Thoughts on recent volatility in global stock markets
by Ted Samuels and Shelby Notkin, Capital International Asset Management
Not long ago investors worried that if the U.S. Congress failed to act on a plan to raise the debt ceiling, it could have negative ramifications for U.S. credit ratings and global equity markets. At the eleventh hour, Congress got the job done, but investors were not impressed. Since a compromise bill was signed into law, equities have suffered a double-digit correction. While such short-term moves have little meaning when viewed from a long-term perspective, two portfolio managers from the Capital organization offered these insights about recent events:
Ted Samuels
Portfolio manager, Capital International ā U.S. Equity 31 years of investment experience
In my view, much of the recent selling has been caused by fear among investors who remember the events of 2008 and early 2009 all too well. They worry that weāre in for another bad period like that and are willing to get out of the market at any price. Automated trading programs may also have played a role in accelerating recent declines.
While we were clearly in the midst of rebuilding confidence lost during the financial crisis, the market has confronted numerous headwinds this year. Most recently we were exposed to a political process in the U.S. that created uncertainty as questions lingered about whether inaction might cause the country to default on its debt for the first time in history. Before that, we witnessed disruptions in the Middle East and North Africa, a sharp spike in energy prices, a continued fall of the U.S. dollar, an earthquake and tsunami in Japan, and questions about financial solvency in the Eurozone.
But there have been many positives as well. Weāve seen an economic recovery begin to take hold on a global basis, companies are reporting solid earnings, interest rates remain low and valuations seem reasonable for many corporations. At the same time, emerging markets consumers continue to drive global growth.
We may not be out of the woods just yet, though Iām not expecting a repeat of the last market downturn. I continue to believe that the outlook for equities over the next five years is compelling. I suspect that some earnings estimates for 2012 will have to come down, but am not expecting the double-dip recession weāre hearing about from some pundits.
Market sentiment has moved from optimistic to complacent to fearful to panicked. While disconcerting and scary, events like this are common at market bottoms.
From where I sit, Iām finding a large number of āfat pitchesā out there today. It reminds me of the valuations we saw near the bottom in 2009, even though the economic outlook is a bit more uncertain right now.
Sure, there is plenty to worry about, and regaining investor confidence in the stock market wonāt happen overnight. But my advice is to stick to your asset allocation plan and remember that trying to make shifts during times of panic often leads to investor regret. For those of us with a long-term perspective, times like these can present excellent opportunities.
Shelby Notkin
Portfolio manager, Capital International ā U.S. Equity 46 years of investment experience
In my view, weāre in for a period where market volatility is likely to remain at increased levels. How long is impossible to predict.
Market corrections are a normal part of bull markets, though they happen unexpectedly. Weāve had very few pullbacks over the past two years and were not surprised to see one following the huge run-up in stocks around the world since the March 2009 low.
This market has actually been extremely resilient despite an array of disconcerting macroeconomic events.
High-volume trading programs, which have increased on Wall Street, add to the extreme volatility in todayās marketplace. Weāve also seen a lot of panic selling. The good news is that panic selling often comes at market bottoms, and it presents attractive opportunities for long-term investors.
Iāve identified a number of good companies that have seen their share prices impacted, yet continue to demonstrate strong fundamentals. Many of these companies serve the growing emerging middle class in the developing world, which has plenty of disposable income to spend. I believe this is a powerful long-term trend, and one we have been talking about for some time at the Capital organization.
Iād also note that, in watching the TV news today, almost everyone you hear is negative, and many are forecasting a weaker U.S. economic environment to include a double-dip recession. Iām really glad to hear that because once everyone is talking about bad news, you know it has probably already been priced into the market.
Granted, earnings estimates may have to come down a bit, since there is some slowing in the economy. But even at reduced levels, stock valuations seem very cheap on a long-term basis. I donāt want to discount the real risks that exist, and I wouldnāt be surprised to see the market move somewhat lower in the short-term. However, when viewed from a long-term perspective, equities seem like very good values, especially at current levels.
Capital International Asset Management
http://capitalinternational.ca
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