In traditional Chinese medicine, different body constitutions react differently to the environment. Those with Yang deficiency lack the “hot properties”. They are advised to keep warm and avoid cold foods. Those with Yin deficiency lack the “cold properties” and often have sweaty hands and feet, dry eyes and dry mouths. They need to drink ample water and eat more “cooling” foods.
We can apply Chinese medicine theories to investment. Just as everyone has a different set of physical traits, each country has different geography conditions, economic development levels, and political systems. These factors drive stock market trends differently.
Take Indonesia and Malaysia as examples – both countries are relatively rich in natural resources. When commodity prices rise, national income increases and so does domestic capital, which is good for the stock market. Statistical data shows that half of the movement in the Indonesian Composite Index (IDX, calculated in US dollars) can be attributed to changes in global commodity prices.
A weak US dollar typically represents a relatively loose monetary policy in the US, which benefits the global capital flows and emerging markets. But the data analysis indicates that only 19% of the changes in the IDX can be attributed to the move in the US dollar Index, far less than the 50% impact of the global commodity prices.
As for Malaysia, 66% of the changes in the Kuala Lumpur Composite Index (KLCI, calculated in US dollars) can be attributed to the move in international oil prices alone, which is higher than the impact of global commodity prices. The move in the US dollar Index also contributes to 33% of the changes in the KLCI. However, if we put the US dollar Index and the oil price together, the combined impact on the KLCI is no greater than the oil price alone.
India is the world’s second-largest oil importer after China. But over the past 12 years, its stock market has been less correlated with oil prices and more influenced by capital flows. Most of the changes in the Indian stock index can be attributed to the move in India’s foreign exchange reserves. Foreign exchange reserves are an accumulation of a country’s total net capital inflows. For most of the past decade or so, overseas capital inflows to India have not only covered the trade deficit but also increased its foreign exchange reserves. As such, it would be beneficial to the Indian economy and stock market if India could continue to improve its infrastructure and regulations to facilitate the capital inflow from foreign investors.
As for the Chinese stock market, its “body constitution” is more interesting. Studies have shown that the Shanghai stock market is not much affected by economic data, but we can still see a correlation for two reasons. First, statistics has its shortcomings. Analysis requires a fixed interval of data. However, the high level of retail participation in the Chinese stock market may lead to more volatility, pushing the stock market away from economic fundamentals in the short and medium term. That could affect the performance of data analysis. Second, the Chinese stock market is more government-policy-driven and may move differently from the economy.
If we simplify the data analysis and look at the direction of change instead of the magnitude of change, there is a statistically positive correlation between the PMI and the direction of change in the Shanghai stock market. However, the credit impulse and the direction of the Shanghai stock market just fall short of the statistically significant relationship within the 95% confidence interval required.
By understanding the unique “body constitutions” of each market, there are good chances that investors could improve their investment performance.
This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.
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