It’s been an interesting week, with emerging markets swinging to its classical “risk off” mode again. China has given up most of its gains since the start of the year. I don’t feel so stressed out now as I did a couple of months back when the market was riding high on optimism and hope.
Emerging markets have caught the flu, and have been hit across the board. It looks like a perfect storm, with problems in almost every major economy: Thailand, Malaysia, South Korea, China etc. It’s one of those moments where investors have forgotten that emerging markets aren’t actually a homogeneous bunch of countries to be lumped together.
Still, I think we as investors should ask ourselves what has really changed in the real economy (as opposed to the stock market). Many of the concerns today are not actually new ones. Just that people have awaken to the fact that the world isn’t as rosy as it once was. But I suspect investors today are shooting on the other-side in pessimism.
To be fair, much of the speculation in recent months has actually gone on in the US markets, and China. Valuations in the rest of the world such as Hong Kong, South Korea and even Singapore have been reasonable by historical measures. Will we get a repeat of 1997? Its anyone’s guess, but the majority of countries have learned from their mistakes.
Stock markets can always go lower (just like it did in 2008 and 1997), but we have to weigh against the probability of it actually doing so which valuations already being on the low side.
I guess its easy to think that the current market volatility and the price drops are “new”… but lets just take a look at what the STI has done over the last decade.
Well… I think its pretty clear that investing in stocks is VOLATILE. That’s the nature of the beast. Leaving aside 2008, you still saw a significant drop in 2011 (despite the low valuations). What’s interesting is that in the last 2 years (and this year by the look of it), the market has pretty much gone nowhere. This is a gross generalization, but markets tend to do better after a serious period of under-performance, and terribly after a period of over-performance.
This is pretty much why value investing works – mean reversion. I don’t want to get into the unreliable world of forecasting stock prices, but if I had to bet, I would say that the next couple of years should provide investors with a very satisfactory return.