Relative trends in the Asia-Pacific region look troubling

Key points:

• Not a single Asia-Pacific country ETF outperformed the S&P 500 over the last three months 
• Similar relative performance trends did not bode well for absolute returns for the MSCI Asia-Pacific Index
• When relative trends are weak over a three and twelve-month period, index returns are even worse

Poor relative trends tend to foreshadow weak absolute returns

In a previous note from February, I highlighted a deterioration in several breadth and price momentum indicators for the Asia-Pacific region, which suggested a cautious outlook. While the MSCI Asia-Pacific Index did not decline on an absolute basis, it did underperform the S&P 500. 

I'm now seeing relative performance trends in the export-driven manufacturing region take a turn for the worse. Over the last three months, not a single Asia-Pacific country ETF outperform the S&P 500. 

When fewer than 5% of Asia-Pacific country ETFs outperform the S&P 500 over three months, the MSCI Asia-Pacific Index shows an annual return of -15%.

The Asia-Pacific region looks weak relative to other areas around the globe, especially Europe, which I highlighted in a recent note.

Similar relative performance trends preceded negative returns

When not a single Asia-Pacific country ETF outperforms the S&P 500 over three months, the weak relative performance tends to presage an unfavorable outlook for the MSCI Asia-Pacific Index over the next one to three months. Since 2008, 14 out of 15 signals showed a negative return sometime in the next few months.

Given that only 28% of Asia-Pacific country ETFs outperformed the S&P 500 over a rolling 12-month period, let's add that condition to the original parameters for further context. However, I'll raise the 12-month threshold from 28% to 50% to capture more precedents.

When the percentage of ETFs outperforming the S&P 500 is weak over three and twelve months, all is not well in the export-driven manufacturing region. Forward returns for the MSCI Asia-Pacific Index look even worse in the one to the three-month horizon.

What the research tells us...

Relative performance for Asia-Pacific country ETFs have taken a turn for the worse. After similar periods of relative underperformance versus the S&P 500, the MSCI Asia-Pacific Index struggled over medium-term time frames. The outlook for the region is even worse when relative performance is weak across several horizons, like now.