This post has taken a little time, and won’t be complete at first posting. It is a complement to the post yesterday, on my general December forecasts across large parts of Asia. Get in on the festive forecasting fun already!
I will here outline the basis of the forecasts I am making, where the divergence spread on different indices will come from and a few other nice-to-knows about the forecasts/guesses I’m making. I will, of course, also include a summary here of the forecasts for easy reading, and look forward to seeing comments on either post for your own 2014 year-end forecasts!
Let’s get to it after the jump!
- Nikkei 225: 18 150
- TOPIX: 1 469
- JPX Nikkei Index 400: 13 600
- USD/JPY: 120.30
- EUR/JPY: 149.50
I think the Nikkei 225 is set to rise roughly 4% from the November close, largely off the back of stimulus, momentum and having the election. The Nikkei has also shown a late November tendency to outperform the volatility-adjusted USD/JPY rate, and I expect that tendency to be carried forward into December. This would thus floor my expectation at 2.5% increases in the Nikkei 225 at the very least, and with added increases of imports from Japan by China that I think are reasonable in December on YoY basis, the extra cash will really help drive Japan’s performance by 0.25-0.5%. I am also expecting between 3% and 5% increases in domestic cash balances, which after filtering through to the GPIF and other funds will disproportionately be invested in equities that a quick Fermi-style estimate says will add roughly 1% to index values, and then rounding up to a little nice and round number.
The same approach is essentially copied and pasted for the TOPIX, while the JPX Nikkei Index 400 gets a further 1% premium as I expect dividends and share buybacks to be disproportionately valued now after the futures on this index are out and major investment players like the BOJ and GPIF are actively investing in the index. Given the small market tracking this, extending the market means that there needs to be quite a lot of shifting around of Japanese stocks, where momentum already rules, so the added capitalization plus extra cash inflows will have an outsized effect here, and while that is incredibly difficult to forecast, I simply put it at a nice, round number.
On the currency market, my USD/JPY forecast reflects three things: my long-standing bet that the yen has a trade range around 118.18 – 121.85 to the dollar, that the current momentum in the market is big enough (especially after Abe really starts running his mouth) to cross the 120 level, and finally that the momentum is not big enough to drive the pair significantly past important levels like 121.9. The forecast puts my bet in the middle of this range which is simply to reach the best hedging I can get: there is a rather strong probability that we cross 120 but that traders trade the rate back down below, (I estimate it at more than 50%) while if we cross significantly (daily/weekly close) then seeing a rate closer to 121.5 does seem more reasonable from momentum. Similarly, I don’t really expect a EUR/USD rate of 1.22 as my EUR/JPY guess would imply, but I think that one of these currencies going up against the yen is rather likely. Given the USD/JPY technical analysis the more likely one to do it would be the euro, although it would break the most-likely estimation I find in either currency. It’s simply another level of insurance, to get lower total errors in my forecasts.
- Taiwan TAIEX: 9 450
I forecast Taiwan’s TAIEX to increase by 2.5-3% thanks to the China imports effect working together with closing books, and there isn’t really too much more to that. I’m prepared to be spectacularly wrong here. Ma Ying-jeou’s political problems will probably lead to a lot of debate, which can either result in him trying to stoke markets being a main effect, or the risk of China policy backtrack implying that markets sell off as the opposition party seeks debate, making this index one of the more difficult to estimate. Add in the spectacular levels of volatility that exist in the Taiwanese market (these people love to gamble, trust me!) and this is probably the index I will be most wrong in versus how much I should know about the market!
- KOSPI: 2 044
- USD/KRW: 1 140
- JPY/KRW: 9.65
3% increase in the KOSPI seems like par for the course if exports to China are anything to go buy. This number is higher than that of the TAIEX partially from a similar momentum expectation on the USD/KRW (pure extrapolation on that one), and partially because of the December effect. I think this might be priced in, and the KOSPI really has had a problem gaining significantly for a while, with growth in Japan really throwing a wet rag both on sentiment and on the Korean competitiveness globally. That is why I’m not giving a premium on currency weakness, but essentially playing it proportionally on par with 3% vs. 2.7%. As I believe the Japanese yen will not go down much further past 121 (to an 80% confidence), and that the BOK will keep the rates from diverging too much in the biggest export months, I do expect the Korean won to weaken against the yen. Using the USD/KRW extrapolation, plus the JPY/KRW rate and my assumptions on top makes me very comfortable with a 9.65 call for the JPY/KRW pair.
- Hang Seng Index: 25 088
- Hang Seng China Enterprises Index:11 645
- Closing Aggregate Balances: HK$280 billion
- Monetary Base: HK$1.39 trillion
- NBFI holdings of OEFBNs: HK$73.8 billion
- For fun (not counting towards the total tracked):
- Days of Northbound trading full use on the SH-HK Stock Connect: 4
- Biggest daily turnover on the HSI: HK$95 billion
- Biggest daily Southbound trading quota use on the SH-HK Stock Connect: RMB5 billion
This is a doozy, let’s get into it piece-meal.
The major drivers here will be an expansion of the monetary base. First of all, the cash that circulates through the economy will be higher in December thanks to Hong Kong retailing, and then expand again in January and February as the Chinese shopping season really gets underway, so there’s no reason to get cash deposited into the banks long-term. I think this might increase the Certificates of Indebtedness (cash in HK$20 and above denomination bills) to somewhere around HK$350 billion, from around HK$340 billion now.
As Hong Kong looks like an attractive investment area thanks to broader increases in turnover and the Chinese link through the Shanghai – Hong Kong Stock Connect, the investments from overseas into a market that normally goes up by about 4% in December and is tied to the strong US dollar will be too juicy to resist, and thus the HKMA will need to pump roughly HK$40 billion into the interbank system on the month, showing up in Closing Aggregate Balances, starting at almost the first sign of HK$ strength. In total, the monetary base would thus expand by roughly HK$50 billion, which would put the total base at HK$1.39 trillion.
This extra cash is likely to find its way to the Hong Kong markets in irregular bouts, with non-bank financial institutions will look to be more heavily invested in the market. They will thus be lowering the liquidity needs they soak up from the HKMA to below the HK$75 billion mark, estimated all the way down to HK$73.8 billion thanks to the CAB inflow effect. It isn’t bigger since I think the level here is very, very low by historical standards, and these financial institutions might start getting a bit antsy if volatility remains elevated.
With these estimates, the monthly increase in the HSI has to be floored by at least the average. From a mark of 23 978 that it closed on last Friday, that would imply a value of 24 876 or above, and I would be very surprised if the market didn’t add at least 1% more with expectations of monetary base expansion. I think the peak will be somewhere around 25 400, but that this might be rejected by more than 1% and force the year-end price into a range of 25 000 to 25 200.
The HSCEI simply gets a China premium of 1% off “feeling” and the expectation that momentum will help this market break higher and find support faster, but the clustering of consecutive peaks will probably hold it back from true sprints higher, and thus an appropriate peak to “rest” below was found at 11 645.
My fun-forecasts are simply that, and we can already see that the turnover bet has been cracked, so please feel free to forecast a top of HK$105 billion! This was largely made off an expectation of no major policy decisions like the People’s Bank of China reference rate cuts, which would mean that major volume drivers would be rather scarce.
- Shanghai A-Shares Top 50: 8 850
- Shanghai Composite: 2 880
- For fun – Biggest turnover on the Shanghai Composite: RMB500 billion
Seeing an increase of 4.7% for the A50 didn’t seem difficult at all, given that the policy stance was expected to be accommodating in China, and a number of different Fibonacci levels would keep resistance there pretty well. So, yeah, my jaw hit the floor today when the A50 went from 8 400 to 9 038 (!), a 7.6% (!) swing! I would have expected small-cap risk to be the name of the game, and Chinese investors to flee the major investment targets that Hong Kong investors will have an easier time targeting and researching as these get more overvalued, leading the broader Shanghai Composite to outperform the A50. Currently though, my forecast differentiation looks as wrong as can be! Expecting the Shanghai Composite to hit 2 880 (+200 points from November close, up 7.4%) seems a lot more reasonable now, with prices up 84 points in one day, just leaving 116 on the table for the rest of the month.
It feels really crazy to forecast a drop by 1.15% in the A50, but old calls are old calls. I won’t short the A50, but I won’t alter the expectation either. I’ll let my markers of shame hang over me, doing so at least doesn’t cloud my achievements. The turnover call still stands, but I wonder for how much longer…
Australia and India: (to be updated)
- ASX200: 5 520
- SENSEX: 26 820
- USD/AUD: 0.8560
- USD/INR: 65.650