View From the Top
Why is now a great time to be an investor?
It’s a well known fact that we can be influenced more by our emotions than by our rational thoughts. We mention this because lately some investors feel that they have experienced something of an emotional roller-coaster ride as we hear dramatic media reports of ‘turbulence and volatility in global markets’. It invokes an emotional response. Yet often this may have little to do with the fundamental value of investments. With this in mind, here are some precise facts about the world’s financial markets:
The facts
During the first quarter of this year, the MSCI World Share index fell by 10.9% in NZ dollar terms. (This followed a drop of 4.1% that occurred during the previous quarter).
What has been referred to as the ‘sub-prime mortgage crisis’ has created problems in the US housing market, affected consumer confidence, and has caused stress in the world’s financial sector. This has contributed to some ‘high-profile’ corporate rescue packages, including the UK’s 5th largest bank, Northern Rock ,and more recently Bear Stearns in the US
The subprime crisis has led to concerns of slower economic growth in the US, because of fears of decreased investment by business and lower consumer spending, both of which drive the economy. With the US economy being the largest in the world, concerns over this have negatively influenced investor confidence globally.
Uncertainty remains, company valuations continue to fluctuate, yet broadly speaking we believe the global economic picture remains positive. Apart from the financial sector, corporate balance sheets are generally healthy, economic imbalances are fewer, and interest rates are lower when compared to prior periods of market stress. Outside of the financial, automotive and discretionary consumer spending areas, most economic sectors continue to grow, and in many of the major sharemarkets globally, company valuations are attractive.
Facts versus headlines
These facts tell us that while there have been a few downs, there have also been a few ups but remember, market volatility is absolutely normal. Essentially, as our Chief Investment Officer describes later in this article, it’s all investment business as usual. However, the media reported these events somewhat differently. They used phrases like ‘global markets plummet’, ‘US stocks crash’, ‘traders jittery’. We’ve even heard use of the phrase ‘economic meltdown’. To some investors this kind of media reporting can be understandably alarming. It’s why investors have asked us some very important questions:
What does all this current volatility mean for me?
At the risk of repetition, we say market volatility is absolutely normal. While investment markets will go up and down in the short-term, in the long term they tend to appreciate.
Separating news from noise
The famous Wall Street Journal gives a great definition: ‘News is important information that may influence your investments. Noise is talk or buzz or some headline that may prevent you from seeing a story clearly - noise is a distraction.”
To give you an example, on Wednesday March 19, the lead story in much of the mainstream media concerned the US Dow Jones Index ‘dropping 293 points’. The media got lots of mileage out of this event. However, on the previous day, the Dow Jones had risen 420 points, and the day after the March fall, it rose a further 262 points. Those gains were less widely reported. Interestingly, at the end of March 2008, the Dow Jones index was recorded as being at around the same level it was a year earlier.
This illustrates two things. Firstly, that markets can and do move very quickly. Secondly, ‘bad news’ makes for more sensational and ‘interesting’ reporting than ‘good news’. The emphasis in this case was on ‘noise’ rather than ‘news’, and some investors could definitely be forgiven for feeling anxious. The lesson is very clear. Sometimes it’s difficult to resist being influenced by noise. But it’s always much better to pay heed to the real news.
Volatility can create opportunity
Are we saying then that the ‘global volatility and turbulence’ we’ve all been hearing about is simply a catchphrase designed to sell newspapers? Not at all. As we pointed out earlier, the markets are in a state of volatility, and that does influence investment performance over the period. But remember, it’s vital that investors always come back to a basic investment principle. Don’t think in terms of days, or even weeks, or even months. Think and act over the longer term, and more specifically in the context of your individual investment goals. By doing that, your investment portfolio can best take advantages of the market ‘ups’ over time, and by carefully diversifying and managing your investment you can minimise the effects of the market ‘downs’.
Recently there was a great example of investment bargain-hunting when JP Morgan Chase was able to buy US investment bank, Bear Stearns, for just 6% of its February 29, 2008 valuation. JP Morgan, saw Bear Stearns as an opportunity to grow value for their shareholders, although time will tell whether they really have picked up one of the all-time great bargains.
By staying cool and calm, through turbulent times, an investor will ultimately benefit. It’s just a matter of time and good management. Today’s volatility can create tomorrow’s success.
It’s a wonderful world, invest in it
As the world’s largest economy, the US commands a great deal of influence and therefore also, as we have seen, media attention. It’s easy to think that investment-wise the US is the only benchmark for investment opportunity and success. Not true. There are many nations who are enjoying real buoyancy. Many of these are so-called ‘emerging markets’ that are displaying impressive and sustained growth.
• Vietnam’s economy grew 8.1% last year. They’ve averaged 7.5% a year over the last ten years as foreign investment continues to pour in. Their textiles and tourism industries are performing well too.
• Brazil has benefited from positive economic reform since 2002, and a huge demand for their beef from China. They’re also becoming a major producer of bio-fuels.
The star performer globally, by a considerable margin, is China. The Chinese economy is forecast to grow more than 10% in 2008, injecting more wealth into the world than the US, India and Japan combined.
Before 2010 China will build:
• 14 motorways
• The world’s longest bridge
• $200 billion worth of new railways
• The world’s largest airport terminal (Bigger than all five terminals at London’s Heathrow)
• 97 airports are scheduled to be built over the next 12 years
China is currently consuming:
• 1/2 the world’s cement
• 1/3 the world’s steel
• 1/4 the world’s aluminum
• 35 times more oil than in 1999
The whole world is benefiting from this phenomenal growth in China. Australia is shipping more coal, iron ore and many other resources than ever before. Many African and South American countries are exporting their oil and gas. Japan is becoming less reliant on the US for their export market, with the growing demand of Chinese consumers for electronic devices. Meanwhile the US is benefiting from the Chinese demand for heavy machinery. Of course, New Zealand has also recently entered into a “free trade” agreement with China.
New Zealand should get a mention too. Despite the clouds circling our domestic economy, Asian demand for milk solids has lead to big payouts for our dairy sector.
In short, these are all signs that the world’s economy is robust, and that globally there are plenty of great opportunities for investors. Spicers’ role is to make sure that your investment portfolio benefits from taking advantage of those opportunities, and use them to achieve your individual lifestyle goals.
It’s investment business as usual
Peter Verhaart is Chief Investment Officer of Arcus Investment Management who are Spicers economic adviser and investment manager. Peter and his team research and select the best fund managers from around the world to manage our client’s money and ensure their portfolios are designed and structured for optimal long-term performance. To do this, Peter has access to top quality market intelligence. In other words, Peter deals only with ‘news’, not ‘noise’. Because of that, it’s interesting to learn Peter’s view on the current market volatility.
He says, “In many ways it’s quite simply business as usual. It’s important to remember that the volatility we’re seeing at the moment is part of a well-known economic cycle. In fact, when we look at data from over the last 25 years, we can see that after a period of turbulence, the markets consistently return to a fundamental state. Despite today’s turbulence, the world’s economy is in good shape for tomorrow, and investors with well diversified portfolios should be absolutely confident about their investments and the future”.
Spicers view
Volatility is all par for the investment course. But in times of volatility, people will become cautious. It’s human nature, a completely understandable reaction. ‘Noise’ can create an atmosphere of trepidation. Don’t let it.
Instead, listen only to the only ‘news’ that really matters – the facts. Stay the course, think, and act in accordance with your long term investment goals.