Finding Opportunities Amidst Volatile Markets

Finding Opportunities Amidst Volatile Markets by
Wong Sui Jau, General Manager
Fundsupermart

View Video with Slides

This talk was delivered on 18th October 2008
Below are the 'printed' notes of the slides.


Markets Year to Date
Market ... Indices ... YTD as at 10th Oct 2008
China ... HSMCI Index ... -54.10%
Emerging Markets ... MXEF ...-52.5%
Asia ex-Japan ... MXASJ Index ... -51.80%
India ...SENSEX Index ... -48.60%
Hong Kong ... HSI Index ... -46.80%
Nikkei 225 ... NKY Index ... -45.90%
Singapore ... STI Index ... -43.80%
Europe ...SX5P Index ... -43.70%
Taiwan ... TWSE Index ... -39.70%
US ... SPX Index ... -38.80%
Malaysia ... KLCI Index ... -35.40%
Korea ... KOSPI Index ... -34.60%

Source:  Bloomberg



Bad News Abound

• More losses expected from the ongoing US financial crisis there.
• US likely to fall into recession.
• Europe and Japan economies now also facing a slump.
• Asia will be affected as well.

How to handle all the Turbulence?

• With the large movements in markets so far this year, many investors may be considering going all cash.
• Is cash the best alternative for investors?
• Inflation levels in Malaysia is high, likely to be at least above 6% in 2008 with food prices going up.
• Negative real short term interest rates very possible this 2008
• Trying to time the market too closely and selling out when faced with a flood of bad news and sentiment is often not the best move.
• Why?

Some of the worst bears and best bulls
HK
Market Crashes:  Sept 87 to Nov 87 -45.8%
Market Recoveries:  Nov 87 to Dec 93 +281.5%

HK 

Market Crashes:  Jul 81 to Nov 82 -59.1%

Market Recoveries:  Nov 82 to Dec 86 +264.8%

Korea

Market Crashes:  Apr 96 to Jun 98  -69.6%

Market Recoveries:  Jun 98 to Dec 99  +245.1%

Singapore 

Market Crashes:  Feb 97 to Aug 98  -58.4%

Market Recoveries:  Aug 98 to Dec 99  +189.5%

HK 

Market Crashes:  Feb 73 to Dec 74  -89.5%

Market Recoveries:  Dec 74 to Mar 76  +166.4%

US 

Market Crashes:  Mar 37 to Apr 42  -57.3%

Market Recoveries:  Apr 42 to May 46  +150.4%

US 

Market Crashes:  Aug 29 to Jun 32  -86.0%

Market Recoveries:  Jun 32 to Jun 33  +146.3%

Singapore 

Market Crashes:  Jul 90 to Sep 90   -33.2%

Market Recoveries:  Sep 90 to Dec 93  +141.6%

Some observations

• Bear markets do not last forever.  Market crashes have ranged anywhere from a few months to a few years in length.  (Most tend to last just a few months to one year though).
• The best rebounds happen after the market crashes (can be as much as 100% or more).
• Missing out on these rebounds can affect one's overall return significantly.

Dealing with our emotions

• The main culprit that affects our returns from volatility is that our emotions often cause us to buy high and sell low.
• Right now, with many Asian markets had already slumped 40% to over 50% from their peak, some markets are priced very attractively - is this the right time to lose your confidence?
• Choosing to sell out of markets now only make it that much harder emotionally to re-enter markets again even when they have truly bottomed out.

Bad news is not always bad

• Interestingly, a time when bad news abound is not necessarily bad.
• Historically, it is when everything looks rosy, when there is no black cloud at all, when markets are expensive.
• Historically, it is when everything looks bleak, with little to be positive about when markets are cheap.

Don't wait for bad news to end

• Markets are forward looking.  When they are see some signs of improvement, they will rebound.
• By the time the recovery actually takes place, they would be up already.
• At near to market bottoms, everything looks bad.
• When did the US market bottom during the period of the second world war?  (It started in 1939 and ended in 1945).

Past bottoms

• The bottom of the US market during the second world war was in April 1942.  (The war ended in 1945)
• The bottom of the US market, during the saving and loans crisis was in Sep 1990.  (Banks were still going bankrupt all the way up till 1993).

Now is a good time for making money

• Money is made by buying low and selling high.
• Good news abound during times of market highs, and bad news abound during times of market lows.
• So, the prevalent bad news all around now, is a signal that markets are low.
• Another signal is low valuations of markets in general.

Our views on various issues

• US in a recession and the ongoing US financial Crisis.
• Where we find bargains and value at this point in time.

US is likely already in Recession

• US property market slump continues.
• Financial sector in turmoil due to subprime woes, further losses expected.
• Consumer sentiment is going to be hit and large portion of these consumers are spending on credit and paying mortgages at the same time.
• Federal Reserves efforts won't prevent this.
• US is already in a recession.

Where we see bargains

Asian Equities

• Asian markets are oversold.
• Asian valuations are currently at very attractive levels.
• Asian remains a high growth region.
• Asian financials have very little exposure to the toxic sub prime related mortgages.

Valuations have come down.

MSCI Asia Excluding Japan and Estimated PE

In Jun 1997:  

Index level was 400

Estimated P/E was 20

In May 2000

Index level was 300+

Estimated P/E was 37

In Dec 2001  

Index level was 160

Estimated P/E was 12

In Nov 2007:  

Index level was 700

Estimated P/E was 20

(see graph)

Source: Bloomberg

Some tips on handling volatility

• Try not to focus so much on the bad news.  Markets cannot drop 5 to 10% every day.
• Have faith that markets and economies are self correcting, they won't go down forever.
• Is the correction really all negative?  Falling markets can prevent buying opportunities.
• Long term investing is less stressful and has a higher probability of making gains.
• Diversify, diversity, diversify!

Yearly Return of MSCI World

1970 to 2007

(graph)

Source:  MSCI Bloomberg

Of these 38 years, the yearly returns of MSCI World were 

• negative for 11 years, and
• positive for 27 years.

Years with Negative Return:

1970

1973

1974

1977

1981

1989

1992

1994

2000

2001

2002

Cumulative 10 years are usuallly Positive

10 year Cumulative Returns of MSCI World Index

(graph)

Source:  MSCI Bloomberg

Diversify!

• Diversification also forms a key part of lowering ones risk and easing the burden our emotions place on us during turbulent times.
• Diversification prevents us from putting everything into just one market or asset and is a key part in how we form our portfolios.

Conclusion

• Bad news abound, but that is not necessarily a bad thing.  It is a signal that markets are low.
• We like - Asia ex Japan equities.
• Stay invested, have a diversified portfolio and most importantly, keep calm!

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