- Global equity markets have tumbled over the past week on negative news and sentiment. Most markets under our watch have not seen a drastic change in fundamentals to match the sharp drop in their prices
- Know the difference between price and value
- Developed markets remain relatively less attractive compared to Asian and Emerging markets in the form of forecasted returns
- Asia ex Japan and Emerging markets have borne the brunt of the down move. Cheap valuations have been made more attractive. A valuation driven approach should be looking to pick up good assets at low prices rather than selling at stressed prices
- A diversified portfolio should help cushion volatility and drawdowns in time like these. It’s never too late to begin diversifying into cheap markets and getting value at low prices!
Global equity markets have dropped sharply over the past week on the back of negative news headlines (some perceived) such as China's depreciation of its RMB, heightened tensions on the Korean Peninsula and multi-year lows in crude oil. While sentiment has fallen off a cliff and markets have reacted in typical knee-jerk fashion (Chart 1), we do not see any material deterioration in the underlying fundamentals of the markets under our coverage.
Chart 1 - How Much Have Markets Dropped In A Week?
To compound matters, as of the time of writing (1300 hours GMT +8), Asian equities are selling off; China onshore equities are shedding a further -8.8%, Hong Kong's Hang Seng Index dropping -4.7% and the Singapore equity market is losing -3.8%.
While we've seen the prices of markets come down (some rather significantly), it is important for investors to know the difference between price and value. For example, while the US and Europe equity markets might have dropped in price, on a valuation basis, both regions are still not as attractive as those from the much maligned Asia ex Japan (chart 3) and Emerging market equity space which has seen already attractive valuations made even more attractive.
Chart 2 - 2017 Forecasted Annualised Returns
Chart 3 - Star Ratings & Forecasted Returns
Chart 4 - Asia ex Japan Still Looking Good
With many of our attractive markets now offering even more value at discounted prices today, investors should not panic. Rather, investors who have faith in a valuation driven approach should be looking to pick up good assets at low prices rather than selling at stressed price. While we do not know how much further markets may fall (if at all) or when they will turn around, investors with the requisite risk appetite might wish to seize the opportunity to invest in the more attractively valued markets with the knowledge that valuations have been beaten down due to the recent market turmoil and have likely priced in a decent chunk of the various worries that financial markets are currently fixated on. The famous adage of buying when there is blood on the streets and panic rules the markets (assuming fundamentals remain intact) appears to be apt in the current situation global equity markets are facing.
While equities have been made more attractive due to the recent correction, it is important for investors not to neglect the fixed income aspect of their portfolio for it is often in times of such volatility as seen today that the benefits of a diversified portfolio are apparent. Rebalancing and diversifying one’s portfolio is always a prudent exercise, and the market environment today is no different. Investors who have been underweight fixed income might wish to rebalance their portfolios to help them ride out some of the volatility currently afflicting the equity space, while those who have been underweight equities could seize the opportunity presented to top up their equity exposure at attractive valuations.
The current sell off seen today in the Indian market is on account of the global turmoil. As far as India is concerned, our macro-economic indicators like GDP, inflation, fiscal deficit and current account deficit are moving in a positive direction. The falling oil prices will definitely add to the positivity that we are already seeing in the macroeconomic data points. Although there is a concern on the currency front, the RBI's decision to use the foreign exchange reserves to combat this crisis is a step in the right direction. We also believe that the baby steps that the government is taking to improve the different sectors of the economy will lead to a recovery in the earnings of Corporate India. In this scenario, we advise our investors to stay calm and continue with their SIPs and also invest into equities via the lump sum.