As world equity markets dip, now seems like a good time to consider whether investors have been pric...
As world equity markets dip, now seems like a good time to consider whether investors have been pricing risk correctly.
The consensus view from fund managers in this month's issue is that the fall is a correction in a long-running bull market. Furthermore, emerging markets are at a discount to their Western counterparts that is not justified longer-term. In the same way that buyers of investment trusts always try to get in at a discount to NAV, so too should investors take advantage of current valuations in Asian and emerging market equities.
These fund managers may well be right - hopefully they are - but after three years of rising markets are we all perhaps a little too complacent? Consider the following four thoughts, all of which appear to be supported by a sizeable section of the investing community:
First, Russia is not far off being a developed market and the government of the country and its markets is very much democratic and liberal in the way we in the West would understand it. The market is bound to go up and even if it goes down it will easy to get your money out.
Second, Bric investing is a great idea even though Russia, Brazil, India and China are highly correlated right down to the fact they have no discernible track record of being shareholder friendly.
Third, being heavily in debt, either personally or at a country level, is a sign of financial sophistication, which is why it should be called "gearing", and is actually a virtue as it helps to stimulate the economy.
Fourth, rising oil prices really have no knock-on effect on anything, beyond the occasional news story that motorists wish fuel cost less. High energy costs did have consequences in the oil crisis of the 1970s but things were different back then and thankfully we have moved on since.
While fund managers remain positive on the outlook for the rest of the year, they do tend to think positively about their investment universe. It is not often you find a manager telling you to avoid his market. Back in 2000 most managers interpreted the first leg of the bear market as a sign that the froth was being taken out of tech stocks and normal service would be resumed shortly. In fact, that bear market had much longer to run and much further to fall.
No one wants equity markets to keep on falling but if they do there will be one upside: it will allow investors to see which managers are momentum players and which are really generating alpha.
Anyone reading International Investment, or indeed any other trade paper, will know that managers appear to have one basic message: markets are going up but even if they go sideways or fall, stockpicking will allow real returns tobe generated.
With equity markets now falling, that claim looks as if it will be put to the test. If the FTSE and S&P 500 are down 10% this year, will most UK and US fund managers be down 10% or will they be able to generate returns of around 5% before fees? Just how many managers really do deserve an A for generating alpha? We may soon find out.
Mark Colegate, group editor
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