ZACKS INVESTMENT MANAGEMENT 4

ZACKS INVESTMENT MANAGEMENT 4

Global Markets Here are 4 reasons why the non-U.S. bull is alive and well

• Upside surprises to forward-looking Purchasing Manager Indices (PMIs) came out on Mainland China. An overall state of PMI expansion in both services and manufacturing bodes well for more than just China. It bodes well for Energy & Materials sector firms, and Industrial. Better China growth is big news. It is more directly tied to Asia & Australia and less to the USA and Europe. But the effects are still global.• Weird behavior, tied to Japanese stock selling by oil dependent sovereign wealth firms, and hedging, should morph into a state of bottoming and reversal. A sub-110 yen to the USD exchange rate is not good news for Japanese exporters. However, the better bet is the yen and Japanese stocks near a bottom. The bad news is all priced in, and the move is overextended.

• WTI and Brent oil prices traders are done selling and shorting down towards $35 a barrel. A short-term price bottom would be my call. A mid-April OPEC production freeze meeting will happen. Consensus still sees $50 a barrel as the 12-month target. • The Fed is tied down to no more than 2 rate hikes in 2016, due to the U.S. election, and due to the negative rate policies in Europe and Japan. Lower risk-free rates leave the risk-on bid alive for stocks. Where else can investors go? Basically the fixed income cupboard is left bare by the world’s dominant monetary authorities. Don’t read this and think the 4 non-U.S. drivers keep alive a smooth week-after-week rise in non-U.S. stocks. The bull market should be on for non-U.S. stocks as long as we don’t have oil prices and China fall apart at the same time. But it won’t be smooth sailing all the time. Last year showed. Stock prices and oil prices didn’t get highly correlated until the August devaluation of the Chinese renminbi. Don’t
assume this high correlation persists! A one-off August 2015 renminbi move by the China exchange rate authorities gave credence to a lingering fear. The weak oil price WAS tied to GDP growth weakness emanating from China, and WAS NOT just an OPEC over-supply issue. Recently, IMF economists produced a nice chart. The chart showed oil prices had very little (0.2) correlation to the S&P500 before August 2015. In fact, the correlation went DOWN in June and July 2015 (to 0.0) before the renminbi peg changed suddenly. After August 2015, that correlation rose to 0.6. In April 2016, given good PMI news out of China, this 0.6 correlation looks too high.

Stock market correlations went up as oil prices went much lower and the weaker China’s financial system appeared to outsiders. Low-tech, lower wage developing economies depend on commodity and manufacturing demand from China. It’s a coherent
global paradigm that cannot easily be dismissed. This demand-supply China feedback has shifted into a positive loop not a negative one.