A round of corrections has set back many markets. Fears over a double dip recession resurfaced due to weaker US economic data. My view is that these fears will eventually blow over, especially as the earnings of companies continue to improve despite the fears. No one should be surprised that US’s economic recovery is a slow one. The blow they took during the Lehman Brother’s financial crisis and a decade of overspending will take time to recover. That doesn’t mean good companies can’t continue to make money in this kind of environment. And it doesn’t mean Asia and the rest of emerging market economies can’t continue to grow either.
I see such corrections as opportunities and if things go lower, I will certainly be looking to add to my holdings. In fact, I myself did not take advantage of opportunities during the Europe Financial Crisis that occurred in the 1st half of the year. Europe was crashing, along with the Euro. I said in this blog that opportunities should show up. Fundamentally, it shouldn’t be a uniform crash because not all European countries and companies should be affected to the same degree just because of Greece, Spain or even the overall European financial sector. Yet, while I did not sell off my European funds, I did not average down or rebalance into them either although they surely fell far more than my Asian equity funds. Europe equities and the Euro has rebounded now, with the top performing funds over the last one, two months mostly all being European equity funds. Oh well, opportunities like these do slip by, but there will be more.
Once a typical country or region’s stock market has fallen in the tune of 30%, there must be bargains somewhere. A typical country’s economy will surely bounce back after any sort of crisis. It could be from a financial crisis, recession, overexpansion leading to bad debts, but once the shock and selloff has occurred already, markets typically do come back. There are many examples of big selloffs in history, from the Asian financial crisis, Lehman Brothers in US, Black Monday, Oil crisis, but if you had invested after the markets had already dropped 30% or more and remained patient, after two or three years, there’s a very good chance you would be sitting on good gains. The key is to be patient. Even if in the short term, the market remain volatile, you are already getting in cheaper by 30% compared to before the crash, the odds are going to be strongly in your favor as long as you are patient.
One market that has been hit badly only just this year is the China Shanghai index. This market is currently down 25% year to date. Since July 2009 last year, it was down 36%, and yet, July 2009 wasn’t even its all time high. The global uncertainty, especially in the aftermath of the European Financial Crisis plus China’s very aggressive tightening has caused the huge drop. But we are talking about one of the most important economies in our times, and few people would say that China’s economic growth story is over.
The key thing holdings us back, and I confess I get affected as well at times, is the fear of whether a drop will continue. At the peak of the US financial crisis, when Asian markets were down 50%, how many of us would have dared to average down, or invest more. The overall investor mood at this point in time remains a very cautious one. This is despite positive news from many Asian countries and strong earnings growth from many Asian companies. But this means valuations at this point in time are attractive. The Shanghai market, for example, is currently trading at just 15 times PE, near to an all time low.
I am confident that the world will move on from its current problems. Even in US, or Europe, which many of the investors here are inclined to avoid at this stage, there remain many good companies. These will not be held back despite a slow recovery in the US or in Europe. And Asia will forge ahead. However, being diversified is going to be more important going forward because markets will likely be very volatile as investors grapple with double dip recession fears against the continuing improvement of corporate earnings. I am currently very comfortable with my current allocation, and looking to add to my holdings where opportunities might present themselves.
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