Global markets continue to struggle following the steep slides in recent weeks.
Applying the 20 per cent or more decline as a bear market definition, several countries are now caught in a vicious downtrend. Even markets that have so far escaped the bear are well below their 2018 peaks.
At the close of October 18, only Israel up 6.2 per cent US, 3.5 per cent and Norway 1.7 per cent are still positive this year. Measured in US dollars, via MSCI indices, most other markets have been battered. The worst bear markets are Turkey, down 43.5 per cent and Greece, which has slid by 33.6 per cent. South Africa is the next worst with a 29.4 per cent decline, The Philippines has slumped by 22.7 per cent, Indonesia 22.6 per cent and China 20.7 per cent,
Other stock exchanges with large losses, but not as yet bear markets include South Korea down 18.7 per cent, India and Italy 16.6 per cent, Germany 15.7 per cent, Spain 15.2 per cent, Hong Kong 13.4 per cent, and Singapore 12.8 per cent. The UK has fallen by 11.7 per cent and Australia by 10.8 per cent.
This year’s selloff in emerging-market assets has created value, according to Goldman Sachs Group. The firm’s asset management arm says it’s time to buy as months of underperformance for developing-nation securities won’t last much longer. Whether that optimistic prediction proves to be correct very much depends on a resumption of the US equity strength.
The S&P 500 chart shows the extensive US bull market which is almost 10 years old and is rated the longest bull market in history. There have been declines, but investors have used them to “bottom pick” stocks. In the latter stages of this bull market, technology stocks have provided the fuel for the market. In particular, the so-called “FAANGS”, notably Facebook, Amazon, Apple, Netflix & Google contributed to the momentum. Significantly, a sizeable proportion of the S&P 500’s gains vanished in recent weeks when some of the fizz went out of the FAANGS bubble.
Michael Marks, who heads US asset manager, Oaktree Capital, has been doing the media rounds plugging his book, “Mastering the Cycle”. Mr Marks is the first person to admit that in the past few years, he called the end of the US bull market too soon. He stressed that it is exceedingly difficult to predict the top of the current market cycle and the next bear market. Indeed, every decline in the past nine and a half years became known as the “buy on dip” periods. Mr Marks isn’t predicting a recession next year, so his assumption implies that profits will continue to grow and that some equities still offer value.
One way of assessing value is to examine cyclically adjusted price-earnings (CAPE) ratios. Robert J. Shiller, the winner of the Nobel Prize for Economics, uses this as a guideline to determine whether a market is under or overvalued. The CAPE is calculated as a ratio of the current market price of an individual share or stock index over the average inflation-adjusted earnings of the ten preceding years. Norbert Keimling, Head of Capital Market Research at StarCapital AG, values global markets on this basis. He states that StarCapital determines the relative attractiveness of 6,500 companies from 66 countries in 13 regions and 39 sectors on a monthly basis.
As at the end of September, StarCapital calculates that Singapore is the eighth cheapest market in the world with an average CAPE of 13.5, price earnings ratio (PE) of 11.1 and dividend yield of 3.8 per cent. The ten most undervalued markets, according to Mr Keimling are Russia, followed by Hungary, Czech Republic, South Korea, China, Poland, Israel, Singapore, Portugal and Spain. The ten most expensive are India followed by Denmark, Indonesia, Ireland, Belgium, Philippines, United States (with a CAPE of 31.5, PE 21.7 and dividend yield 1.8 per cent), Switzerland, South Africa and Finland.
| Global Stock Market Valuations | ||||
| Country | CAPE | PE | Dividend Yield % | YTD performance % |
| Cheap | ||||
| Russia | 6.8 | 7.0 | 5.5 | – 0.3 |
| South Korea | 14.3 | 10.7 | 2.0 | -18.7 |
| China | 15.7 | 7.2 | 4.3 | -20.7 |
| Israel | 16.5 | 15.6 | 2.3 | + 6.2 |
| Singapore | 13.5 | 11.1 | 3.8 | -12.8 |
| Expensive | ||||
| India | 21.7 | 25.9 | 1.3 | -16.6 |
| Indonesia | 17.6 | 18.5 | 2.5 | -22.6 |
| Philippines | 18.7 | 18.4 | 1.7 | -22.7 |
| United States | 31.9 | 21.7 | 1.8 | + 3.5 |
| Switzerland | 25.4 | 23.1 | 3.0 | – 7.9 |
| Source: StarCapital & MSCI – end September 2018 & *YTD to October 18 | ||||
Since Wall Street is the scene setter for global equities, Mr Marks says “proceed with caution”.
“Today’s financial market conditions are easily summed up,” he says. “There’s a global glut of liquidity, minimal interest in traditional investments, little apparent concern about risk, and skimpy prospective returns everywhere.”
He frets that with all investments, including corporate bonds, private loans and private equity funds, “investors are readily accepting significant risk in the form of heightened leverage, untested derivatives and weak deal structures”.
© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore
Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
See reviews of both books on: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M