Our “Stay Home” investment theme outperformed the “Go Global” alternative all year until the November 6 US election results raised the odds that the US might fall off the fiscal cliff after all. The S&P 500 dropped more than overseas markets during the first half of November. The performance gap remained narrower than it had been during the rally in global stock markets during the second half of the month. The S&P 500 is up 12.6% ytd, while MSCI Europe is up 10.3% and MSCI Emerging Markets is up 9.7%.
Leading the way this year in Europe is Germany, which is up 25.6% ytd. Among the emerging economies, India’s stock market is also outpacing most of the rest with a gain of 25.1% ytd. (However, Pakistan's is up 46.1%, and the Philippines' is up 28.6%.) China is one of the worst performers this year with a drop of 8.8%, making a new low for the year last week. Yet there have been significant rallies during November in Taiwan (7.2%), Singapore (16.0%), and South Korea (5.9%). What are the markets telling us? Here are a few possibilities:
(1) Germany’s outperformance suggests that investors believe that even if Europe remains in a recession, it will be moderate. (This morning we learn that the euro zone’s M-PMI remained weak at 46.2 in November, but up from 45.5 in October.) In addition, it suggests that German companies will find enough growth globally to offset weakness in the euro zone. Meanwhile, despite all the recent commotion about Greece and Spain, Spanish and Italian government bond yields have dropped sharply in recent days, down to 5.17% and 4.39% this morning. Also impressive is that the FTSE Eurofirst 300 Banks Euro Index rose to a new high for the year last week.
(2) China’s underperformance may reflect a growing perception that China’s belligerent territorial claims in the South China Sea may drive foreign direct investment, especially from Japan, elsewhere. Maybe that’s why other Asian bourses are outperforming.
Until this summer, when the territorial disputes heated up, China’s stock market had tended to be highly correlated with the price of copper, which actually rallied strongly last week. China’s economy is growing, as evidenced by the surprisingly strong 20.5% y/y increase in industrial profits during October. China’s official manufacturing PMI rose to a seven-month high of 50.6 in November from 50.2 in October.
(3) India’s outperformance partly reflects the government’s recent moves to reform the economy, which is showing signs of faster growth. This morning, Reuters reports, “India’s manufacturing sector beat the expectations of economists to grow at its fastest pace in five months in November, boosted by strong export orders and a surge in output, a business survey showed on Monday. The HSBC manufacturing Purchasing Managers’ Index (PMI), which gauges the business activity of India’s factories but not its utilities, rose to 53.7 in November from 52.9 in October.”
Today's Morning Briefing: Aloha! (1) Hawaiian vacation. (2) Geithner offers to cut spending by $1 for $4 of taxes. (3) McConnell laughs, while Boehner cries. (4) Pelosi and Cantor both say: “We won.” (5) Cocky Dems expect GOP to cave. (6) Will Nero surf while Rome dives? (7) The market is bipolar, with more upside on deal than downside on no deal. (8) Why are Germany and India outperforming while China is underperforming? (9) Ups & downs in GDP. (10) "Silver Linings" (+). (More for subscribers.)