John Woods

Opinion | Make hay - and hedge - while the sun shines on our markets, as change may arrive in a heart beat

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Rising US rates and bond yields, plus a strengthening US dollar will sound the death knell to Asia’s equities bull market.

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A commuter ferry (bottom R) sails towards Hong Kong Island as light shines through clouds in the skies above on November 25, 2016. Photo: AFP

John Woods

Published: 10:26am, 19 Jan 2018Updated: 10:45pm, 19 Jan 2018

Among even the most contrarian of investors, there’s a grudging acceptance that the fundamental, valuation and technical architecture framing Asia’s current bull market is broadly sustainable, at least for the next quarter or two.

Indeed, standing in front of price momentum year to date, particularly in North Asia, has been like standing in front of a train. Bears have been crushed.

In my pre-Christmas column, I suggested a number of reasons why I felt markets could - and should - continue to post gains well into the New Year. I continue to hold such a view. But in this piece, conversely, I’m going to highlight a number of signals, indicators and economic risks that may warn when the bull is flagging, representing an ideal opportunity to lock in gains.

First, some context. Using the MSCI Asia Ex-Japan index as our benchmark - and using data going back to 1990 - we can show that the average bull market lasted 28 months and returned investors 118 per cent. The current bull market, which started in Jan 2016, is now 24 months old and has returned 71 per cent. On that basis, the rally appears mature.

But averages can be deceiving. Asia’s longest rally - between April 2003 and October 2007 - comprised fully 55 months and returned an impressive 315 per cent. Similarly, averages have been rendered moot in the United States with the S&P’s 106-month rally now the second-oldest bull market on record since 1928.

In other words, beyond framing broad expectations, setting investment strategies based on cyclical averages can be misleading and unprofitable. Yet, markets do not go up forever. And typically, the higher they rise, the harder they fall. What should we be looking for, therefore, in order to step out of the way?