What the charts are saying about the SEMDEX

Back when almost everyone was bullish on local equities in the middle of last year, the Technical Voice called an end to the almost two year old bull market. Since August of last year, the 50 day Exponential Moving Average crossed its 200 day counterpart and since then, the market has been stuck within a descending channel with no breakout in sight. From the top to its current level, the market is down close to 19% so far with many a bull now in hiding. Within that drawn channel, rebounds were plentiful and often were confused for a recovery in stocks which never happened. The only good news so far is that more and more people have become negative on local equities and on the economy in general but as of date, it remains too early to be bullish on local equities. Looking at the chart of the SEMDEX, we continue to see a lot of potential downside risk although in the short term, yet another short term rebound is certainly overdue.

The market appears to be oversold in the short term and is particularly true in the hotels space but there remains no evidence as per the charts that a bottom is forming yet. Typically, a change in trend would only begin to be noticed once prices begin to stabilize and move sideways. Typical bottoming patterns that have manifested themselves in the local stock market in the past have revolved around inverse head and shoulders, double bottoms or inverse rectangular formations but we have yet to see this. In any event, the upper end of the drawn channel which is resistance would need to be broken to the upside on decent volume before we change our view.

Source : Reuters

On a longer term perspective, the Technical Voice has maintained that the bull market of the past where the SEMDEX would generate annualised returns in the high double digits is likely over and shall likely not be replicated in the next decade. This poses long term problems for many institutions in the business of asset liability matching. For more than ten years, pension fund portfolios have benefited from strong equity returns on the local market which has saved the dismal performance of their foreign portfolios. At the local level, considering the depth of the local bond market, especially at the longer end and declining yields at the shorter end of the yield curve, the lack of roaring SEMDEX shall increasingly become telling. Last year, the Technical Voice had forecast that growth in GDP would stand at the low 3% range deeming the BoM and CSO forecasts too optimistic and these forecasts remain accurate today. Interestingly, we continue to expect this trend of sub-par growth to remain well into next year with 2013 growth expected to hover anywhere between 2.7% and 3.4%. This is based on assumptions such as a continued Chinese slowdown and a contraction in the order of 2-2.5% in the Euro Zone. We still believe that the market is not yet fully pricing a tough two years to come which is why a bottoming formation has yet to take place. Short term rebounds aside, we see nothing exciting about the chart.

Investors and institutions in the asset liability matching business in particular shall increasingly have to rely on the proper management of their foreign portfolios in the coming decade in order to generate the returns they need in order to satisfy their clients. Local investors and institutions remain underweight real assets, be it soft or hard commodities and shall need to increase these allocations gradually for this is where the performance shall be in the future. Considering our import-export dilemma, a proper hedge against inflation led by money printing remains important today. As the local market tries to find its new and more moderate path forward in the coming years, locals shall need to gradually shift away from being MSCI World and MSCI Emerging Markets trackers to true alpha generators. Higher growth areas such as Sub Saharan Africa shall need to play an increasing role in the equity portfolios and in general even within equities, being overweight countries/companies that have real assets (soft commodities in particular) shall be key. It is absolutely normal and perhaps healthy for the market to cleanse itself from excesses over time and it is perhaps not such a bad thing for long term investors that it is finally happening to the SEMDEX after such a long time.

DISCLAIMER: This article is provided for discussion purposes and does not constitute, nor should it be construed as, an offer, solicitation, advice or recommendation to buy, sell or hold any securities or to employ any investment strategy discussed herein. Readers should seek professional advice regarding the suitability of any securities or investment strategies referred to herein and should understand that any statements, views, opinions, outlooks or forecasts made herein may not be realised.