It’s the kind that catches people by surprise. There isn’t any particularly earth shaking news happening. People are busy watching the world cup, and volume is very low everyday in the stock market. Yet, markets are quietly rallying. However, if I mentioned which regions had the biggest rallies over the last one week, I think many people would be taken by surprise by the answer.
Its not Asia, though Asia has rallied as well. The biggest rallies have been seen by the European region. Many European equity funds have rallied 7 to 10% over the last one week (as at 17th June). Granted that they were the most badly hit over the last six weeks and many are still down 10 to 15% even after the rally these few days. However, my point is that often, these rallies sneak up on us before we even realise it.
Is it time to start to look for bargains in Europe now? The biggest bargains happen after the biggest crashes. The bigger the crash, the more bargains there are. And certainly, what Europe has just gone through over the last 6 weeks wasn’t a mere correction. There was real panic in the markets there. I believe most investors here avoided being hit too badly as most were severely underweight Europe (including me). But now that Europe has been bashed down, and is showing signs of stabalising, is it time to look for bargains?
But has Europe’s problems been solved? Definitely not! They are in for more pain in the days ahead, particularly for the countries that have run up large deficits and are now struggling to control them for fear of being singled out and cruxified in the bond markets (if they haven’t already). But a key thing to note about stock markets is that you can’t wait until everything has cleared and blue skies are out. By that time, the first stage of the rally would have largely passed you by, and that often has some of the biggest gains. So similarly for Europe. Its problems are not going to be solved within a few weeks, however, has the European equity market already factored in most of the bad news?
We have to remind ourselves, the global economy is actually still in a recovery mode, and in actual fact, many of the European countries are forecast to see some sort of recovery this year as well, including Germany. Furthermore, the primary culprit of the financial crisis that erupted there was Greece. Even if you include some other problematic cases like Portugal, even Spain, it does not add up to the whole of Europe. Europe is far bigger than just Greece, Portugal and Spain.
One problem with investing into Europe is that if the Euro continues to fall further against the Sing dollar, they would reduce gains even if its stock markets went up. But again, the question is whether a lot of the bad news has already been factored into existing decline in the Euro already. It has already fallen by 15% against the Sing dollar since 6 months ago. That’s a massive drop considering it such a core important currency. Also, the drop in the Euro would have made Europe’s exports cheaper.
Since I already have some holdings in Europe, I am content to wait and monitor further at this point. But if the main economic data flowing out from UK, Germany, France remains positive, then Europe would soon become more and more interesting as a place to look for bargains.
Of course the European financial crisis affected all markets, and emerging markets, including Asia also took a hit. So, valuations are cheap there now as well. In fact, After European funds, the next best performing funds in the past one week are the emerging market equity funds. It is too soon to say that these will lead the rest out of the pack as the rebound in markets take hold, but given that markets have just started to stabalise only last week, its all the data we do have at present.
Ultimately though, investing is about being patient, and having the guts to ignore emotions of fear when the markets are crashing, and similarly, to get cautious about being greedy, when markets are booming. We don’t have to always get it at the exact low point (that is often impossible). On a fundamental basis though, with Asian exports continuing to look healthy (Singapore’s latest NODX numbers were great), there is reason to be optimistic. It doesn’t feel like that coming off the last few weeks of volatility, but I strongly believe that in the end, valuations are more important. And valuations of many equity markets are cheap right now. Even Asia, with its highest growth, is trading at only 12 times PE, and some countries within Asia are even cheaper. No doubt if we looked hard at Europe and broke it up into different countries, we would probably turn up a few very cheap markets as well.
I wish I had more investible money at this point, but most of it is already invested! Anyway, I will end off by saying that I am excited currently and looking to see where there might be bargains. I believe that daring to enter now (or at least soon) will reap bigger rewards than waiting too long. I have also just updated my holdings online. I apologise that I haven’t updated them under my profile, so those who are interested can see how I am currently positioned. (And yes, I do have both European equity funds and Latin American equity funds at this point in time).
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