Reward Outweighs Risk on Betting Against QE Tapering
August 14, 2014
US stock investors are glad whenever the US economy weakens on some point like the weaker retail sales of late. When there are signs that the US economy is still weak, chances are that QE will be prolonged and that the stock market will continue to rise. It was different just a couple of weeks ago when US GDP growth was reported at 4% pointing towards a 2014F US GDP growth of 2%. This was a reversal from the effects of the harsh winter on the US economy in 1Q14.
From the current S&P 500 of 1,947, the upside of a prolonged QE is greater than the downside of QE being tapered and abolished. Using the S&P 500 Bands similar to our PSEi Bands, the upside is at 31% to the peak of 2,555. The downside is lower at 22% to the bottom of 1,522. This is so since the S&P 500 is currently below the central value of our S&P 500 Bands of 2,038. So reward is greater than risk, and US stock investors are bullish whenever there are signs of a weak US economy.
QE will be tapered and abolished, but when is anyone’s guess. It will happen, and the effect on the S&P 500 is a downtrend on a rise in interest rates. We estimate the US10YTN rate rising to 4.47% when this occurs from the current 2.46%, and the S&P 500 will settle at the bottom of the S&P 500 Bands of 1,522.
The PSEi, on the other hand, is already expensive at euphoric high levels to begin with unlike the S&P 500 which is currently at low levels or below the central value in the S&P 500 Bands. With or without QE tapering, the PSEi is overbought and due for a consolidation.
It is currently buoyed by new money, the 2Q14 earnings season and for today, the MSCI quarterly rebalancing for the Philippine market which gave weight increases to TEL +7.12% , ALI +0.88% and AC +0.12%. These are three big PSEi heavyweights which caused today’s rally. New money poured into the Philippine stock market from an average daily traded value of PHP5.97 bn in mid-July to PHP7.92 bn last Friday. This may continue to grow especially after the “ghost month” in late August when more investors catch up with the market.
Earnings season, however, is coming to an end, and the MSCI rebalancing is already over. This will make the PSEi susceptible to the downside of its overbought condition.
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