Charts of the Day - November 9, 2022: An equities come-back !



The S&P 500 breaks above its 50-day moving average.

The recent rally in equity markets has brought the S&P500 index back above its 50-day moving average (dotted green line) again, as the previous attempt at the end of October failed. It is interesting also to note the triple bottom at around 3500, which is marked with the yellow circle. These are positive technical developments for the short- term.

If one adds the fact that the period until the end of the year, especially in a mid-term elections year, is usually positive, we could see a continuation of this move to higher levels. Trying to find where the index might eventually stall and potentially trigger a decision to reduce positions, we would say that the 4000-4050 levels should provide significant resistance for now. These levels coincide also with the dotted grey line which marks the 200-day moving average. Were the index to move into this region it still represents a 6% potential gain from current levels and almost 15% higher from the lows.


The Euro Stoxx 50 has broken out of its 200-day moving average.

The technical picture of the Euro Stoxx 50 index, which consists of companies headquartered only in the Eurozone, is even more positive. Having broken its 50-day moving average in mid-October (green dotted line), it broke out of its 200-day moving average this week (grey dotted line). Of course, if the US markets start correcting again it would be almost impossible for the European index to move higher, but it could definitely outperform (fall less). The 4000 level looks attainable, ie almost 10% higher from current levels.

On September 30th, we issued a brief report on the Euro Stoxx 50, titled "Not as junk as people might think " (feel free to ask for a copy from your relationship manager). This report highlighted the attractive valuations of some of the best-in-class companies in this index, which also share high quality characteristics : solid balance sheets, positive cash flows, growth potential, strong management teams etc. Coincidentaly, that date was the low of Eurozone equities, which are up about 14% since then. We maintain the view that one cannot ignore the fact that a lot of bad possible outcomes for Europe (deep recession, energy crisis etc) have already been discounted to a great extent in the prices.


Hong Kong' index has never been cheaper.

This is the chart of the Hang Seng index, which tracks the share prices of primarily Chinese stocks listed in that stock exchange, for the last 20 years. The blue line is the actual index level, while the dotted green line is its valuation as measured with the Price-to-earnings (P/E) ratio.

Trading at just 8 times its forward earnings, the index has never been cheaper. In the first half of this century, which was "the era of Emerging Markets and Asia", the index had reached a peak valuation of 22 times earnings. In the years of the great financial crisis and the Eurozone problems (2008-2012), the index was still trading at around 10 times earnings, which is 20% higher than today's levels. In the last few years and before the pandemic, the index had achieved valuations of around 12-15, which means 50-100% higher from today's levels. Make no mistake. When the Covid19 restrictions start to be relaxed in the coming 3-4 months, Chinese equities should offer ousized returns, perhaps in excess of 40-50% in a 12-18 month period. Of course, a major geopolitical event will negate this scenario. But it is no surprise that the index has moved up by almost 15% in a matter of two weeks, as investors are bargain-hunting.



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Sources of the charts : Factset, if not otherwise mentioned in the chart.