Market Views: Bargain hunting after a global market meltdown
The global financial markets have been experiencing significant turbulence in recent days, with major indices across Europe, Asia, and the United States showing notable declines.
European and Asian markets registered substantial losses earlier this week: The FTSE 100 and Euronext 100 saw significant drops, while Japan's Nikkei 225 experienced its largest point drop in history.
This downturn has been attributed to a combination of factors, including concerns about a potential US economic slowdown, disappointing corporate earnings reports, and shifting monetary policy landscapes across different regions.
An unwinding global carry trade was also blamed for the shock losses in financial markets.
In the days following the meltdown, there have been signs of recovery in various markets.
Yet, the overall sentiment remains cautious. This tentative recovery suggests that while investor confidence hasn't been entirely shaken, there is still a degree of uncertainty about the near-term economic outlook.
AsianInvestor asked fund managers and market analysts if now is an opportune time for investors to 'buy the dip' and what sectors present good entry points at this time.
The following responses have been edited for brevity and clarity.
Andrew Hendry, CEO, Singapore, head of distribution, Asia
Janus Henderson
Fluctuations are normal market occurrences and can open up opportunities for long term investors.
For those waiting for the right moment to enter the market or considering adding to their holdings, this recent wobble signals an opportune entry point.
The unprecedented levels of innovation occurring in sectors such as biotech, for example, will not be derailed by things like US unemployment rates and other short-term market noise.
Adding to the above, there’s a so called ‘wall of money’ valued at over $7 trillion currently stockpiled in money market funds.
As interest rates are cut and yields diminished, a large chunk of this $7 trillion is expected to find its way into stock markets and provide a boost to equities.
Meanwhile, Hong Kong and Singapore time deposits have been steadily declining since the beginning of the year, further weakening the case for holding cash and cash instruments.
In summary, we urge investors to look beyond the noise and be reminded that volatility is natural; it’s what creates opportunities.
Vikas Pershad, portfolio manager, Asian equities
M&G investments
Had long-term investors been asked two weeks ago, “Knowing what you know today, would you like to allocate capital to familiar names at a 20% to 30% discount?” the answer would likely have been a resounding yes.
Today, that opportunity has arrived.
Indeed, there is new information to consider: the yen has strengthened; retail investors and large corporates have quickly reversed their inexpensive yen-funded positions abroad; and geopolitical risks have increased.
However, even accounting for this new information, equity prices have adjusted materially lower – and in many cases, often beyond what seems justified, knowing what we know now.
For long-term investors, though perhaps not for short-term traders, there are numerous opportunities available.
In Japan, we have allocated incremental capital to the semiconductor supply chain for the first time in months.
In India, we have done the same for the infrastructure capex sector. Across China, Japan and India, there are plenty of opportunities in the small and mid-cap portions of the market.
The sharp declines at the start of the week represented a significant correlated, non-linear move in equity prices - much more than “a dip.”
Long-term investors should be looking to buy.
Raisah Rasid, global market strategist
JP Morgan Asset Management
The Fed’s dual-mandate focus has shifted attention to the labour market, which appears to be losing steam, stoking fears of a sharper US economic slowdown and triggering a sell-off in risk assets globally.
Disappointing data could front-load the Fed’s policy action towards the neutral rate, with markets re-pricing for larger cuts at the remaining FOMC [Federal Open Market Committee] meetings this year than previously envisioned.
The baseline scenario around US growth still suggests a slowdown rather than a recession.
There are a couple of investment implications.
Firstly, there is opportunity for investors to add to equities at more attractive valuations in a market that has tended to over extrapolate the weakness in the economy, especially if data improves.
In particular, the focus on quality when it comes to risky assets such as equities should be top of mind for investors.
Secondly, in the event of a sharper growth contraction that is met with deeper policy rate cuts by the Fed, extending duration into high-quality bonds could provide stable returns in the long-term.
Thirdly, the imminent monetary policy easing by the Fed could imply a weakening in the US dollar, implying stronger returns on non-US stocks. Thus, investors should allocate their portfolios across both across both US and global equities.
Dan Scott, head of multi-asset
Vontobel
We view the recent global market sell-off as merely a healthy consolidation at high levels.
Global economic momentum is slowing but still resilient enough to support global equities. We continue to see upside potential for developed market (US and European) equities.
Going into what will likely be a short and shallow recession, we would however have a preference for companies with strong balance sheets and earnings resilience like healthcare or infrastructure related names.
Within fixed income we are currently defensively positioned with an overweight government debt and an underweight high yield bonds.
However, emerging market (EM) debt could offer a good tactical opportunity, especially given that selected EMs have credit fundamentals that are better than they are for many developed markets.
In order to insure against geopolitical risk and as a basis for stability in portfolios, we also continue to be allocated to gold and other liquid alternatives like catastrophe bonds and insurance linked securities.
Kristina Hooper, chief global market strategist
Invesco
Markets are concerned that the Fed has waited too long to begin cutting and is committing a policy error.
Our tactical indicator had turned defensive as growth was below trend and slowing. However, we believe that markets are overly worried about recession.
We would be cautious in the very short term, given that our tactical indicator is cautious.
However, our intermediate-term expectations are driven by the policy response, the normalisation of the yield curve, and the resilience of the US economy.
For time horizons beyond the very short term, we favor an overweight to risky assets as is typically the case during easing cycles not associated with recessions.
The TOPIX rout in the past few days seems to stem from a combination of factors.
We believe that this pullback in Japanese equities could be a healthy breather after the recent investment euphoria.
We believe that the selling pressure could be short lived, given the Japanese economy continues to experience multi-year structural tailwinds.
On the Japanese yen (JPY), we believe that the currency could prolong its appreciation against US dollar (USD), given the prospect of multiple rate cuts by the Fed towards end-2024.
Going forward the USD/JPY outlook is likely to be more dependent on the Fed’s monetary path rather than incremental actions from Japanese policymakers.
Still, we believe that it would be imprudent to pull back from Japanese equities taking an excessively tactical approach towards the currency – and miss the multi-year Japan structural narrative.
Raj Shant, managing director and client portfolio manager
PGIM Jennison Associates
As the broader economy slows, stocks with durable earnings growth become more attractive, which should bode well for growth stocks in a slowdown.
If the Fed engineers a soft landing, lower discount rates would raise the net present values on long-duration assets like growth stocks.
This dynamic, combined with solid fundamentals and strong secular growth themes, would give global equities more room to run from current levels.
While macroeconomic influences can move equities fleetingly, dynamic growth from innovative forces outside the economic cycle offer ongoing opportunity.
Investors should focus on the fundamentals.
Advanced technologies, particularly in data centers, semiconductors, and cloud computing, are creating opportunities driven by the rise of artificial intelligence.
Top luxury brands are thriving by leveraging direct-to-consumer innovations.
Industrial automation enabled by technology offers potential for significant productivity gains in manufacturing. Fintech platforms are improving access to financial services, especially in emerging markets.
Healthcare innovation is opening up possibilities in areas such as drug development, personalised treatment, and data analysis.
Xin-Yao NG, investment director of Asian equities
abrdn
We are hearing that more unwinding might happen so there could be another few days of pain.
We are not changing our base to hard landing in US but acknowledge that the risk of that is higher.
A potential monetary policy mistake in Japan adds to the complication.
We still think that tech’s structural growth is intact, but there are rising complexities in the Nvidia supply chain, with a potentially longer life cycle for Hopper versus a delay and maybe shorter life-cycle for Blackwell.
This has more implications for the Taiwan tech industry because some companies play more to Hopper while others play to Blackwell.
We favour stocks that play to the long-term advancement in chips and penetration of high-performance computing regardless of whether it's Hopper or Blackwell.
Jon Bell, global equity income portfolio manager
Newton Investment Management
Equity markets have been spooked by weaker employment data in the US stoking fears that global economies are heading for recession.
Fixed income markets are beginning to price in emergency rate cuts in response.
Highly valued US growth stocks are proving to be especially vulnerable as are the more cyclical parts of the market.
The Japanese market has also fallen as the Yen has strengthened.
Whilst we believe that fears of recession are perhaps overblown, it is by no means certain that an economic slow down will be avoided.
In addition, we have been highlighting for some time the risk to the valuation of the growth stocks that have dominated markets (Magnificent 7) and the relative undervaluation of income stocks, so in many ways the market action comes as no surprise, even if the speed of the rotation has been savage.
Chi Lo, senior market strategist APAC
BNP Paribas Asset Management
Jason Lui, head of equity and derivative strategy APAC
BNP Paribas
While there was probably some reallocation away from Japan and India back to Hong Kong and China during the rally in April-May, global investors may prefer to reduce their overall risk exposure now rather than switching to Hong Kong/China due to the rising uncertainties of US economic outlook.
We have seen sizable outflow in US-listed emerging market ETFs over the past two weeks – VWO (Vanguard Emerging Markets Stock Index Fund) saw an outflow of $1.8 billion between July 25 and August 5.
In the near term, volatility will remain high, with a side-way underlying trend as market expectations alternate between US soft and hard landing scenarios.
Market players will focus on tactical changes in adjusting their portfolios than strategic hold as sentiment and market moves will be volatile and swift.
In light of the Bank of Japan’s rate increases and the prospect of the US Fed rate cuts in the coming months, such policy divergence will drag on Japanese stocks in the short-term. Still, we may see single digit gains for Japanese stocks between now and 2025.
The longer outlook for Japanese asset prices depends a lot on whether the prevailing expectation of a virtuous inflation-growth (earnings) cycle will sustain. This, in turn, depends on the BoJ’s policy.
Ultimately, the US employment data will be key to the Fed policy outlook and equity market volatility and, hence, investor confidence.
Geopolitical risk and US election uncertainty are also adding to stock volatility in the short-term on the back of growth fears.
Finally, stock volatility typically rose before the Fed cut rates in previous cycles. So, market sentiment will remain fragile and very sensitive to the change in growth-inflation dynamics.