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Christopher Wood christopher.wood@clsa.com +852 2600 8516<br />
What about the American stock market? While credit spreads, along with the shape of the yield<br />
curve, are most important in terms of signalling an inflection point in monetary tightening, the equity<br />
market also plays its role. Having diverged from the weakening trend in other stock markets in the<br />
first three quarters of last year, there was a lot of room for the American stock market to play catch<br />
up on the downside, which is clearly what happened last quarter. The S&P500 declined by 14% in<br />
4Q18, compared with 11.8% and 7.8% declines in the MSCI AC World ex-US and MSCI Emerging<br />
Markets (see Figure 6).<br />
Figure 6<br />
S&P500, MSCI AC World ex-US and MSCI Emerging Markets performance since the beginning of 2018<br />
12<br />
(%chg)<br />
9<br />
6<br />
3<br />
0<br />
-3<br />
-6<br />
-9<br />
-12<br />
-15<br />
-18<br />
S&P500<br />
MSCI AC World ex-US<br />
MSCI Emerging Markets<br />
-21<br />
Jan 18<br />
Feb 18<br />
Mar 18<br />
Apr 18<br />
May 18<br />
Jun 18<br />
Jul 18<br />
Aug 18<br />
Sep 18<br />
Oct 18<br />
Nov 18<br />
Dec 18<br />
Jan 19<br />
Source: CLSA, Datastream<br />
Indeed there is now in GREED & fear’s view a risk of extreme American underperformance if<br />
potential turmoil in the credit markets causes American equity investors finally to take a more<br />
critical look at years of financial engineering financed by leverage in corporate America. This has<br />
resulted in a dramatic collapse in tangible book value for the S&P500, which has fallen by 22% since<br />
June 2014 (see Figure 7).<br />
Figure 7<br />
S&P500 tangible book value<br />
360<br />
340<br />
320<br />
300<br />
280<br />
260<br />
240<br />
S&P500 tangible book value<br />
220<br />
Jan 10<br />
May 10<br />
Sep 10<br />
Jan 11<br />
May 11<br />
Sep 11<br />
Jan 12<br />
May 12<br />
Sep 12<br />
Jan 13<br />
May 13<br />
Sep 13<br />
Jan 14<br />
May 14<br />
Sep 14<br />
Jan 15<br />
May 15<br />
Sep 15<br />
Jan 16<br />
May 16<br />
Sep 16<br />
Jan 17<br />
May 17<br />
Sep 17<br />
Jan 18<br />
May 18<br />
Sep 18<br />
Source: Bloomberg<br />
Thursday, 3 January 2019 Page 4
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