Asia Pac Dynamics Quant Strategy – Playing Defence :: Macquarie Research,

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Asia Pac Dynamics
Quant Strategy – Playing Defence
With the market volatility this month we focus on our macro model to see what it
can tell us about the market environment and what strategies may work going
forward. In last month’s Dynamics report our macro model suggested that the
economic environment looked very much like June 2008, which was not a
positive sign, and unfortunately proved prescient with a large market correction
last month.
We updated our macro model and this month it flags that the peak periods of
similarity now are both August 2010 and June 2008. This suggests we are at
the cusp of possibly two very divergent market regimes. In August 2010 QE2
was introduced and the markets rallied through to the end of the year, while in
June 2008 the markets were heading into the Global Financial Crisis. With
such divergent possible outcomes there is probably more market volatility
in the short term.
Scenario analysis for the bull and bear case
We looked back at what worked in the six months after August 2010 and June
2008 to see what countries, sectors and strategies worked in each scenario:
Bull Case – What happened after August 10 Bear Case – What happened after June 08
Countries Most countries had positive returns - Hong
Kong, Japan, Taiwan and Thailand did best.
While India, Philippines and Singapore did
worst
Most countries had negative returns in this
environment with New Zealand, Philippines
and Malaysia doing best. While Singapore,
Thailand, Hong Kong and Taiwan did worst.
Sectors Energy, Materials, Industrials and Tech
outperformed, while Healthcare, Telecom
and utilities were weakest.
Defensive sectors of Consumer staples,
Health care, Utilities and Telecoms did best.
While Tech, Energy and Materials did worst.
Investment
Styles
Buying risky deep value stocks with strong
analyst sentiment and good momentum
worked. While styles to avoid were
profitability and large caps which were the
weakest
Buying quality, low risk, large cap stocks
worked well. Of the value signals Dividend
Yield worked strongly. While Momentum,
Analyst Sentiment and Growth were the
weakest signals.
Dividends – a strategy for all seasons
In uncertain market conditions where the risk appetite can break in either
direction, we recommend focusing on mean reverting technical indicators
(which work well in volatile markets) and dividend yielding stocks.
Dividends have the advantage of being defensive in a down market, while
retaining some value exposure in case the market bounces strongly and starts
chasing over sold cheap names.
Re-enforcing the dividend call, the August to September period is ex-dividend
season for a number of Asian countries including Japan, Hong Kong,
Singapore, China, Australia, New Zealand, Malaysia, India, Taiwan and
Thailand. The outperformance of stocks into their ex-dividend date should add
to the returns to dividend yield exposures.
Some high dividend yielding stocks with good Technicals are: Formosa Chem &
Fibre (Taiwan), Esprit Holdings (HK), Greentown China Hdg (China), Philippine
long distance tel (Philippines), Hutchinson Port Hdg (Singapore), KT (Korea) and
Westfield (Australia).