Knowing when to prepare the cheque book
Investors should watch emerging markets as an advance indicator of when to buy.
At the end of May, stockmarkets hit some enticing lows – the kinds of valuations that are often associated with a bargain basement buying opportunity, or a good time to drip more money into the market. Major stockmarkets outside crisis-hit Europe were roughly 10 percentage points off their highs in mid-March. They were also a little less than 10 percentage points off their levels in mid-February, when some of the more cautious fund managers said – and I reluctantly agreed – that stocks were getting a little overextended.
Last week, I said I would examine whether we will see a better version of this opportunity later this year. In spite of the correction, I still think that this is inevitable. The reason is that emerging markets have less room to stimulate their economies than they did in 2008, the US will slow due to upcoming austerity measures and European politicians are hardening their stances on the continent’s debt crisis even in the face of potentially extreme volatility.
In an era of yo-yoing markets, investors have to be much more conscious about price
Once emerging markets fully recognise that inflation is now a secondary concern, and they embark on their limited stimulus in full, signs of a turnaround will fall into place and some of the troubles in Europe can be outweighed by investment elsewhere. But until that happens, we are in limbo.
Brian Dennehy, managing director at IFA Dennehy Weller and a much wiser and more experienced market watcher than I, said investors should effectively prepare their cheque books for if the FTSE 100 hits the 4,000 level. (On June 28 it was trading at roughly 5,450.) Opinions will vary at what lows the FTSE will hit. But markets 10 percent off last week’s levels are surely worth dripping into, potentially in anticipation of further falls later in the year. In particular, investors should watch emerging markets as an advance indicator.
For big international firms, growth in emerging markets is often a key source of extra earnings. Once that growth stabilises or shows signs of falling slower, international firms will experience upward pressure on their profits even if developed economies get even uglier. Second, in late 2008 and early 2009, emerging markets led the stockmarket recovery following the sharp post-Lehmans deleveraging as investors recognised their superior economic firepower. That firepower is lower today, but emerging markets’ reserves and will to grow remain strong.
Investment advisers might legitimately ask why all this matters. Surely timing the market is all but impossible, and investors should simply pick a diverse range of fundamentally sound investments and stick with them? Sadly, in an era of yo-yoing markets, investors have to be much more conscious about price. Emerging markets had great economic fundamentals at the end of 2007 – but emerging market stock prices were far too high. In previous years, investors also had to worry about timing the stockmarket much less as they could pick bonds – in particular government bonds – to hedge against economic slowdowns. Now government bonds are hitting worrying peaks. With a little patience, however, investors can ride out the storms. They may not have long to wait before markets hit their lows and turn around.
Nick Rice is editor of Investment Adviser