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Outperformance in cyclical theme play is likely to persist

Outperformance in cyclical theme play is likely to persist

The rotation into US cyclical/value and small-caps stocks has been reinforced, as seen in the performance of the major US benchmark stock indices yesterday, after the Senate flipped towards the Democrats after the Georgia run-off election.

The Dow Jones and Russell 2000 are heavily weighting towards cyclical/value stocks, and US domestically small-caps stocks respectively recorded stellar gains of 1.44% (30,829) and 3.98% (2,057) that pushed them to more fresh record all-time highs. In contrast, indices that have significant weightages in big tech stocks (Facebook, Apple, Amazon, Microsoft, Google) underperformed; the Nasdaq 100 dropped -1.40% (12,623), while the S&P 500 rose +0.57% (3,748).

All three branches of the US legislation (presidency, House and Senate) are now under controlled by the Democrats, so market participants now are looking ahead for more potential fiscal stimulus packages being improved (which benefits cyclical and domestically-oriented value small-cap stocks), while the push for anti-trust measures against US big bech may gain more traction in Congress. Also, the sell-off in the Nasdaq 100 dragged down the rest of the broader technology sector; semiconductors (SOXX) fell -0.32%, cybersecurity (HACK) dropped -0.51%, cloud computing (CLOU) fell -2.87%.

The latest US Federal Reserve minutes indicated that Fed officials supported providing advance notice before the Fed makes changes to its $120bn in monthly bond purchases ($80bn in treasury bonds and $40bn in mortgage-backed securities). In addition, officials believe any changes in the pace of bond purchases will not be based on “specific numerical criteria or thresholds”, which reiterated that the Fed is willingly to let inflation 'run hot' for a while before altering the direction of its monetary policy. In a nutshell, the latest Fed minutes indicated a dovish Fed that is not in a hurry to turn off the 'liquidity tap'.

Meanwhile, the out-going Trump administration is considering adding China’s big tech firms, Alibaba and Tencent, into a blacklist of Chinese companies that are allegedly owned or controlled by the Chinse military, the same treatment as several Chinese telecoms and oil firms. If such a proposal materialises, Alibaba and Tencent shares are likely to be delisted from US stock exchanges and also removed from global benchmark indices compiled by S&P, FTSE and MSCI. Shares of Alibaba and Tencent traded in the Hong Kong Exchange recorded losses of -4.26% and -3.52% respectively at the time of the writing. Also, the Hang Seng technology index declined by -2.77% from its current all-time high close of 8,609, recorded yesterday.

Most Asian stock markets are having a positive feedback loop from the outperformance of US cyclicals and small-caps; Japan’s Nikkei 225 is up +1.85% (27,560), South Korea’s KOSPI 200 is higher by +2.45% (411.80), China’s CSI 300 is up +1.01% (5,472), the Hang Seng index is slightly higher at +0.10% (27,660), Australia’s ASX 200 is up +1.78% (6,725), and finally, Singapore’s STI is up +1.31% (2,900) at the time of the writing.