To Buy The Dip In Stocks Or Not To Buy, That Is The Question

(Bloomberg) -- Global equities are motoring toward yet another weekly loss, the third in a row, leaving investors facing the age-old question -- buy the dip, or get out before it gets worse.

On the surface, there’s not a lot of cause for optimism in Asia or elsewhere. The MSCI Asia Pacific Index is down 1.3% this week, slightly beating the 2.4% loss in the MSCI All-Country World Index. Still, the global benchmark is hanging on to a 9% gain for the year, while Asia stocks are up less than 3%.

Negative factors this week include the ongoing protests in Hong Kong, putting the squeeze on the city’s economy and finances, while China readies retaliation against looming U.S. tariffs after arguing they violate accords reached by Presidents Donald Trump and Xi Jinping. Meanwhile, yield inversions continue to pop up, stoking fears of a global slowdown.

So in sum, there’s plenty of pessimism to go around. Yet when it comes to whether this truly signals the end of the equity bull market, opinions among analysts are a bit more mixed.

“Our bear market checklist is telling us to buy into this dip, just as it did in 2016,” analysts at Citigroup Inc. said in an Aug. 15 global equity strategy note. “Our framework suggests that it is still too early to call the end of this 10-year bull market.”

There are currently only 3.5 red flags waving across 18 market indicators in Citi’s checklist, including the inverted U.S. yield curve, rising credit spreads and leveraged balance sheets, compared with four red alerts in February 2016. After bottoming out in mid-February 2016, global stocks ended up rallying almost 20% the rest of the year.

By contrast, there were 17.5 red flags at the 2000 peak, and 13 of 18 flashed in 2007. In both cases, global equities followed that up with losses of more than 50%, the analysts said. Other variables include equity valuations, market sentiment, activity in the mergers & acquisitions and initial offerings markets, as well as profitability and balance sheets.

“Other signs of traditional end-cycle excess remain notably absent” this time, the Citi analysts said.

UBS Group AG strategists Francois Trahan and Samuel Blackman adopt a more cautious approach, noting that the combination of slowing economic indicators with other factors such as the earnings outlook and interest rates suggests a risk-averse market environment.

“With the equity market about to enter the risk-aversion phase of the cycle, we would label the risk-reward of buy-the-dip as being extremely poor at this stage,” the strategists said in a note to clients Tuesday.

Stock Market Summary

• MSCI Asia Pacific Index ex-Japan up 0.3%
• MSCI Asia Pacific Index up 0.2%
• Japan’s Topix index up 0.2%; Nikkei 225 little changed
• Hong Kong’s Hang Seng Index up 0.8%; Hang Seng China Enterprises up 0.8%; Shanghai Composite up 0.7%; CSI 300 up 0.9%
• Taiwan’s Taiex index up 0.8%
• South Korea’s Kospi index down 0.8%; Kospi 200 down 0.7%
• Australia’s S&P/ASX 200 little changed; New Zealand’s S&P/NZX 50 down 0.5%
• Singapore’s Straits Times Index down 0.8%; Malaysia’s KLCI down 0.5%; Philippine Stock Exchange Index down 0.2%; Jakarta Composite up 0.3%; Thailand’s SET up 0.6%; Vietnam’s VN Index down 0.2%
• S&P 500 e-mini futures up 0.6% after index closed up 0.2% in last session

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Kurt Schussler

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