Pias Investment Outlook for Q4 2014

At the time of writing, markets are undergoing a significant correction. Reasons for the market correction are plenty: worries over the internal conflicts within Ukraine, the rise of ISIS in the Middle East, the coming conclusion of the US Fed tapering, HK protests for democracy, the European economies slowdown, and the recent spread of Ebola beyond Africa. The world has seen similar issues like this before, but markets found a way to recover soon after. But is this time different? Is this correction going to be the start of a real market crisis? We think not. The likelihood that this is a new market crisis is probably 15% or less. This is because equity markets remain attractive as opposed to fixed income. Valuations for global equities are fair to slightly below fair valuations, while emerging market equities are mostly below fair valuations.

In actual fact, we have been anticipating a significant market correction such as this for the past four months. Markets have been doing rather well for a stretch of time, thus a breather to the markets is expected before the next leg up. This is quite clear when equities are up by about 25% since the last major correction which ended in late June 2013. (See chart.) That said, it is never easy to bear seeing our investment portfolios dropping by a large extent in the meantime. However, opportunists would consider this to be a possible good time to top up their investment portfolios when prices are lower.

Source: Financial Express

Table 1: Market Returns for 2014 Year to Date (end September 2014) in SGD terms

The US economy continues to remain quite resilient during these past few weeks. Unemployment rates have dropped further to 5.9%, the first time it had dropped below 6% since the Great Financial Crisis. Unfortunately for Europe, recent economic indicators have weakened further. IMF now projects an almost 38% chance that the Eurozone may enter a new recession. We have to watch this more closely although we think that any recession will likely be short lived and shallow. The European Central Bank (ECB) will likely push for growth with further QE actions and will call for the Eurozone governments to stimulate their economies.

Ernest Low

In Asia, despite the recent market correction, India, Indonesia, Thailand and Philippines are up at least 17% year to date (as of 20 October 2014). These countries which are more domestic driven have been somewhat resilient lately. The more open economies such as Korea, Taiwan and Singapore were impacted by the current market conditions and have practically lost all their stock market gains for the year. China’s growth rate continues to maintain above the 7% level so far this year, with the Chinese government acting whenever they deem necessary.

Recently when some of us attended an investment conference organised by Citywire, Marc Faber was a guest speaker there. Faber, also known as Mr Doom, was relatively optimistic on prospects for Asia. We found that somewhat surprising as he is usually quite pessimistic about equity markets in general. Investors should take note when Faber finds something to be positive about. He was quoted as saying, ‘If you have to invest for the next 10 years, then you will make more money investing in Asia.’ We do agree with him, but would add that investors who invest in Asia would also have to bear the greater volatility in order to reap the rewards.

As for the bond markets, they remain challenging in terms of good opportunities. Interest rates in the US are expected to start rising as early as middle of 2015. There may be still some upside potential for emerging market bonds and Asian high yield bonds. But this is meant for investors who are willing to take higher risks. Otherwise short duration bond funds and total return bonds funds remain our current favourites.

We think that after this current market correction, equity markets will continue their current bull run. We should only start to reduce our weight to equities when valuations are no longer compelling or at the start of a new crisis. Otherwise, this may be an opportune time to consider topping up your investments. If you wish to top up your investments as equities are now cheaper, let your PIAS financial consultant know.

Author | Ernest Low, General Manager, Product & Research | PIAS | 24 October 2014