by Olivier d'Assier
The year of the Rat is finally over. The COVID-19 pandemic. Global lockdowns. Failed reopenings. Second and third infection waves. Anti social distancing protests. Pre and post US election theatrics. Brexit trade deal. Multiple vaccines. GameStop. So, what’s in store for investors in the year of the Ox?
Odds are only about 50-50 that you’ll read this entire post now that you know what it’s really about. Such is the enormous suspicion that an annual forecast evokes in this post-Trump-post-COVID-19-post-lockdown-post-QE-post-fiscal stimulus-post-GameStop world. A world in which even a quarterly forecast is riddled with fragile and undefendable assumptions about binary events no one can reliably predict. Still, like a child with a scab, we find it hard to let alone.
According to the ChineseZodiac.org website,
“the year of the Metal Ox brings career advancement, success in business, prosperity, and wellness for all zodiac signs. The Ox year of 2021 is under the influence of the metal element, just like the Year of the Rat 2020. This year predicts new career opportunities, so don’t let anxiety or negative thinking affect you”.
Asia ex-Japan markets have certainly taken that last sentence to heart in the home stretch of the year of the Rat, and are welcoming the year of the Ox by completely ignoring investors’ rapidly declining risk appetite. The chart below shows the cumulative return of the STOXX Asia/Pacific 600 ex Japan index (black line) and Qontigo’s two ROOF sentiment indicators1, the Style ROOF (blue line) and the Sector ROOF (green line), from the start of 2020 through to January 29, 2021.
The chart shows a strong deterioration in investor sentiment for both of our ROOF Ratios (blue & green lines) since late December 2020, on the back of rising new COVID-19 infections around the world and renewed social distancing measures and lockdowns to stop it. 2021 started with sentiment falling out of the bullish zone (area above the green horizontal line at +0.5 on the left axis), rapidly crossing through the neutral zone (area between the two horizontal lines between +0.5 and -0.5 on the left axis), and ending January with the Sector ROOF ratio in the bearish zone (area below the red horizontal line at -0.5 on the left axis), with the Style ROOF ratio chasing it down. Yet, since sentiment peaked in the last week of December following the November news of multiple vaccines becoming available, the index has risen by an additional 5% in complete denial of investors’ deteriorating risk appetite, leaving markets exposed to a big “I told you so” moment if an unexpected negative risk event comes along.
With the Chinese New Year holidays and the US earnings season winding down, this negative risk event is likely to come from the geopolitical spectrum rather than another GameStop-type saga or big earnings miss from one of investors’ pandemic darlings. At the top of that list is the US-China relationship, both on the trade and regional security (i.e., Taiwan) front.
The table below reports the style factor returns in the Axioma Asia Pacific ex-Japan medium-horizon fundamental factor risk model (APxJP4-MH). The top half of the table breaks down the factor returns for Q4 2020 and the bottom half for the full year 2020. The bottom two rows in each half compares the recent period with the long-term average (LTA) covering the full history of our model back to January 1997: first in terms of standard deviation from the mean (“standardized”) and second in terms of the recent value’s rank within that history (“Rank”).
A few things standout from this data. During the year of the Rat, investors literally bet the farm on Growth with the 2020 Rank hitting 100 in our full history going back to January 1997. Other bullish bets were made on Market Sensitivity (96 Rank) and to a lesser extent, Volatility (88 Rank). So, it seems that in 2020 the Rat’s personality traits of resourcefulness, quick wit and opportunism were well rewarded.
Looking ahead to the year of the Ox, at these market levels investors will have to rely on its strength, patience, courage, and calm, and less on its stubbornness to successfully navigate through the rough seas of a deteriorating geopolitical environment. The positives for the economy are all long-term – vaccination, an end to rising new infection rates, détente between the US and China, and a return to a pre-COVID-19 redefined normal towards the end of the year. All these forces will take time and patience to implement and take effect. To come out ahead in 2021, be the Ox, forget the Rat.
Please visit our blog on a performance analysis of all STOXX China indices.
[1] Style ROOF Methodology can be found here, and Sector ROOF Methodology here.
