23rd April 2018 by Darius McDermott
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
It has been a turbulent year for investors so far: 2018 kicked off with minimal volatility and steadily rising markets until, on the 26 January, the global equity market peaked.
On 2 February things started to snowball and, over a period of less than two weeks, some markets entered ‘correction’ territory – which is when the price of assets falls by at least 10%. This was the first official correction we had seen in almost two years.
While markets have since stopped plummeting, there is still certainly more volatility around than we have seen in quite a while.
Is volatility a bad thing?
In my view, a market correction was overdue – markets had been treading water for almost twice as long as they usually do before a sell-off. I actually think that markets were in need of some volatility; eerily calm indices can sometimes be a sign of misplaced confidence, which can set investors up for a fall. It can also mean that potential risks simply aren’t being priced in.
It’s also worth bearing in mind that, during times of volatility, stocks will hit highs as well as lows. It’s just that investors will feel the pain of a loss more vividly than they will the thrill of any gains. And of course, the aim of the game is to buy into investments when they’re cheap and sell them when they’re expensive – volatility allows investors to do exactly that.
What about this volatility in particular?
A lot of the global market volatility has been caused by what is happening in the US – whether this is anticipated interest rate rises, the increased likelihood of a US/China trade war, or even president Trump’s latest Tweet. The US is, of course, an important market, but investors may not be focusing on the full picture.
The important point here is that all of these factors (aside from interest rates) are potential headwinds – they haven’t happened yet and, in some cases, may not even happen at all. There are plenty of positive fundamentals out there – global growth is picking up pace and the consumer outlook across several regions looks positive.
Where should I invest?
We believe that equities are still an attractive asset class. While valuations look expensive compared to history – even after February’s market correction – there are areas that we think are more favourable than others.
We are positive on Asian and emerging market equities, for instance. Not only are they more attractively-valued relative to many other markets, the regions boast favourable demographics and a rising middle-class, which should boost consumer spending power. In India specifically, prime minister Narendra Modi is also pushing through economic reforms which should improve companies’ profits and encourage them to be more shareholder-friendly. Funds we like here are Schroder Asian Income and Magna Emerging Markets Dividend.
In terms of purely developed market exposure, we like Japanese equities. Like Asian and emerging markets, they are relatively attractive on a valuation basis, but should also benefit from an improving Japanese economy. Akin to Modi, Japanese prime minister Shinzo Abe is in the throes of implementing business-friendly economic reforms which, again, should stand investors in good stead. A fund we like here is T. Rowe Price Japanese Equity, which invests in companies with strong branding power and competitive technology.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.