On Monday (5 February), it was a fear of returning inflation that precipitated the fall, exacerbated by Wells Fargo and the closure of Nomura’s and Credit Suisse’s incautious ETP’s adding a whiff of 2008 to the day. On Thursday, the brief failure of Congress to prevent a government shutdown added an additional chill to the fear that volatility has returned.
Meanwhile, in Asia, with the exception of the febrile HK-Chinese markets, bourses did not fall as far as Wall Street on Monday and later-closing countries such as ASEAN and India are shrugging off last night’s fall, as they assimilate the fact that US government will now not in fact be shutting down. That US markets are trigger happy after such a long bull run and with valuations standing at all-time highs should not be a surprise. What may be less understood is the reaction in Asia.
Like the US, Asia has had a long bull run and many companies stand at high valuations. However, unlike the US, inflation, although rising a little, remains subdued by strong currencies and government policies. Central banks remain cautious about raising rates and most have chosen not to follow the Fed’s recent increases, despite fundamentally benign domestic conditions. Local governments have been pushing companies to deleverage throughout 2017 and this has led to substantially stronger cash flow and balance sheets in most countries.
There is also another, perhaps more important point to consider: Chinese New Year begins at the end of next week. The domestic Chinese and Taiwanese markets will shut for almost a full week (until 22nd Feb) and most other countries have long bank holidays as well. So market reactions to these falls will be coloured by the decision on whether to buy and leave positions open over the holidays, or cash in, have a good holiday and look again a week later. Our feedback suggests that after a year of rampant gains, most Asian investors are not panicking out of stock, so much as taking profits on positions which have risen rapidly (often more than doubling) and that they are most likely to sit back and watch from the side-lines until after the New Year holidays are over. Additionally, economic data at this time of year is also always skewed by the lunar holiday and will not give an accurate steer until March numbers come through. Seasoned investors typically take all Q1 Asian data with a pinch of salt and this year looks likely to repeat the pattern.
We also took some profits in December and early January on stocks which had risen 40%+ in just a few months and with around 6% cash at present, we are poised to buy selectively into this volatility.
The falls in Asian markets so far have taken the region’s Price to Book valuations to the 3 year mean and Chinese Indices are already back to their 5 year mean. Buying territory could be perhaps 5-7 % away.
The fund is responding well to this approach so far and Year-To-Date is down 0.3% versus the regional fall of 3.12% in Sterling terms.
Volatility is always concerning, especially after such a long period of steady gains, but investors in Asian countries should remember that whilst the economic fundamentals remain strong (as they do for every country in Asia except India), this presents opportunities to buy at attractive prices.
Sally Macdonald Head of Asian Equities
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