News about recent sharp falls in financial markets around the world have been dramatically documented in the media under headlines referring to “Black Monday”, “the worst-ever decline”, “a US$5 trillion rout”, and “the rand plummets to a new all-time low” against the US dollar.
It is enough to unnerve any investor, so it is reassuring to hear that asset managers were expecting a market correction, don’t foresee the end of the investment markets as we know them and, in fact, are seeing opportunities to buy into markets at lower prices (see “No bear – just a ‘market correction’”, below).
Long-term investors need to remember that short-term movements are “just noise”. A financial plan that sets out your investment goals and an appropriate strategy to achieve it is a good anchor that will ensure you aren’t at sea in the market storm.
A good financial plan should not only match your investments to your needs and investment time horizon, but also prepare you for the potential losses you may suffer over the shorter term.
If the turmoil in the markets and the effects on your investments was way too scary for you, you may need to revise your goals and your strategy, and give some thought to seeking shelter in investments with what is known as downside protection, as the volatility is likely to continue (see “How to deal with risk in your portfolio”, link below).
Steven Nathan, the chief executive of 10X Investments, warns against making irrational investment decisions based on your emotional reaction to market volatility.
“Despite our best intentions and our awareness of market cycles, investors place too much importance on recent events and act in the belief that these developments will persist. This is called ‘recency bias’ and it causes investors to buy [when markets are] high and sell [when they are] low, which is the opposite of sensible investing,” he says.
Nathan says a long-term investment strategy will help you overcome recency bias.
“Setting the strategy upfront serves as a compass when the market is in turmoil, as a way to keep sight of the end goal, and a reminder to stay on course.”
The recent weakness in both the rand and the local stock market may tempt you to move money overseas, but although the momentum may seem favourable in the short term, it is impossible to say when this trend will reverse, Nathan says. Changing course now is tantamount to selling local investments low and buying offshore ones high, he says.
The rand collapsed in 2001 and again in 2008, and at both times transferring money overseas during the decline would have been the wrong move, in terms of the subsequent currency and local stock market performances, he says.
Nathan says investors should respond to developments by rebalancing their investments rather than by chasing recent market trends.
Commenting on the rand’s decline, George Herman, the head of South African Portfolios at Citadel, says “it is darkest just before dawn – the rand has now entered very dangerous and oversold territory”.
“The bounce-back could be swift and large,” he says, “and investors should only make new dollar investments as part of a long-term investment planning horizon and with severe caution.”
NO BEAR, JUST A ‘MARKET CORRECTION’
The current downturn in global financial markets is a correction rather than the beginning of a bear market, and global investors should have expected it given the weak economic growth globally, asset managers say.
They say share prices were elevated to unsustainable levels that were out of sync with weak global economic growth.
The aggressive selling-off of shares on Chinese markets after the Chinese government devalued its currency, the Renminbi, coupled with weak manufacturing numbers, set off more selling on financial markets around the world.
But, actually, markets had started to retreat over the past few months. The most recent turmoil was just a more violent expression of this, Clyde Rossouw and Sumesh Chetty, portfolio managers at Investec Asset Management, say.
Both they and Peter Brooke, the head of Old Mutual Investment Group’s MacroSolutions boutique, say there was a disconnect between the slowing economic growth and the rising Chinese share market and it was not sustainable.
Herman van Papendorp, the head of macro research and asset allocation, and Sanisha Packirisamy, economist at Momentum Investments, say relatively strong economic growth in China and the unprecedented liquidity as a result of global central banks’ easy monetary policies have been the two main forces that have supported the global economy and financial markets since the 2008 global financial crisis.
Investors now see economic growth in China faltering amid their fears that the US Federal Reserve is on the verge of increasing interest rates for the first time in over a decade.
Van Papendorp and Packirisamy say emerging market currencies, including the rand, weakened sharply in response to China’s devaluation of its currency, in an attempt to regain competitiveness for their exporters.
Brooke says a number of emerging markets have been under pressure for some time, with the Chinese stock market, as measured by the Shanghai Composite Index, in a clear bear market and falling 44 percent from its peak in June to its recent trough. However, most developed markets and South Africa had been performing well until the panic this month. The fears about China’s economy triggered a sharp correction of more than 10 percent on most markets, he says.
Brooke says a correction was expected, because markets had become expensive and had moved away from the underlying fundamentals. However, he does not think this will result in a global bear market. Furthermore, as many asset managers had sold equity in advance, they have cash to buy shares as they become cheaper.
Rossouw and Chetty say the market slowdown will continue until market valuations (the price of shares relative to their expected earnings) are more in line with the muted economic growth expectations.
Brooke says that although Chinese growth appears to be slowing quicker than previously expected, the Chinese authorities have the ammunition to prevent a collapse of their economy.
He says the most important thing for you to remember is that an equity market fall creates opportunities and panicked selling will only mean missing out on these opportunities.
Templeton Global Macro’s chief investment officer, Michael Hasenstab, and its director of research, Sonal Desai, say investors on global financial markets reacted as if China was headed for a full-blown recession, but they don’t believe this will be the |case – they believe that China’s economic growth will, instead, moderate as its economy normalises.
They say the Chinese government will control the pace of the currency devaluation as it incrementally moves towards a more market-driven environment. The latest events are not a signal of a massive currency depreciation to come, they say.
Hasenstab and Desai say they still expect the US Federal Reserve to |raise interest rates in that country this year. They also say that while volatile markets are not comfortable for investors, they see opportunity in the current period of volatility.
SOME PERSPECTIVE ON ‘LOSSES’
Media headlines around the world have predictably focused on the so-called “losses” for investors from recent equity market highs, but these are only “paper losses”, unless you actually decide to sell, because the markets may recover before you realise your investment, head of research Herman van Papendorp, and economist Sanisha Packirisamy, from Momentum Investments, say.
Van Papendorp and Packirisamy say the South African equity market is now 14 percent lower than its April 24 high and the United States equity market is currently 11 percent below its peak on May 21.
But these recent drops from the equity market highs actually pale into insignificance when compared with the local market’s 160-percent increase and the US market’s 180-percent increase since their lows in March 2009 during the global financial crisis.
Old Mutual Investment Group’s head of MacroSolutions, Peter Brooke, says a 10-percent fall or correction in the market is a common feature of equity markets all around the world. The S&P500, British FTSE 100 and Japanese Nikkei 225 have all had, on average, |a 10-percent fall once annually since 1928. South Africa’s market is much in line with this global trend, with corrections averaging 12.5 percent.
Tamryn Lamb, the head of client servicing for Orbis, Allan Gray’s offshore sister company, says some perspective is useful when headlines are constantly fearful.
She says earlier this year the Greek crisis was making headlines and yields on 10-year Greek bonds spiked to 18 percent. They are now around nine percent – the same level as a few months and a few thousand headlines ago.
“If you slide a few feet down Everest, you’re still near the top of a mountain: after its slide, the Shanghai Shenzhen 300 Index is still up roughly 40 percent over the past year,” Lamb says.
Lamb says Orbis’s funds hold Chinese shares listed in Hong Kong or the US where the volatility has been more muted than on the Shanghai stock exchange.
More importantly, she says, Orbis doesn’t think the recent price swings have been driven by substantial changes to most companies’ fundamentals.