Research Summary
The report provides an analysis of the 2023 global equity markets, focusing on the performance of Mexico and Japan. It discusses the shifting momentum in these markets, the improving liquidity backdrop, and stretched sentiment/positioning. The report also highlights the performance of specific stocks such as Grupo Carso and Nintendo.
Key Takeaways
Performance of Global Equity Markets in 2023
- Nasdaq’s Leadership: Nasdaq emerged as the leader among global equity markets in 2023, with Mexico and Brazil taking the 2nd and 3rd spots. The Dow also had a strong performance, finishing as the strongest major US equity index from a technical point of view. China, however, was the big loser, returning -11.5% on the year.
- Momentum Shifts: A closer look at the 3-month return shows a shift in momentum, with Brazil and Mexico taking the top two spots. The report suggests that Mexico (EWW) will likely maintain its strong relative performance and trade higher in the coming year.
Significant Changes in Mexico’s Market
- Breakout from Long-term Consolidation: The Mexican peso has broken out from its 20-year downward channel versus the USD, indicating a significant change in the market. The EWW also broke out from a 7-year sideways consolidation range, suggesting a lot of coiled energy to drive the trend higher over the next few years.
- Top-performing Stock: Grupo Carso, a large industrial/infrastructure company, was the top-performing stock in EWW last year. The report suggests that stocks like this will be good buys once the current parabolic move ends and a multi-week/month pullback occurs.
Japan’s Market Outlook
- Strong Yearly Chart: Among the major equity markets globally, the Nikkei 225 index has the strongest yearly chart. Despite Japan being a popularly attractive market, the report suggests that it will take years of strong relative performance to turn the narrative pendulum and investor flows to a point that more reflects the new reality.
- Outperformer Prediction: The report predicts that Japan will be an outperformer in the years ahead. Nintendo, in particular, is highlighted as a stock to watch, with a strong bullish thrust from a sizable base.
Improving Liquidity and Stretched Sentiment/Positioning
- Improving Liquidity: The MO Liquidity indicator turned positive for the first time last summer and continues to surge higher, indicating an improving liquidity backdrop. With inflation falling and Powell unwilling to rock the boat in an election year, conditions are expected to stay relatively easy for the foreseeable future.
- Stretched Sentiment/Positioning: The report notes that major US Index average fund flows have now spiked to Dec 21’ levels. However, the eventual correction is expected to be a retrace within a broader primary bull trend.
Actionable Insights
- Monitor Mexico’s Market: Given the significant changes and the breakout from long-term consolidation, it would be beneficial to closely monitor Mexico’s market and the performance of stocks like Grupo Carso.
- Consider Japan’s Market: With the strong yearly chart of the Nikkei 225 index and the prediction of Japan being an outperformer in the coming years, it would be worthwhile to consider the Japanese market and stocks like Nintendo.
- Track Liquidity and Sentiment/Positioning: As the MO Liquidity indicator continues to surge higher and major US Index average fund flows spike, it would be prudent to track the liquidity backdrop and sentiment/positioning in the market.
