Views From the Floor

Global euphoria; and South Korea on the up.

Euphoria Strikes

The Bank of America Merrill Lynch (‘BAML’) Global Risk-Love Indicator moved into ‘euphoria’ territory, in November (Figure 1). In isolation, this is an incremental negative signal.

The indicator tracks a variety of measures, such as manager positioning, put-call ratios, investor surveys, price technical, volatility, spreads and correlations. If the indicator is around 0.8 or above, the global equity market is in ‘euphoria’. Conversely, if it is roughly -0.8 or below, it is in ‘panic’, which is a cue to go out and buy every stock you can lay your hands on.

Our analysis, which looks at a much broader suite of indicators, valuations, fundamentals and sentiment, is still supportive of a continuation of the bull market. Nevertheless, we will be watching closely to see if other warning indicators starting flashing. In the words of John Templeton, “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”.

Figure 1. BAML Global Risk-Love Indicator

BAML Global Risk-Love Indicator

Source: BAML Research; as of 18 November 2019

KOSPI Goes Gangnam Style

Chiming with our first section, the KOSPI index is up 6.8% since the beginning of September. By our calculations, some 60% of this move has been in semi-conductor stocks.

In our view, what is most important about this move is its potential to herald a reversal in the trajectory of the export driven South Korean economy. As Figure 2 shows, the KOSPI leads the year-on-year growth of South Korean exports by about three months. Improved export data may be just around the corner if the rally of the last 10 weeks is anything to go by.

We would argue that this bolsters our base case that we are in the midst of a mini-cycle upturn. The South Korean economy is something of a bellweather for global trade. If we do see the expected uptick in export data, it would confirm that we have entered the global rally that one would expect to see coincide from BAML’s euphoric indicator reading.

Figure 2. KOSPI Index versus South Korean Exports (3-month Moving Average)

KOSPI Index versus South Korean Exports (3-month Moving Average)

As of 22 November 2019.

With contribution from: Teun Draaisma (Man Solutions, Portfolio Manager) and Ed Cole (Man GLG, Managing Director).