess the likelihood of a market correction and identify attractive investment
targets. Here we look at four indicators for fundamentals.

▌TAIWAN EXPORT GROWTH VS. MSCI ACWI INDEX

(Customize | View Chart)

Historically, reversals in Taiwan’s export growth have led the MSCI ACWI Index
by about 8-12 months, making the former a useful indicator for turning points in
the global stock market. The rationale behind the leading-lagging pattern lies
in the global supply chain: When economic outlook brightens, anticipating demand
to rise, downstream manufacturers will start to replenish inventory and place
more orders with upstream suppliers. Sitting at the upstream end of the global
supply chain, Taiwan is among the countries to receive these orders first.
Taiwanese exports thus see an early boost ahead of a global market upswing.

Currently, Taiwan's exports continue to reach new highs, with yoy export growth
reaching 18.9% in March, much higher than the 9.7% in January and February. The
strong export performance reflects sustained strength in the global information
and technology sectors.

We expect the export momentum to continue and unlikely to see reversals in the
short term. This means continued support for the MSCI ACWI Index to keep
climbing. That said, we should watch for signs of slowdown in Taiwanese exports
in the second half of 2024 due to higher bases, as a slowdown could signal a
potential reversal in global stock markets ahead.

▌MM GLOBAL RECESSION PROBABILITY

(Customize | View Chart)

With 50% as the baseline, the MM Global Recession Probability is based on
various economic indicators, including data on consumption, employment,
manufacturing, financial market and raw materials.

When the indicator remains significantly above 50% for a sustained period, it is
highly likely that the global economy will enter a recession, leading to a
decline in global stock markets. Thus, this indicator can also help us
anticipate upcoming stock market reversals.

Currently, the MM Global Recession Probability has dropped to just around 30%,
indicating the likelihood of a global recession is quite low. Overall, overall
economic fundamentals remain supportive, and the probability of a major downturn
in global stock markets is low.

▌CITIGROUP EARNINGS REVISION INDEX

(Customize | View Chart)

Another useful indicator is the Citigroup Earnings Revision Index, which is
calculated by subtracting the proportion of companies receiving EPS downgrades
from that of EPS upgrades. When the index rebounds from a low point, it signals
optimism towards corporate earnings, which can provide upward momentum for the
stock market.

Currently, the index’s 12-week moving average has been trending upward,
indicating improved market sentiment on corporate profitability, which can fuel
further gains in global stock markets.

▌MM ECONOMIC EXPECTATIONS INDEX

(Customize | View Chart)

Lastly, we come back to actual economic performance to assess which markets will
enjoy momentum from strong fundamentals after reaching new highs. For that, we
can refer to the MM Economic Expectations Index for changes in market estimates
towards GDP growth in each economy. An increase in the index indicates a more
optimistic economic outlook for the next 12 months.

At present, the MM Economic Expectations Index for most countries are seeing
upward revisions, indicating that the global economy is on an upswing, where
strengthening fundamentals can drive further gains in global stock markets.

Taiwan and the US are among the economies seeing the most upward revisions. Both
stock markets can expect strong support for the medium to long term: the
Taiwanese economy to enjoy long-term support with the manufacturing cycle
entering the recovery phase, and the US economy showing robust expansion,
steering away from a hard landing and even poised for the no landing scenario.

--------------------------------------------------------------------------------


CONCLUSION

Taking into account the above indicators, we believe global stock markets can
expect further gains. Liquidity wise, despite the absence of broad-based
interest rate cuts, financial market risks are relatively low, with steady
capital inflows into stocks.

The global economy’s return the upswing phase also offers tailwinds, with
gradually improving corporate earnings and no reversals in sight for broader
fundamentals. The resilience of the US and Taiwanese stock markets, in
particular, remains supported by solid fundamentals.

Overall, the recent decline in the stock market appears to be more influenced by
sentiment rather than significant changes in fundamental trends, with Taiwan's
exports continuing to grow and global recession probabilities decreasing.

Looking ahead, users can bookmark the [charts from the global stock market
collection] to stay informed about global market trends.




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