The recent plunge in global equity markets after such a long period of market gains may be alarming for many investors but it is especially important at times like this to keep a cool head. Despite the size of the market moves, valuations have only moved back in many cases to levels recorded towards the end of last year. And despite the suddenness and speed of this market correction, there appears to be little sense of rising panic evident in the wider financial market place.
For one thing, the typical safe havens (such as the US dollar, the yen, gold and government bonds), are not rising appreciably. But also, the nature of this sell-off points more to a technical correction rather than a market crash. It has been led by the US, which appears on many measures to be the most over-valued international market. Indeed, the higher risk Emerging Markets equity market complex has outperformed other markets since the beginning of the year. While Eurozone, UK, Japanese and US equity markets have all moved back into end-2017 territory, the MSCI Emerging Markets equity index remains over 5% higher this year. And this is a market that is typically regarded as a high-beta (or higher risk) global market that will tend to under-perform others when investors become very risk averse. In short, the shape of this market downturn, with the US the weakest of the major markets and the Emerging Markets complex the strongest, is the complete opposite of what you would expect if the market was in ‘panic mode’.
I last wrote to investors about this topic in early 2016, during the market correction that was occurring then. And the key message I delivered then is just as relevant now and worth repeating.
Return and risk are not independent. It is quite possible that a correction from over-valued levels may well be in progress across global equity markets but even so, it’s important to step back from the chaos and evaluate the bigger picture. While highly volatile market conditions may encourage long-term investors to question their investment strategies, attempting to profit from these more ephemeral drivers of equity markets crosses into the territory of the speculator, for which current highly volatile conditions can be treacherous. We still hold to the view that underlying economic fundamentals that drive the longer-term path for these markets, have not deteriorated markedly and think it important to remind ourselves that in the long run, there remains a strong tendency for the riskiest assets to deliver the highest returns. Fundamentally, we do not believe the longer-term outlook for revenue growth has altered significantly although in the short term, clearly, there are challenges. Market corrections are inevitable, as history has repeatedly demonstrated. But viewed over a longer-term perspective, the market environment does not seem nearly so threatening.
The global economy is strong – indeed, strengthening. And while sudden adjustments to equity market valuations can be alarming and certainly merit close monitoring and attention to portfolio protection, we retain a fundamentally positive view of the longer-term investment outlook.
Don Smith
Chief Investment Officer
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